ePAROL - Economic News and Views

How to measure inflation

The idea is to convert back to the old way of calculating inflation, as measured by the Consumer Price Index (CPI), which is a theoretical market basket of goods, supposedly representing what people routinely buy, and used to calculate inflation by noting the changes in the prices of each item from month to month. Seems simple enough.

For the last quarter of a century, however, the CPI has "conveniently" left out the costs of energy and food. But now, thanks to public outrage, things may soon change, and the much-abused-and-viciously-contorted CPI may be replaced by the "trimmed mean PCE", as explained by Dallas Fed's top dog Harvey Rosenblum, who said "The Federal Reserve should move away from using inflation measures that exclude food and energy since they make the central bank seem aloof from the reality of rising costs faced by Americans. Excluding food and energy angers many people. It makes the Fed seem out of touch."

And why are food and energy excluded from modern calculations of inflation in the first place? To lie, my naïve little darling! Why else does the government change anything? Hahahaha! They don't see it that way, of course, and instead rationalize it as "Food and energy costs were originally excluded from the inflationary equation in the late 1970s," he says, "when prices in those sectors were particularly volatile." He admits that "the measure is now outdated and does not capture the full scope of underlying price shifts."

-- The Mogambo. Sept 20, 2006

posted by G @ 9:44 AM