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Socratic Economics IV: How is inflation calculated?

by A swedish kind of death Thu Oct 11th, 2007 at 09:18:53 AM EST

I saw this in todays Salon:
metavision:

Not new, but worth repeating http://dailypaul.com/node/2406

Printing more money is the Fed's typical answer, but we are on the verge of runaway inflation. We have printed so many dollars now that we are at parity with the Canadian dollar for the first time since 1976. Since the Fed stopped publishing M3, which tracks the total supply of dollars in the economy, we can't even be sure how many dollars they are creating. Reported inflation is around 2%, but the method for calculating inflation changed in the 1980's, largely at Mr. Greenspan's urging. Private economists using the original method find actual inflation to be over 10%, which matches more closely the pain consumers in the real economy feel.

It poses some questions:

  1. Did the way of calculating inflation in the US change in the early 80'ies?
  2. What has the inflation been in terms of the old standard? Or what was the inflation of the 70'ies in terms of the new way of calculating?
  3. Is inflation even calculated the same way in different countries?

Promoted by Colman


Socratic Economics is a series of posed questions in the effort of understanding economics. Previous entries:

  • Socratic Economics I: Why GDP growth above all else?
  • Socratic Economics II: What is Money?
  • Socratic Economics III: Is full employment possible? And how?
  • Display:
    In Sweden I find no shift in the early 80'ies. According to the Central bureau of statistics:

    Inflation i Sverige 1831-2006 - Statistik från SCB

    Inflationstalen bygger på en tidsserie som bildats genom sammanlänkning av Myrdal-Bouvins konsumentprisindex (1830-1914), Levnadskostnadsindex utan direkta skatter och sociala förmåner (juli 1914 - juni 1954) samt Konsumentprisindex (juli 1954- ).

    Lots of swedish (have I mentioned I like TribEXT?) but essentially the core of the matter is that since july 1954 inflation in Sweden has been based on a consumer price index. The items in the index change to accurately reflect the actual consumption.

    Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

    by A swedish kind of death on Wed Oct 10th, 2007 at 01:41:37 PM EST
    I see you haven't yet discovered the wonders of Ctrl+Shift+N...

    Inflation i Sverige 1831-2006 - Statistik från SCB Inflation in Sweden 1831-2006 - Statistics from the SCB
    Inflationstalen bygger på en tidsserie som bildats genom sammanlänkning av Myrdal-Bouvins konsumentprisindex (1830-1914), Levnadskostnadsindex utan direkta skatter och sociala förmåner (juli 1914 - juni 1954) samt Konsumentprisindex (juli 1954- ). The inflation figure is based on a time series which is constructed by linking together the Myrdal-Bouvins consumer price index (1830-1914), the cost of living index without direct taxes or social benefits (July 1914 - June 1854) and the consumer price index (since July 1954)


    We have met the enemy, and it is us — Pogo
    by Migeru (migeru at eurotrib dot com) on Wed Oct 10th, 2007 at 01:52:22 PM EST
    [ Parent ]
    (have I mentioned I like TribEXT?)
    Have I mentioned how much I like it when people like TribExt? Maybe not, but I do. So, keep enjoying it, please!
    by someone (s0me1smail(a)gmail(d)com) on Wed Oct 10th, 2007 at 02:38:51 PM EST
    [ Parent ]
    I've created a monster!

    We have met the enemy, and it is us — Pogo
    by Migeru (migeru at eurotrib dot com) on Wed Oct 10th, 2007 at 01:44:15 PM EST
    You know how it is with monsters. You bring them to the world, feed them and burp them and then one day they are all grown up and starts to go on rampages.

    And you can only hope that what you have taught them will lead them to the right rampages.

    Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

    by A swedish kind of death on Wed Oct 10th, 2007 at 03:41:43 PM EST
    [ Parent ]
    Poor Socrates!  Excellent discussion, though.

    Our knowledge has surpassed our wisdom. -Charu Saxena.
    by metavision on Sat Oct 13th, 2007 at 12:45:16 PM EST
    [ Parent ]
    ... inflation.

    First, you can define a "basket" of goods, and measure how the total cost of buying the basket changes over time. Here, the inflation rate is simply the percentage rate of change of the sum total to buy the basket. This is used for Consumer Price Index, Producer Price Index, and a range of others.

    A limitation here is that this approach will always only represent the change in prices of the representative items in the basket. So the Second way is to take the value of a set of transactions, such as GDP, and measure what would have been the value if the prices had not changed. This gives the so-called "Real" GDP. The ratio of actual GDP to "real" GDP gives the index, called a "deflator", and the rate of inflation is the percentage change in the deflator.

    This still has the problem what to do with goods that appeared in one year and where not present previously, either because they did not exist, or because they represent a qualitative improvement. At one time, the US used a base set of prices that was fixed for a decade or more, so there was a series of deflators "indexed to 1982", for example, if the prices were from 1982.

