Monday, September 25, 2006

Continuing the inflation theme

Continuing the inflation theme:

While inflation can obviously lead to many problems, there is an important bias that must be considered (especially when you think of inflation measured by government statisticians.) As the NY Times so aptly points out, this problem can be illustrated with the humble snow-blower.

Life Is Better; It Isn't Better. Which Is It? - New York Times:
"...the benefits of the snow blower, namely more free time and less health risk, are largely missing from the government'’s attempts to determine Americans'’ economic well-being. The same goes for dozens of other inventions, be they air-conditioners, cellphones or medical devices...."
Why? In part because new inventions, or improvements of existing items, can take years to show up in official indicies.

Again from the NY Times:
"The cellphone and the air-conditioner also improved middle-class life, and also took years to get into the inflation numbers, by which point their prices had plummeted. Wal-Mart’s effect on prices is another blind spot in the index, which considers something sold at a discount to be lower quality (and, therefore, not truly a bargain) than something sold at full price...."
The result? Official inflation numbers are overstated. Not only does it enter our mental math on whether we are better off or not than past generations (we are contrary to what some will tell you), it has become a campaign issue, and can have major implications to cost of living adjustments (COLAs).

Best advice, realize CPI and other government inflation indicies overstate the actual inflation rate.

BTW be sure to look at the NY Times Graphic that shows how large of impact the inflation bias can have on "real" income.

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