Inflation Rates - Truth and Consequences

Okay being the GEEK I am I have to look up the current rate of inflation to calculate the REAL interest rate I will be paying on my new car.  For those of you who don't recall it is really very simple.  Let's pretend for simplicity that the rate you are paying on a loan is 4%.  If the rate of inflation is 2% then you subtract that from the interest rate and that is the rate in REAL terms.  So you are only paying 2%.  The next thing you do to determine if this is a good deal is to figure out what that money could earn you if placed elsewhere.  This calculates the opportunity cost of the loan.  Say you can make 2% in savings and the loan is costing you two percent then the opportunity cost is 4%.  Simple huh?

Let's go back to getting a loan and comparing it to the rate of inflation.  IF you get say a loan rate of 2% and the inflation rate is HIGHER at 3% then you should NOT pay off the loan early because the cost of the loan is lower than the "cost of money".  In effect they are paying YOU to borrow their money.  Of course the rate of inflation changes over time -- but if you watch it you can optimize your borrowing power.

 Well go on -- look up the current rate of inflation that is being reported by the Fed.  It says the rate of inflation is 1.7%.  Wow, that seems low doesn't it?  With all the printing of money that the current administration is doing you should wonder, HOW IS THAT POSSIBLE? Well it is not. When the Fed prints a bunch of money (i.e stimulus dollars are the prime example) it injects the money into the economy but that money doesn't represent anything of value, it is just paper, so that flood of new money DEvalues the money that was already circulating -- this causing INFLATION.  With money "growing on trees" you have to give more of your now lower valued dollars to buy what fewer dollars used to buy. It always catches up and the market seeks equilibrium or balance.

Now how DOES the Fed determine what the value of money is? The Federal Reserve calculates the rate of inflation for us -- tax payer dollars at work!  They use something called the Consumer Price Index or CPI. In that they take a bundle of goods -- things we all buy all the time and price them in the market.  They compare the current prices of that bundle of goods, or how much it would cost them to buy all the stuff on their shopping list to the prices of the SAME bundle of goods over time -- voila you now know what the inflation rate is.  But WAIT, there's more!

What is IN this bundle (or list) of goods they are pricing?  More appropriately what is NOT in this bundle of goods?  That is the million dollar question.  What are things EVERYONE must buy?  Well food for one -- you would think that food MIGHT be in the "bundle of goods" -- it is not.  If you are the grocery shopper in the family you KNOW that a loaf of bread didn't used to cost nearly $5.  You also know that meat didn't used to cost what it costs. The worst drought to hit U.S. cropland in more than half a century could soon leave us reaching deeper into their pockets to fund a luxury that people in few other countries enjoy: affordable meat. Rice and beans are looking pretty good! Some analysts are projecting that we could see food prices rise by 14 percent or more over the next year. I am the shopper in the family and I know that I am spending nearly DOUBLE what I was only three years ago on the same stuff. What else do we all buy?  Energy?  We all buy fuel for our cars, pay electricity bills and heat our homes usually with natural gas or in the northeast oil. Have you filled up your tank lately? Ouch! Energy of all kinds is also left off the list for the CPI when determining the rate of inflation.  Crazy huh?

One begs the question, why? One can only guess -- but it sure makes our elected leaders look good! Here is how they do it.

First it reflects ONLY buying habits of people in urban, metropolitan areas -- if you live in the "burbs" or in the country you are not represented.  Those of us who live in places OTHER than a city buy the most fuel; we commute to work, the store is farther away. We drive more and we don't have the option of public transportation.  Also, they survey a whopping 7000 families in a nation of over 300 million to determine the Consumer Price Index (CPI).  That is .00002333% of the population.  Hardly a snap shot.  But as far as surveys go it is true that the larger the population the smaller the sample size can be -- that said for an optimal survey of 300 million people the sample size should be at least 11,520 or 40% larger.  So that is a problem too.

Now the Bureau of Labor and Statistics does do a better job calculating the rate of inflation because their bundle is more reflective of what we all actually buy.  However it gets little attention because unlike the Fed, they don't set interest rates.  The Feds have the rate of inflation inaccurately low -- so in real terms it is a good time to take on debt (if you are sure you can pay it back of course and after reading this you might alter your grocery habits).  Based on their calculations money is cheap right now. On the flip side it is always good to understand what the REAL-life inflation rate is -- what IS the cost of LIVING?  It isn't 1.7%.  The term used for the things people REALLY buy is the EPI or "Everyday Purchase Index". This list does include energy and food.  If one looks to this for a real rate then things change dramatically.

If any of us remember science classes we know in order to study something we need a "control" -- if we don't have something that is constant HOW are we expected to document change over time?  How do we compare apples to apples if we don't have an apple? The way that the government calculates inflation has changed more than 20 times since 1978. The government is constantly looking for ways that it can make inflation appear to be even lower. If inflation was measured the same way that it was back in 1990, the inflation rate would be about 5 percent right now. If inflation was measured the same way that it was back in 1980, the inflation rate would be about 9 percent right now. But instead, we are expected to believe that the inflation rate is hovering around 2 percent.

Here is just ONE example of ONE of the TWENTY changes in how the government calculates the rate of inflation.  It is called of all things HEDONICS!!  Now that is funny!

Hedonics was introduced in 1998 and is a means by which the government actually DECREASES the price of items, even if the price you paid was higher or the same. The reasoning is that if the items are of better quality, than the value you receive is greater and should be accounted for with a lower net price. They are saying that you got more "bang for your buck" and somehow because what you bought today is better than what you could have bought ten years ago, even if the item of lower quality isn't even available to buy anymore.

Here is an example: If you bought a base model computer with 20 GB of hard drive space with 1 MB of ram at a cost of $999 in 1998 and the next year that same base model computer had 30 GB of hard drive space with 2 MB or ram for $999 in 1999, the government might use $500 as your price for the computer when calculating CPI because IF the older model of computer were still available it would have only cost $500 since the better-faster model cost the same.  So they are discounting the advances of efficiency.

Two organizations actually release information that reflect reality -- the problem is that you must put down the spoon you are being fed with and dig with a knife and fork to find it.  Even when the news is not good -- it is better to know the truth. Isn't it?

The American Institute of Economic Research (AIER) and Shadow stats are two organizations that do more accurate calculations for everyday living. Both use data with the old calculation methods. The EPI put out by AIER shows that inflation the last three years averaged 5.2%, the CPI was about 2.5% (average). That is DOUBLE the amount of inflation being reported by the Fed. If we look at Shadow stats, it shows inflation has been near 10% total for the previous three years. What Shadow Stats does is compare APPLES to APPLES. They use the methodology in place prior to 1980. In actuality we are in an inflationary period akin to the 1970's under Jimmy Carter.  Brutal to know the truth, huh?

Don't believe the CPI data, believe the prices you pay, and place the blame on where it truly belongs, the Government and the Federal Reserve -- printing money is an immature why to keep the masses happy for a short period of time.  When the pain and suffering hit -- it is too late, they are already in power. So when you vote, vote with facts and don't vote with the fiction being fed to you by the very people who want you to vote for them!  The ONLY way to change anything in this country is through your voice and your vote.  Make it count!