    But while a personal computer from 1982 can, with sufficiently clever programming, connect to the internet, it does not have the processing power or memory to run, for example YouTube clips of claymation political satire. And so there has been a move from a fixed index to comparing each year to the previous year, which is called a "chain index".

    More critical for the US is that the Fed focuses on the s0-called "base" inflation rate, excluding prices of goods that have historically had more price volatility than inflation over time ... like food and gasoline. However, if in fact we have entered a period of a long term rising trend in energy prices, this is no longer warranted.


    I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

    by BruceMcF (agila61 at netscape dot net) on Wed Oct 10th, 2007 at 02:46:10 PM EST
    I see.

    Does the resulting inflation numbers vary greatly between approaches or are they somewhat the same? When Central banks are fighting inflation which index do they use? Different ones?

    Ron Paul is then (one can assume) writing about the difference between the Fed base inflation rate and something else (that includes food and gasoline ( perhaps consumer price index))?

    Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

    by A swedish kind of death on Wed Oct 10th, 2007 at 03:31:00 PM EST
    [ Parent ]
    Have you checked the Wikipedia article on Price Indices?
    Some notable price indexes include:
    • Consumer price index
    • Producer price index
    • Personal consumption expenditures price index
    And to that one must add at least the GDP Deflator.

    So, there are at least four indices one can call "inflation", and for each of them one can ank the methodological question of how it is calculated.

    We have met the enemy, and it is us — Pogo

    by Migeru (migeru at eurotrib dot com) on Wed Oct 10th, 2007 at 06:11:20 PM EST
    [ Parent ]
    ... are different ... that is the point of doing them, to view the impact of price changes on the typical consumer, or a typical low-income consumer, or a typical producer (or heavy industry producer, or light industry producer), etc.

    For the GDP deflators, I believe that the differences between the overall inflation rate and the "core" rate excluding food and fuel are more important than the difference between using a single base year and using a chain index, but that is an off the cuff reaction ... I haven't checked that out.

    Anytime the inflation rate is reported, it is a lie ... but the lie is in "the". There is no such thing as "the" inflation rate ...

    ... the only precise rate of price inflation is the price inflation of a particular product over time, which means that there are as many exact inflation rates as there are products, with a new series coming into existence every time a new product is introduced or a substantial change is made, and an old series extinguished every time an existing product is withdrawn from production or substantially changed.

    SO, for example, to compare gas prices in the US today with prices at the peak of the second OPEC oil price shock, to get at any kind of detail at all, I should use:

    • The overall CPI to look at it in terms of a typical consumer
    • The low-income CPI to look at it in terms of the most vulnerable consumers
    • The PPI to look at it in terms of impacts on producers (and likely employment)

    However, if I am making a sweeping statement, I will likely reach for the GDP deflator, since it includes all newly produced goods and services for all final customers ... households, government, business ... and net impact on trade.


    I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
    by BruceMcF (agila61 at netscape dot net) on Wed Oct 10th, 2007 at 06:41:40 PM EST
    [ Parent ]
    A limitation here is that this approach will always only represent the change in prices of the representative items in the basket.

    Why is that a limitation? If you make your list out of relevant and largely unavoidable expenses - food, housing, transport and utilities - surely your represenative list will remain representative for long periods.

    So the Second way is to take the value of a set of transactions, such as GDP, and measure what would have been the value if the prices had not changed. This gives the so-called "Real" GDP. The ratio of actual GDP to "real" GDP gives the index, called a "deflator", and the rate of inflation is the percentage change in the deflator.

    This also ties GDP closely to 'growth', because a lot of apparent growth will come from increased prices - and this has a worrying circularity about it, as a notion.

    And so there has been a move from a fixed index to comparing each year to the previous year, which is called a "chain index".

    This is now making less and less sense, and moving further and further away from anything that might pass as a coherent understanding of what inflation really means to most people, which is the fact that the same sum of money buys less than it used to.

    The PC utility argument is nonsensical, because it's equating being able to watch claymation with being able to eat and keep the rain out - or in other words equating discretionary disposable income with basic living costs.  

    I can buy the volatility argument, however, especially for prices with reliable seasonal variations. But it should be easy enough to average those out - it's standard practice for retail sales figure in the UK.

    So I think the basket idea remains the most useful by a long way - especially now.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Oct 10th, 2007 at 04:52:14 PM EST
    [ Parent ]
    I think I have argued along the following lines before in a comment thread, but let's do it again...

    The nominal GDP is easily understood: the price of all goods and services purchased in a year:

    G = sum_i p_i q_i

    where i labels the products, p is price (or the average average for similar products/services) and q is quantity. (Price here is properly replaced by value added, but for the purposes of this argument that's a nitpick)

    Then, approximately from one time period to the next...

    dG = sum_i dp_i q_i + sum_i p_i dq_i + O(dt²)

    The first term is inflation, the second term is real GDP growth, and the third term is an error term that becomes negligible when the time periods are small enough.

