Thursday, April 24, 2008

Fortune on Inflation

"If the filet mignon is reasonable, all is right with the world. If it seems unduly expensive, Dana gets worried that inflation is spinning out of control. So a couple of months ago he returned from a month in Paris to find that the price of pricey steak had jumped to $38, up from $36. To hear him tell it, not since the Last Supper has an evening meal emanated so pervasive a sense of impending doom. ... But it's a little frightening when a guy who just spent several weeks spending euros (now 1.58 to the dollar and climbing) comes back to New York, switches to dollars, and finds himself 'aghast' that everything's so expensive. ... So how do we account for the discrepancy between the [Fed's] recent assurances that inflation is under control and the 91% of the population that's worried it isn't? ... The ... most disconcerting possibility is that the CPI systematically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. ... One of my favorite 91-percenters, Fusion IQ's Barry Ritholtz, puts it amusingly: 'If you take everything out of the CPI basket that's going up in prices, sure, you have no inflation!' ... People like Ritholtz are thinking of the 1996 Boskin Commission, which was established to determine the accuracy of the CPI. The Commission conlcuded that the CPI overstated inflation by 1.1%, and methodologies were adjusted to reflect that", my emphasis, Elizabeth Spiers (ES) at Fortune, 14 April 2008.

Welcome aboard ES. One quibble: The Boskin Commission was not "established to determine the accuracy of the CPI", but to find a rationalization for reducing it. At least, that's my opinion. See my 5 October and 18 November 2007 posts.

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