Measuring Inflation By William Cate
Knowing the inflation rate for your business or family is vital to your long term financial planning. Thanks to the Federal Reserve in Minneapolis, it's now possible for you to easily develop an individual inflation meter. Also, it allows you to prove to yourself that the Government is lying about the inflation rate.
The U.S. Department of Labor reports the Consumer Price Index (CPI). The Government wants you to believe that the CPI is the U.S. inflation rate. It isn't. Like many Government and industry statistical indexes, it is intentionally misleading. The purpose of the CPI is to under report the U.S. inflation rate. The CPI rate is used to adjust Social Security payments and the real inflation rate would be very costly to the Government. Consumers relying on the CPI mistakenly have a more favorable view of the country's economic future and buy more goods and services, thus creating more jobs and helping ensure the economic illusion will continue longer.
The Government's primary statistical method for under reporting the U.S. inflation rate is to carefully select the components that make up the CPI. The Government chooses items that aren't responding to inflation. An example would be that single family residents were used as the housing component until house prices started to move upward rapidly over a decade ago. Then, the Government switched to the cost of a single-family rental unit, which wasn't moving up quickly. The steady rental rates are in part due to local government rent ceiling ordinances.
Until last year, gasoline prices at the pump were well below the annual CPI rate and were used as the energy component. The reason that the gasoline price was low was that our friends in Saudi Arabia were willing to sell oil to us without adjusting the price to the real inflation of the U.S. Dollar.
It's easy to find items whose price hasn't adjusted by the inflation rate. Phone costs have declined in the past decade, due to competition and PC prices remain constant, etc. The Government's secondary method is to have a statistical formula with a strong downward bias as the result.
The Rule of Thumb in the American business and financial community is to take the CPI and double it to get an approximate real inflation rate. Fiscal conservatives argue it should be tripled.
Someone at the Federal Reserve in Minneapolis developed a calculator based upon the CPI. [http://woodrow.mpls.frb.fed.us/research/data/us/calc/] It allows you to determine the factor needed to adjust prices for any year, starting in 1913. If you want to determine the CPI adjusted price for an item in 1913 with the same item in 2005, you'll find that you should factor the 1913 price by 19.8. As a byproduct of where I dined during my college years, I know that a steak dinner in a middle class St. Louis, Missouri restaurant was $0.25 in 1913. The restaurant had its original menu on the wall. Based upon the CPI that steak dinner should cost $4.93 today. I'll bet you can't get a decent steak dinner in St. Louis for less than $10.00 now. I know that I can't get one for less than $20.00 in the San Francisco Bay Area.
You can apply the Fed's calculator to the Government. In 1952, you could mail a postcard for one cent. If the CPI were accurate it would now costs you about seven and a half cents to mail a penny postcard. On the other hand, you can confirm that oil prices have stayed well below the inflation threshold. In 1957, regular gasoline at the pump in the San Francisco Bay Area was $0.34/gal. Today, it should be $2.36. It's $2.69 today, but a year ago, it was $1.79/gallon.
If you are in business, take the past price of your twenty most expensive overhead items. Note their cost the year that you started your business. Using the Federal Reserve calculator, determine what they should cost you in 2005. Calculate the percentage difference between your current actual costs and the Federal Reserve's calculator factored price. Average the percentage difference and you have a percentage adjustment for your business that should be applied to the CPI to get your business's inflation rate.
For your family, take the past price of the twenty most expensive costs you incur as a family. This usually includes housing, food, funeral, college education for your children, etc. Determine their cost in the year that you were married. Using the Federal Reserve calculator, determine what they should cost you in 2005. Calculate the percentage difference between their actual costs today and the Federal Reserve's calculator factored costs. Average the percentage difference and you have a percentage adjustment for your family that should be applied to the CPI to get your family's inflation rate.
If you still believe the CPI is more or less an accurate index of American inflation, go to your local library. Borrow some old catalogs from 1913 or later. A useful one is the 1916 Sears catalog. Using it with the Fed's calculator, you can prove to yourself that not everything the Government says is true --- or even close to the truth.
I doubt that the folks in Minneapolis wanted to supply proof that the Government is lying about the CPI. If this article is well published on the Net, I wonder how long the Fed's calculator will be available to the public?
About the author: He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinves tmentclubwelcome/]