    We have met the enemy, and it is us — Pogo

    by Migeru (migeru at eurotrib dot com) on Wed Oct 10th, 2007 at 06:20:04 PM EST
    [ Parent ]
    ... even if it can only ever be an approximate correction:
    This also ties GDP closely to 'growth', because a lot of apparent growth will come from increased prices - and this has a worrying circularity about it, as a notion.

    GDP deflator = [Actual GDP/"Real" GDP]x100

    so:

    GDP deflator inflation rate approximately equals
     % growth in Actual GDP minus % growth in "Real" GDP.

    I put the "Real" in ironic quotes, because the number is constructed by supposing that prices had not changed but that the precise same quantities of goods had been sold anyway.

    I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

    by BruceMcF (agila61 at netscape dot net) on Wed Oct 10th, 2007 at 06:46:40 PM EST
    [ Parent ]
    Well, that's a nice way to fudge it. :)

    I still think it's circular because it's not making a qualitative distinction between different kinds of prices.

    The simplest social definition of inflation is that it decreases the choices available to participants in the economy.

    This means not all prices are equal. If food becomes 50% more expensive, I have little or no choice but to buy it. (Assuming I'm on a standard and not on a luxury diet.) That means my choices decrease - I have less money to spend on non-essentials, and I have no flexibility in this.

    If luxury yachts become 50% more expensive, no one's choices are seriously diminished. Yacht wannabes may feel the inflationary sting of not being able to afford the model they want, but yacht buying remains a discretionary activity. And if a yacht becomes unaffordable, it's always possible to spend an equivalent amount on something equally weighed down with bling.

    So even though increased yacht prices may count towards inflation using the GDP definition, the price increase is voluntary, the decision to buy is voluntary, and the profit will most likely be recycled into the economy.

    But with food prices, the price increase may not be voluntary (because it may be going on overheads), the decision to buy isn't voluntary (or is at least tightly constrained) and the money effectively disappears. (I suppose technically some of it could be recycled as profit, but that's not how it seems to work out.)

    So - some prices affect freedom of choice much more than others. And price inflation in some parts of the economy is much more damaging than in other parts. A proper analysis would pick out price elasticity and capital mobility as elements too. (E.g. capital tied up in house prices is, at least partly, lost to the economy, and therefore house price rises are highly inflationary - even thought they're not counted as such today.)

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 05:18:25 AM EST
    [ Parent ]
    I still think it's circular because it's not making a qualitative distinction between different kinds of prices.

    The simplest social definition of inflation is that it decreases the choices available to participants in the economy.

    This means not all prices are equal. If food becomes 50% more expensive, I have little or no choice but to buy it. (Assuming I'm on a standard and not on a luxury diet.) That means my choices decrease - I have less money to spend on non-essentials, and I have no flexibility in this.

    I guess economists would wiggle out of this one by pointing out that, unless price rises happen in non-substitutable staples, people can always switch to other foodstuffs.

    If there are Giffen Goods in the economy, of course, that is not the case.

    But I think however you construct it (even if you do it in what you'd call a "socially sensible way") the GDP Deflator and the Real GDP are not directly measurable, but have to be constructed from the details of the Nominal GDP, which is measurable (at least in principle).

    I guess this is another case of an economist going and saying "look here: nominal GDP growth consists of two components: real GDP growth and inflation", and people going "ooh, ahh", and after giving the economist his Nobel price going "but how do you calculate real GDP and inflation?". And after much debating turning to the statisticians and saying "guys, here's the data on all the goods and services traded over time, with amounts and prices". Please figure out a way to calculate the Real GDP and the GDP Deflator.

    By the way, there's the following juicy quotation from Keynes:

    That the units, in terms of which economists commonly work, are unsatisfactory can be illustrated by the concepts of the national dividend, the stock of real capital and the general price-level:

    ...

    Thirdly, the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of causal analysis, which ought to be exact.

    Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I hope to show, that one can get on much better without them.

    The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for quantitative analysis need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgement rather than of strict calculation, which may possess significance and validity within certain limits.

    But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision—such as our causal analysis requires, whether or not our knowledge of the actual values of the relevant quantities is complete or exact—is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better Queen but not a happier woman than Queen Elizabeth—a proposition not without meaning and not without interest, but unsuitable material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of our quantitative analysis.

    — John M. Keynes in The General Theory of Employment, Interest and Money



    We have met the enemy, and it is us — Pogo
    by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 05:43:20 AM EST
    [ Parent ]
    I guess economists would wiggle out of this one by pointing out that, unless price rises happen in non-substitutable staples, people can always switch to other foodstuffs.

    They could, but they'd also admit that the switch was being forced and not a matter of choice. Whereas if prices dropped while wages rose, buyers would have increased choice.

    I think if you use choice as the bottom-line criterion a lot of the conceptual confusion disappears.

    The problem becomes quantifying that choice. And it's possible a simple one-line model may not be the  best way to do that - and also that choice will vary for different groups, and optimising choice for one demographic may lower the choice of another.

