Is this guy right?

1. Dec 7, 2008

2. Dec 7, 2008

mgb_phys

Official inflation rates are underestimated by a factor of 2-3x.
The inflation is based on the rise in prices of a basket of goods bought by the average consumer - you can rig the figures by simply what you include in the basket.
In the UK for example the official inflation rate doesn't include mortgage/rent (because houses are an investment not a cost!) or fuel costs (because they change so much) or taxes. They do include major purchases like a flat screen TV.

6. Dec 7, 2008

Staff: Mentor

Part of the problem is that it isn't uniformely spread over the whole economy. A person who drives 30 miles to work gets hit much harder than someone who drives 10. My house uses propane heat and propane's price swings with the oil price - but someone who has electric heat has a cost that has been basically capped for a decade.

Comodity prices are however, reflected in the prices of products, so they do still show up in the CPI.

7. Dec 7, 2008

wildman

Thanks Russ. What you say makes sense. Sorry if I restarted something that was already discussed.

8. Dec 7, 2008

Art

The central thrust of the argument in the article referenced in the OP is correct.

Understating the inflation rate led to the gov't pursuing a flawed economic policy in regard to interest rates. Instead of increasing rates to cool down a rapidly over-heating economy the gov't was lowering them adding fuel to the fire. This led directly to the housing bubble which in turn led to the credit crunch which has led to the current economic crisis.

One key reason why the gov't would have an interest in understating inflation is to keep wage claims down as these are inevitably tied to the CPI as are many index linked pensions.

9. Dec 7, 2008

Staff: Mentor

The discussion of it before was pretty thin anyway. There are certainly people who would disagree with me and agree with the author, though...