We have been told that the inflation rate for 2011 was 3.1% and we also were told that this is a low number.
First of all, due to the effect of compounding, this “low” rate will cut the value of your dollar by almost 17% in 5 years. That means that 5 years from now you will have to pay $117 to buy what costs $100 today. Let’s say you retire and are on fixed income. In 15 years you will need $159 to buy what costs $100 today. 3.1% is not really that low is it?
Suppose it is really higher than 3.1% and we are being misled. There are some problems with the Consumer Price Index or CPI calculations which I will explain. The government takes a comprehensive list (referred to as a market basket) of things that we buy and prices them in the marketplace. It compares that cost to what it was when they priced the market basket the year before. That comparison gives the inflation rate. So the cost of the market basket in 2011 was 3.1% more than it was in 2010. It seems straight forward enough, just price the same things and see what the new cost is. At one time, that is how it was done, but things change.
There have to be changes in the market basket contents over time to reflect that we buy different products as time goes on. As new things come along, like cell phones, people buy them and they rightfully should be included in the market basket, and likewise, things we no longer buy should be dropped. Because of this, there has been a trend toward saying the market basket contains things of “equal satisfaction” instead of equal products from year to year. This has opened the door to doing things like saying, fewer people are buying steak, and more are buying hamburger so we will weight hamburger more and steak less in the market basket. That is not the same thing as saying more people use cell phones and fewer use “land lines” so we will weight it toward cell phones. That seems sneaky to me as few people would prefer hamburger to steak, and in my mind this is gaming the numbers to make them look lower under the guise of “equal satisfaction”. When something gets expensive, people will substitute something cheaper, and ignoring the fact that the price went up and drove the change is, in my opinion, a bit dishonest.
There is also the question about how market basket items are weighted. Some people think that the cost of durable goods, like a new car, a new refrigerator or other similar big ticket but infrequently purchased items, get too much weight in the CPI. They would like to see an inflation calculation that reflects what we spend day to day.
There is a group called the American Institute for Economic Research that has put together what they call the “Everyday Price Index” or EPI. They use the market basket approach but they removed the big ticket, infrequent purchases. What they are trying to show is the inflation that we see in day to day living. Using their market basket, they calculated that the 2011 increase over 2010 was 8.0%. I don’t know about you, but that seems more like what I am seeing when I shop. Again, if you use the compounding effect, in 5 years you will need to pay $149 for what costs you $100 today. That is a really big change, and if inflation grows, it could be worse. Don’t forget, that under Jimmy Carter, inflation was about 45% for his single 4 year term.
I could write several letters about how the current administration’s policies are driving inflation. Two big causes are rampant deficit spending and new, costly regulations, and there is no relief in sight. We have a chance to get the country going in the right direction in November, and I pray that we do, before it is too late.