    As usual it's a political problem, not an econometric one. You can't create good metrics until you decide what you're trying to achieve socially and politically.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 07:42:29 AM EST
    [ Parent ]
    ... definition are the various CPI's and PPI's (depending on the group of participants you want to focus on).

    For the definition of inflation as a sustained, ongoing increase in the average price level in the economy, where the "social definition" above is understood as one possible but not necessary consequence, then some form of GDP deflator is the only practicable approach to encompass that.

    And, of course, the "social definition" does not in fact encompass every important scenario involving price inflation, as when there is rapid economic growth accompanied by mild inflation, where the inflation may be redistributing some of the gains but is not imposing substantial losses, and the main concern for those wishing to push the the rate of inflation down is that the redistribution is going from people holding wealth denominated in monetary terms to people holding wealth in real productive capacity and most workers.


    I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

    by BruceMcF (agila61 at netscape dot net) on Thu Oct 11th, 2007 at 02:15:34 PM EST
    [ Parent ]
    But what is the accuracy of the computation of GDP?  

    IIRC, GDP is not a measurement, per se, but an estimate.  Which is a horse of a different guacamole, epistemologically speaking.  


    She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

    by ATinNM on Thu Oct 11th, 2007 at 06:55:03 AM EST
    [ Parent ]
    But at least Nominal GDP is a well-defined concept, in principle, even if it is hard to quantify.

    For the thermodynamics buffs, this makes Nominal GDP Growth an exact differential, but Real GDP Growth and Inflation are inexact differentials. This means Nominal GDP is a "state variable" and path-independent, but Real GDP and the GDP Deflator are path-dependent and not state variables.

    We have met the enemy, and it is us — Pogo

    by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 07:02:04 AM EST
    [ Parent ]
    ... something which can be aggregated, a monetary amount, while inflation and/or "real" GDP (whichever comes first ... with a market basket it is the inflation index that comes first and "real" values are imputed from that, with a deflator it is the other way around) are an effort to provide a simple index value to summarize a relationship between vector quantities.

    Keynes' basic argument for working in terms of nominal amounts and employment was that the ability of a person to work as unskilled labor if need be provided a connection between various specialized and more restricted skilled labor markets in terms of their renumeration as a multiple of the wage of unskilled labor, providing a quantity that could be aggregated with greater justification than the vector of the amount produced of each and every different type of final product for sale in the economy.


    I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

    by BruceMcF (agila61 at netscape dot net) on Thu Oct 11th, 2007 at 02:22:09 PM EST
    [ Parent ]
    for the details viz. the U.S.  I think that I published a diary on this subject on ET a few months ago.  If not, it was DailyKos.

    paul spencer
    by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Oct 10th, 2007 at 04:28:26 PM EST
    Interesting.

    Does not look like it was here you posted the diary. Do you have a link?

    Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

    by A swedish kind of death on Thu Oct 11th, 2007 at 06:50:48 AM EST
    [ Parent ]
    Sorry about the length, but I can't make the link work correctly.

    Thu Jun 21, 2007 at 02:18:05 PM PDT

    The federal government claims that inflation is low and fairly stable at present.  Do you believe that?  If inflation rises, this is supposed to be an indication that money is too available relative to the products, services, and property that are available for sale, so prices are bid up by eager buyers.  So the Federal Reserve System raises a key interest rate that starts a chain of interest rate increases, choking the money supply somewhat by making credit more expensive.  If credit is more expensive, businesses (and consumers) that depend on credit for expansion, or even for operation, (or for consumption) have to restrict purchases - and business in general starts to contract.  This contraction alleviates the pressure on prices, and the inflation rate stabilizes again.

    What is a low inflation rate?  The FED seems to like 1 to 3% at the consumer level.  And nowadays, the federal government reports inflation rates that typically fall in or near that range.  My take is very different, and, from what I've read from other diarists here, this article should raise a hackle or two.  If you would like to discuss, please read on:

    paul spencer's diary :: ::
    In 1953 postage stamps for First Class mail cost $ 0.03 each. Recently, the price went up to $ 0.41.  
    In Texas Regular gasoline averaged about $ 0.22 per gallon.  Currently, it's running about $3.20.
    A 10-ounce Coke was a nickel in a metal refrigerator box (where the bottles were held in a metal
    labyrinth, at the end of which was a gate that allowed the bottle to be lifted out when activated by
    the coin.  You could defeat the gate by jamming something narrow into it, so that you could pull the
    next bottle out, too.)  Today a 12-ounce Coke goes from $ 0.75 to $1.25 in a coin-operated machine.
    (And there may be a camera taking your picture if you try to defeat the system.)  So - let's take the
    average and call it $1.00 per can.  Figuring the amount difference, 10 ounces costs about $ 0.83.  
    The upshot is that the average price increase of these three examples is over 1400% since 1953.

