Friday, January 28, 2011

Is Inflation Much Greater Than We've Been Told?

Chris Martenson thinks so. In a piece published on Business Insider he provides data and analysis that corroborates what I've previously noted here, here, and here.  Martenson argues that the Consumer Price Index (CPI) now routinely understates the amount of price inflation we are experiencing. He attributes this inaccuracy to three adjustments the Bureau of Labor Statistics (BLS) makes to the data as they calculate the  CPI.
[T]here are three major statistical 'tricks' that the BLS imposes on the Consumer Price Index. They are hedonics, which tries to account for improving quality in products over time, substitution, which is the act of switching to lower-cost items when prices surge on preferred items, and weighting.

Martensen then uses how the BLS incorporates health care prices into the CPI as a case study illustrating why he thinks the CPI underestimates the impact on raising health care prices on inflation.

He conlcudes:
For the reasons above, inflation is much higher than proclaimed. Yet we are being told, on a near-daily basis, that the massive money printing and deficit spending activities of the Federal Reserve and federal government, respectively, are not stoking inflation. At least, 'not yet.' Since the Fed uses the CPI as a key indicator in its decision making, the big risk here is that Bernanke will not begin to turn the wheel on the monetary supertanker until after it is too late.

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