The real inflation rate

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The real inflation rate

Your government is lying to you. They say the U.S. economy grew at a 1.5 percent inflation-adjusted rate in the third quarter, or so said the Bureau of Economic Analysis in its GDP estimate. The number is subject to revision and will probably change. Based on recent experience, revisions could easily push it below 1 percent or above 2 percent. Since this is “real” GDP, it also depends on inflation numbers. The agency doesn’t use the Consumer Price Index for this purpose — CPI comes from an entirely different agency, the Bureau of Labor Statistics.

You can get quite different real GDP growth numbers if you use the inflation figures calculated by the Dallas Federal Reserve Bank. The Dallas Fed developed something called trimmed PCE, the use of which would make real third quarter GDP growth 1.1 percent. Or, if they all decided that the calculation of “median CPI” performed by the Cleveland Fed was what we should use, then GDP growth was about 0.3 percent. (Which is of course why they don’t use it!)

Heaven forbid that we use the method employed in Europe for calculating inflation. Evidently, housing is not a very big deal in Europe, so it is a much smaller component of the inflation calculation. If you can believe it, the Europeans actually use an archaic methodology for calculating housing inflation that involves the real prices of home sales, as opposed to a totally artificial guesstimate called Owner’s Equivalent Rent, used by more sophisticated countries like the United States. If we had done things the European way, inflation would have been sky-high during the last decade, and the Federal Reserve would have been forced to raise rates rather than holding them under 1% for far too long. And who knows where the inflation rate would have gone if we hadn’t pricked our little housing bubble.

If, like me, you are ancient enough to remember the 1970s, you will recall that inflation was Economic Enemy No. 1. Presidents Gerald Ford and Jimmy Carter spent most of their terms trying to control it. Their inability to tame it is one reason neither had a second term. No, it seems like we are being told there isn’t enough inflation.

So what is inflation, and what causes it? Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it cannot occur without a more rapid increase in the quantity of money than its output.” In other words, inflation is an artificial increase in the money supply that leads to higher prices for goods and services.

As can be seen by the opening paragraphs, the main problem in determining inflation is the method by which it is calculated. If something seems to unduly skew the quarterly calculation, government statisticians can apply adjustments for things like “hedonic quality” — whatever that is — or seasonality. Or if it seems too far out of whack, no matter how reliable the data, they can simply eliminate it from the equation.

Why do they do this? It is in the government’s interest to keep the inflation rate low. No increase in Social Security this year? It is because the inflation rate is low. Government employees get cost-of-living raises? Not this year, inflation is low. Bad news stories? How can that be, there is low inflation and the economy is growing.

Tell that to the single mother trying to support a family. Gas is down, but food prices have increased by an average of 3.7 percent. Been to the doctor lately? Thanks, Obamacare. Likewise, a trip to the veterinarian won’t save you any money, because taxes on medical equipment affect vets also. Interest rates are low, but housing has increased accordingly. Rent costs have gone up. Tried to buy a car lately? Those prices certainly haven’t gone down.

Then there are the costs not ever considered in the inflation figure. These are things like state and local fees and taxes. My vehicle registrations on similar vehicles, for example, have nearly doubled in the last four years. The fees to renew my limited liability company and pay the associated business registration increased by 38 percent this year.

So when the government tells you that inflation is low, don’t believe it. Instead, question the method they use to calculate it instead. Believe what you see in the store, at the gas pump and the checks you write instead. I suspect you will find that your costs are up from last year. Believe your own checkbook, not Washington’s.

Tom Riggins is an LVN columnist and may be reached at


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