    That's how I figure inflation.  Given a base year of 1953, the average price increase per year is 26%
    from that base.  That may not be a useful comparison, so let's look at it from a compound interest
    point-of-view.  This works out to about 5.5% per year, compounded annually.  The federal government figures inflation, too.  For many years their average numbers would not have been too different from mine, even though they use a "market basket" of items to compare prices, in contrast to my smaller sample.  Nowadays, though, their numbers are substantially smaller than mine.

    W. John Williams goes much deeper into the subject at www.shadowstats.com, but his preferred
    numbers are, again, close to my simplistic estimates.  Also, because he pays close attention to such abstruse esoterica, he can explain why the recent federal government's inflation numbers are stable, while the real rate of inflation is now rising rather quickly.  By the way - did you doubt that this is the case?  Of course, this is part of the point of this diary.  The inflation monster is hungry, and it has its eye on our tender parts.  Please see the chart on Williams' web site; then, if you like, you can read about the details, too.

    One side-effect that Williams raises is that, where Consumer Price Indices are used to inform Cost of Living Adjustments to wage contracts, or, more importantly, to Social Security Insurance payments; the recipients - us - are being systematically short-changed.  His estimate is that SSI payments would be about double the current levels, if the CPI had been calculated in the old and standard manner for the past 20-some years.  Of course, the system cannot pay that amount, but that's a separate story.

    Background - in 1953, when stamps cost 3 cents, the U.S. was truly the leading economy in the world. Our industrial rivals were digging out of the rubble of World War II and rebuilding almost by hand and wheelbarrow.  Everyone needed our products.  Overall, U.S. industry had to placate labor; the government supported research and education; banks invested and made loans for construction. Then businesses figured out that, in an empty market and via oligopoly, they could raise prices whenever costs were increased - due to, for instance, wage increases.  Their partisans in Academia even thought up a name to justify their non-free-market scheme: the Wage-Price Spiral.  (Do I need to point out that they didn't call it the Price-Wage Spiral?)

    You probably know that the federal government also puts out data on wage trends.  Median and average wages show very similar trends, as you might expect, although there is more divergence lately due to the fast rise on the super-rich end of the data set.  Thus, average wage is rising more quickly than the median wage - which is probably one reason that they like to publish the average wage.  Even taking the average wage, however, the increase from 1953 is a little over 1100%.  If you take my number of 1400% inflation to be close to meaningful, then the average wage-earner is losing ground - but not if you take the government's numbers.  Their numbers show inflation at less than 800% from 1953 to 2007.  What do you think?  Are you and your friends and your family 40% better in purchasing power than your and their parents were then?

    Not too long ago (for old guy's like me), most of us might have said "Yes" to that question.  Of course, for some of us the answer is still affirmative, but how many trends, such as outsourcing, foreclosures, foreign slave-wage competition, and sociopathic federal government policies and officials, are required to start another kind of economic spiral?  Or trap-door might be a better analogy.  Then there is inflation.  Currently, this factor is fueled - literally - by the cost of petroleum.  The associated costs of power and transport are, of course, being passed on to the customer in the prices of every item in the "market basket".  Even electronics - the signature items of the economic optimists' bandwagon - are increasing in price now.

    (I won't go into "hedonics" or quality improvement as a justification for underestimating inflation, as Williams' site covers this type of "substitution", as well as the other types.  IMO, though, these types of actions only occur when consumers are fairly confident of solvency, if not of personal wealth.)

    It may be the case that the current trend will stabilize (or equilibrate at some new "normal" level), if the price of petroleum stabilizes, but don't count on such an event.  If Jerome a Paris' diaries concerning Peak Oil are correct, we are just getting started on that spiral (might look more like an F-16 taking off than a spiral).  What's more, there is no - I repeat, NO - plan or program or proposal to do anything meaningful about the situation.  There are a few things that could be proposed, but, instead, we have "free trade" agreements and an almost feckless `Energy Bill' and the god-awful waste spending of a god-awful occupation on the opposite side of the globe.

    Now - an alleged bright spot is the current - and historical - performance of the U.S. stock markets. For you and I, it's only a bright spot, if we have 401Ks, or some stocks of our own, or the corporation that employs us seems securely financed via stock value.  Need I relate the events of the early 2000s? Well, we may be looking at déjà vu all over again.  The inflation rate data (remember inflation?) provided by the government is part of the justification for many stock owners and fund managers to stay in that market, as opposed to leave it for bonds or gold or real estate or cash or foreign stock markets.  If inflation is low and stable, then interest rates will be stable (according to stock-trader CW), which decreases the incentive for moving funds out of stocks either into protection (gold) or into higher yields (high interest rates = higher returns on bonds).  However, in reality inflation is not low and is trending upward quickly.  And the smart money is both cognizent and realistic.  

    Your broker or fund manager probably does not know that, due to the true history of inflation, the true "real dollar" increase of the stock market is much lower than his/her propaganda states.  He/she probably does not know that inflation is trending upward.  (He/she may have a gut feeling about price increases, but he/she does not distrust the federal government's data.)  So - I won't try to cut in on your broker's territory, but I will say that I have moved 100% into bonds and cash.  This is not advice, just my personal strategy.  No experts involved here; nothing to see; move along, please.

