Be Careful What You Wish For: Inflation Is Much Higher Than Advertised
What the Federal Reserve is actually whining about is not low inflation–it’s that high inflation isn’t pushing wages higher like it’s supposed to.
It’s not exactly a secret that real-world inflation is a lot higher than the official rates–the Consumer Price Index (CPI) and Personal Consumption Expenditures PCE). As many observers have pointed out, there are two primary flaws in the official measures of inflation:
1. Big-ticket expenses such as rent, healthcare and higher education–expenses that run into the thousands or tens of thousands of dollars annually–are severely underweighted or mis-reported. While rents are soared, the CPI uses an arcane (and misleading) measure of housing costs: owners equivalent rent. Why not just measure actual rents paid and actual mortgages/property taxes/home insurance premiums paid?
Healthcare is 18% of GDP but only 8.5% of CPI. To those exposed to actual costs of healthcare, 8.5% of the CPI is a joke.
The same can be said of higher education: households paying tuition and other college costs are exposed to horrendously high rates of inflation, as illustrated in this chart:
Revealing the Real Rate of Inflation Would Crash the System (August 3, 2016)
The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016)
Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017)
Then there’s the hedonic adjustments that are made to reflect improvements in quality, features, safety, etc. So the price of computers is discounted to reflect the increase in memory, etc. compared to previous models. This is a can of worms, as anyone shopping for a new car or truck can attest: yes, the vehicles have more safety features, but the sticker price is much higher. Do we knock off $10,000 the “price” because of these additional features? Why should we, when consumers have to pony up $10,000 more than they did a decade ago?
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