Recession?

jason_els

<img border="0" src="/images/badges/gold_member.gi
Joined
Dec 16, 2004
Posts
10,228
Media
0
Likes
163
Points
193
Location
Warwick, NY, USA
Sexuality
90% Gay, 10% Straight
Gender
Male
Don't confuse monetary inflation with price inflation. They're two different things.

There are two schools of thought about why inflation occurs. Monetarists insist that inflation occurs because of too much unbacked currency in the monetary system. Keynesians merely believe that excess currency is a factor, if not the cause.

The government monitors price inflation by creating a theoretical basket of goods. This basket is composed of consumer goods and expenses and supposedly represents what the average consumer spends for the same items over a period of time. What they've done is change what's in the basket. The most notorious example is when they switched mortgage payments out of the basket for rent-equivalent payments which is very useful when mortgage payments are high and rents are low due to market demand. This process is called, "hedonic adjustment." The government also likes to cite, "core inflation," meaning price inflation without counting food or energy expenses. This is very useful now as we're seeing record prices in commodities. The goal is to find numbers that represent price inflation as low as possible to make the government, and the financial system, more stable than it is. So while you and I are seeing prices of everything rise, the government can come back and tell us it's just our imagination; the cost of living really hasn't risen as fast as we'd like.

Back in the 70s and 80s, the basket of goods, was arguably more representative of what the typical consumer buys. By changing out meat for cheese, frozen vegetables for fresh, the price of the lowest priced car on the market versus the average priced car, Wal-Mart clothing for better brands, the apparent cost of living is much lower than it is for middle class Americans. It's quite the shell game.

I know the government has changed the way it calculates unemployment rates now (no longer counting people who have been unemployed over 6 months) but how is inflation calculated differently that makes the official rate artificially low?

In all actuallity, inflation is rather location and socio-economic group specific isn't it? I mean if you loose your job and need to buy health insurance your inflation rate is through the roof while those govenment workers with free health coverage are insulated to the rising cost of healthcare. If your kid needs to go to college your inflation rate is 15-20% (the rate of education inflation) but if you have no kids then you have very little. The same holds true for SUV drivers vs. people who use mass transportation and the cost of gas. And if you live in the Bay Area and want to buy a house your inflation rate was about 20% for the last few years.