    OK - my personal market move is not the main point of this paper.  This is the place to recommend some solutions at the root-causes level.  The best one would be to liquidate every non-essential asset that you have, buy some land, build a simple and energy-efficient house with geothermal heating and solar panels, grow your own, and work to create a community of this sort around you.  Easier said than done, as many such communities from the late 60s and early 70s will attest.

    More practical - really - more practical - is to work and organize for political solutions.  First and foremost is to end the occupation of Iraq.  Military spending is waste spending.  The lifetime of military hardware and ammunition is short, and there is no residual value, no used-bullet market.  Pulling money out of the "civilian" economy for such use is an automatic boost for inflation in the classic market sense.  There are fewer dollars recirculating in the economy, chasing items of real value, so things become relatively more dear.  A military budget is a "social welfare" decision based on the perception of need (fear of invasion) in a given international context.  It is not an economic pump-primer, despite what the war-mongers say.

    From another angle - as ASiegel promotes, we need major incentives and programs for manufacture, installation, and coordination of solar-based technology.  As many diarists state, we need major promotion of energy conservation methods and devices.  As NNadir insists, we need a major program for a renaissance in nuclear power generation plants - plus nuclear fuel recycling plants.  What do conservation and non-petroleum-based energy production have to do with inflation?  The obvious connection is the present effect of the price of petroleum on inflation.  Beyond that, husbanding energy and material means lower market pressure on scarce (increasingly) resources.

    Finally, we need to create a moderate level of socialism.  The true salient factor behind inflation, and concomitant economic issues for the vast majority of us, is the corporate oligopoly.  The simple facts are that capital has been concentrated to such an extent that: 1) almost all transactions are now cost-plus-profit for their products because of their market dominance; and 2) no large-scale changes in any aspect of economic - or political - direction can occur without the intention or the acquiescence of the big corporations and of their masters.  These are not new facts, but they are somewhat exacerbated today, compared to, say, 1953.

    A return to regulation of corporations, at a level similar to the pre-Reagan era, would probably prove useful, but it is not sufficient.  If the railroad companies still control the right-of-ways, which "we" gave them 140 years ago, we will not get to high-speed passenger service nor efficient freight service.  If the nuclear industry remains "private", then there will be security issues that will demand redundant control and protection systems - the company and the federal government will run parallel services - and the government will still be stuck with the nuclear waste issue anyway.  If insurance is not nationalized - like Social Security - then the insurance companies will continue to siphon off the profits in a stable cost-plus-profit (actuarial) system for no value-added reason; and these profits will continue to go to the same investors who own/run the rest of the corporations "who" own/run the country.  In other words there will be no substantial change that will drive economic justice for the vast majority of us - which is why I brought up inflation in the first place.

    paul spencer

    by paul spencer (spencerinthegorge AT yahoo DOT com) on Thu Oct 11th, 2007 at 10:35:44 AM EST
    [ Parent ]
    Here's the link:

    Inflation  -  Suspicions Confirmed by paul spencer on June 21, 2007

    We have met the enemy, and it is us — Pogo

    by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 11:19:07 AM EST
    [ Parent ]
    Having finally got round to reading this diary you got me looking for UK stamp prices. and while looking came across this.

    Postal-Math

    The actual values of the CPI are listed below. There are actually several Consumer Price Indexes, depending on the particular "market basket" (set of consumer goods) included, the set of consumers involved, and geographical factors. Two of these CPIs are used most frequently. In the 1996 Green Book, the House Committee on Ways and Means explains the difference between the two indexes as follows:

    Prior to 1983, the CPI measured housing prices using a procedure that included changes in the asset value of owned homes. Because the asset value of houses was growing so much faster than the consumption value, the inflation rate that included asset values was excessive.
    In 1983 the Bureau of Labor Statistics began using a rental equivalence approach to measure the value of housing. The official CPI-U inflation rate is based on the asset value of housing prior to 1983 and rental equivalence in 1983 and later. To provide a consistent time series, the Bureau constructed an experimental series, the CPI-U-X1, for 1967-82 based on rental equivalence. The general effect of using the CPI-U-X1 is to lower inflation in past years which in turn has the effect of lowering poverty thresholds for those years. A lower threshold means that fewer people are poor. As can be seen by comparing the first two columns in table H-7, adjusting the poverty threshold using the CPI-U-X1 reduces the official poverty rate by an average of about 1.5 percentage points (11 percent or 3.4 million persons) per year between 1979 and 1994.

    So if I understand what I'm reading, the inflation figure was fudged so that the poverty level was artificially  reduced during the Reagan and BushI years.  Yet another nail in the coffin of Republican economic competence.

