Monday, April 7, 2008

The great inflation cover-up

From Fortune:

If the price of dinner is pinching us, why don't the CPI numbers acknowledge it?

...The third and most disconcerting possibility is that the CPI systemically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. In the words of many a UFO spotter, it isn't paranoia if they're really out to get you.

...But Ritholtz is more concerned about the third scenario, in which the CPI isn't accurate in the first place. And the difference between the second and third scenario is the difference between miserable and horrible. People like Ritholtz are thinking of the 1996 Boskin Commission, which was established to determine the accuracy of the CPI. The commission concluded that the CPI overstated inflation by 1.1%, and methodologies were adjusted to reflect that. Critics of the Boskin Commission suggest that the basis upon which the CPI was revised doesn't account for the way people actually purchase and consume products. The commission pointed to four biases inherent in the way the CPI was determined that supposedly contribute to overstatement - among them, a bias that doesn't take into account substitution of one good for another and a bias that fails to take into account increases in quality that are reflected in price increases....MORE