Monday, April 30, 2007

Do We Need New Ways To Calculate Inflation?

An interesting discussion regarding inflation has started over at the TPM Cafe. But I found the comment by James Kroeger the most compelling one against using the current system:

I think an important part of the picture you are missing, Jared, is the fact that it is possible for different income groups to experience different rates of inflation.

During the past couple of decades---thanks to the export of jobs overseas and the huge tax cuts the Republicans have given to rich people---the lower classes have been experiencing lower measured rates of inflation while at the same time wealthy Americans have been experiencing dramatically higher [unmeasured] rates of inflation.

That is to say, cheap imports and the continuing chronic labor surplus have combined to put downward pressure on both wages and prices for the lower classes. At the same time, the big tax-cut giveaway that the Republicans threw at America's wealthiest households drove up both their disposable incomes and the prices that are charged by the markets that serve the rich: luxury markets and real estate markets and art markets and the stock market.

You see, rich people really don't mind inflation if it is their own incomes that is inflating; they just don't want inflation to occur in the lower classes because their wages are generally a cost of the upper classes.

Not only is it possible for members of different classes to experience different rates of inflation, it is even possible for one income group to experience inflation while another income group is experiencing either deflation or disinflation. These hidden facts would be revealed if the data collectors at the BLS were to calculate and publish the different inflation rates (cost-of-living indexes) that are relevant to different income groups, producing an 'inflation spectrum' of sorts.

This would be done by using different 'market baskets' that are clearly relevant to different income groups. When the price of stocks or real estate or art skyrockets, the 'cost of being rich' goes up dramatically. This kind of statistical initiative would provide much more valuable information for policy makers than the current use of the CPI or the GDP deflator as a measurement of the 'burden' that inflation is supposedly imposing on all of us.

See if you can't discuss this with your economists friends over at the EPI. Then, perhaps you'll want to spend some time reading through this:

Make The American People Richer.


**Update**:Here is a link to the thread so you can follow the follow-up comments as well.

If I am reading this right, it seems that the inflation indicator is skewed toward the investor and wealthy classes. That is to say: the poor and middle class can be sinking by the effects of inflation, but because their inflationary pressures are never measured, the reality never gets reported.

I have watched this debate between Mish (Global Economic Analysis) and Barry Ritholtz (Big Picture). If what Mr. Kroeger is saying is correct, both of them would be correct from their own point of view.

What do my readers think?

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