    Any idiot can face a crisis - it's day to day living that wears you out.

    by ceebs (ceebs (at) eurotrib (dot) com) on Thu Oct 11th, 2007 at 11:49:42 AM EST
    [ Parent ]
    thanks paul, that was a very clear exposition.

    'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
    by melo (melometa4(at)gmail.com) on Thu Oct 11th, 2007 at 02:18:30 PM EST
    [ Parent ]
    In Spain inflation is computed with a basket.. a clear basket ... fromt hem you can get those that everyone needs... but every decade or so the basket must be changed...

    Surprisingly a lot of people consider that the real inflation ahs no relation with this basket of items....

    IN spain for example I wonder if the price of apaprtments are included... and more importantly.. what is the weight of it..

    So it is not onlyt he basket but how mcuh weight you give to each price.. Since foods expenditures ahs disminished with years inlfation is kept very low.. while otehr aspects of ligfe icnrease a lot and are wighed out..

    I also guess you can get the basket chosen in the standarized inflation of the europe union .. and the corresponding weight of each item.

    A pleasure

    I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

    by kcurie on Wed Oct 10th, 2007 at 06:14:25 PM EST
    In 1996 the US changed its method for calculating inflation. Details here:

    Nouriel Roubini: Output and Inflation: Are We Mismeasuring Them? The "CPI Inflation" and "Chain-Weight GDP" Debates

    In December 1995, the U.S. moved to a new system of measuring GDP and the GDP deflator: from a fixed-weight method to a chain-weight method.

    The problem with the traditional (fixed-weight) method of measuring output was that too much weight was given to production of the goods (such as computer and microchips) whose price has fallen over time.

    by TGeraghty on Thu Oct 11th, 2007 at 02:00:03 AM EST
    So far, it looks mysterious how real estate bubbles and inflation are (not) related. But the hot Baltic economies are experiencing swift inflation now.
    Consumer prices soared in September throughout the Baltic region, surpassing analysts' expectations and sparking new fears of macroeconomic imbalances that could eventually lead to hard times.
    In Latvia, the Baltic's inflationary champion, consumer prices rose 11.4 percent annually as of September, the highest level in 10 years. Inflation for the month reached 10.9 percent, the highest since January 1997, the statistics agency said.

    In Estonia, annual inflation reached 7.2 percent, significantly beyond the estimates of some 6.3 - 6.5 percent and leading some analysts to believe that 8 percent was a real possibility for the entire calendar year.

    Finally, in Lithuania, where inflation has been relatively tame in recent years, the consumer price index catapulted to 7.1 percent based on September data.

    I am puzzled by the monthly 10.9% (?!) inflation in Latvia. The Lithuanian inflation for the month of September was 1.4%.

    by das monde on Thu Oct 11th, 2007 at 04:14:08 AM EST
    Is that actually a bad thing if wages keep up? The whole point of EU entry is to bring their economies in line with the rest of the EU? The opening of labour markets is bound to bring up the price of labour and thus cause inflation on consumer stuff, surely?
    by Colman (colman at eurotrib.com) on Thu Oct 11th, 2007 at 04:19:42 AM EST
    [ Parent ]
    The wages in the Baltics were indeed very stagnant till now. Hence, many people immigrated, especially youth.

    But the relation between wages and inflations seems to be too straight to be true - just when the wages started to raise, inflation kicks in. It may look that the Baltic states are more ruthless to regular folks than Bernanke's rate cuts. What does the asset inflation then mean? Does it accumulate wide inflation in the future, or does not play a role at all?

    by das monde on Thu Oct 11th, 2007 at 04:34:24 AM EST
    [ Parent ]
    The relationship between wages and inflation is used as a propaganda tool to ensure that real wages don't grow and so that growth is captured at the top.

    We have met the enemy, and it is us — Pogo
    by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 04:38:36 AM EST
    [ Parent ]
    Yes, but it is also a real and inevitable effect.
    by Colman (colman at eurotrib.com) on Thu Oct 11th, 2007 at 04:59:15 AM EST
    [ Parent ]
    Not if owners take a dividend cut instead of automatically passing wage rises on to consumers.

    If that happened (as if...) wage rises would count as growth - more spending, on more goods and services, and possibly more small scale investment too.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 05:21:02 AM EST
    [ Parent ]
    But that is assuming the owners, i.e., stockholders, expect their Return on Investment to be in the form of cash.  Currently the expectation is ROI will be received in the form of a rising stock price.  


    She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
    by ATinNM on Thu Oct 11th, 2007 at 07:09:28 AM EST
    [ Parent ]
    A rising stock price is useless if you can't cash it in and spend it on something. So there's an implication that it's still - effectively - equivalent to real cash. (Otherwise, what would be the point?)

    Of course what's happened is that the capital and physical economies have decoupled more and more, so it's possible for ROI to circulate indefinitely between different schemes, becoming bigger and bigger and never actually being spent on anything tangible.

    The mythology calls this growth and seems to consider it a good thing.

    I think it's inflationary because at best its leeching value out of the physical economy, and at worst it's just a big Ponzi-shaped pile of IOUs.

    You can of course still cash ou, but only if you do it before the pile collapses - which is useful for anyone who gets there ahead of the rush, but not so useful for the Bigger Fools who are a little slow.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 11th, 2007 at 07:53:03 AM EST
    [ Parent ]
    A rising stock price is better than cash because it isn't a taxable event and yet can be monetarized, e.g., when used as collateral for for a loan.  If you're a bank a rising stock price is a capital asset contributing to your reserves.  And there's lots of other financial shenanigans that can be pulled - derivatives immediately spring to mind.

    None of this has anything to do with actually producing something.  

    She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

    by ATinNM on Thu Oct 11th, 2007 at 08:35:31 AM EST
    [ Parent ]
    This partly explains the asset bubble.

    We have met the enemy, and it is us — Pogo
    by Migeru (migeru at eurotrib dot com) on Thu Oct 11th, 2007 at 08:45:00 AM EST
    [ Parent ]
    Is wage rise slower or faster than inflation?
    by Colman (colman at eurotrib.com) on Thu Oct 11th, 2007 at 04:58:39 AM EST
    [ Parent ]
    I do not know wages' rise numerically, though the common wisdom is that entrepreneurs are "forced" to raise wages because of "vanishing" qualified workers. Before this summer, the average monthly wage in Lithuania was something like 600 euro, or even less possibly.

    But more generally: if inflation is caused by greater capacity and willingness of regular folks to spend more, there should be some time lag before all elasticities work out new price distributions "forced" by greater spending power of consumers. Yet, why does inflation kicks in so suddenly? Even more, if consumers get greater spending power, they won't necessarily increase demand of the basic basket of goods - in the modern world, extra income is massively put into "investments". I don't make a sense of why consumer demand should raise so dramatically when wages rise, but not dramatically at all when they are burning their loans.

    But I see the following simple explanation. When entrepreneurs are "forced" to raise wages, they still want to protect the same profits. They might even wish to keep their monetary share from the business bounty, tending to leave employers with still marginal share. The same profit level (or relative share) could be possibly kept by raising prices! It's elementary observation: consumers do not set prices in the modern market, the enterprising side sets prices. A consumer has only the power to buy or not to buy a product for a new price. Whatever elasticities are, inflation statistics do not even register new consumer demand - they register only raising prices.

    So apparently, the mechanics of greater wages on inflation is that entrepreneurs tend to seek the same profit (or relative share) even when they have to raise wages. This inclination is especially strong after a long period of cheap worker force. In the textbook economics, consumers would punish enterprisers that raise prices out of proportion to marginal demand. But in the real world, they do not have much choice in limited time. The whole elasticity theory flies out of the window at times of strong inflation. The basic inflation psychology is not that consumers have urgency to spend more, but that entrepreneurs cannot "afford" to keep the same prices.

    by das monde on Fri Oct 12th, 2007 at 03:55:05 AM EST
    [ Parent ]
    has not been mentioned yet?


    Hedonic Pricing Method

    The basic premise of the hedonic pricing method is that the price of a marketed good is related to its characteristics, or the services it provides.  For example, the price of a car reflects the characteristics of that car--transportation, comfort, style, luxury, fuel economy, etc.  Therefore, we can value the individual characteristics of a car or other good by looking at how the price people are willing to pay for it changes when the characteristics change.  The hedonic pricing method is most often used to value environmental amenities that affect the price of residential properties.

    And via the WSJ:


    An Inflation Debate Brews Over Intangibles at the Mall

    WASHINGTON -- To most people, when the price of a 27-inch television set remains $329.99 from one month to the next, the price hasn't changed.

    But not to Tim LaFleur. He's a commodity specialist for televisions at the Bureau of Labor Statistics, the government agency that assembles the Consumer Price Index. In this case, which landed on his desk last December, he decided the newer set had important improvements, including a better screen. After running the changes through a complex government computer model, he determined that the improvement in the screen was valued at more than $135. Factoring that in, he concluded the price of the TV had actually fallen 29%.

    Mr. LaFleur was applying the principles of hedonics, an arcane statistical technique that's become a flashpoint in a debate over how the U.S. government measures inflation. Hedonics is essentially a way of accounting for the changing quality of products when calculating price movements. That's vital in the dynamic U.S. economy, marked by rapid technological advances. Without hedonics, the effect of consumers getting more for their money wouldn't get fully reflected in inflation numbers.

    But even as the Federal Reserve raises interest rates amid a recent uptick in inflation, many critics complain the hedonic method is distorting the picture of what's going on in the economy. They say hedonics is too subjective and fear it helps keep inflation figures artificially low -- meaning the Fed may already be lagging in its inflation-fighting mission




    In the long run, we're all dead. John Maynard Keynes
    by Jerome a Paris (etg@eurotrib.com) on Fri Oct 12th, 2007 at 05:45:50 AM EST


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