I was just reading an article in the Boston Globe about the trade deficit hitting a 4-month low when I stumbled across these two paragraphs:
In a second report, inflation at the wholesale level jumped sharply in July, rising by 0.6 percent, far above the 0.1 percent increase analysts had been expecting. The bigger-than-expected jump reflected sharply higher energy prices.
The Labor Department said that core wholesale inflation, which excludes volatile food and energy costs, rose by a much more moderate 0.1 percent, even better 0.2 percent gain analysts had expected.
I don’t recall whether I blogged about this before (and I’m way too lazy to search my archives), but this is a really cool tidbit: Inflation numbers are cooked to make the government look good.
It turns out that inflation has really been going up a bunch over the last 20-30 years. Real income, that is, how much stuff we can buy if we spend every dollar we take home, has fallen for most of us. We can buy less today than we could 30 years ago. (This reflects the statistic that most of the economic growth since the 70s has gone to the top 10% or even the top 1% of the earners.)
As you can imagine, this makes the government look bad, no matter who’s in office. It made Reagan look bad. It made Bush 1.0 look bad. It made Clinton look bad. And it made Bush 2.0 look bad.
But Bush Administration 2.0 has been nothing if not brilliant at redefining reality. So in 2000, the Federal Reserve Board redefined inflation. Now we have “inflation” and “core inflation.” Core inflation is just like inflation, except they don’t include increases in energy and food prices. Those prices, you see, are too volatile, and might paint a misleading picture.
Hah! Those are also the most important components of measuring inflation, because neither is a optional purchase. If energy prices rise 20%, we pretty much have to pay that cost. It gets factored into our gas prices directly, and it gets factored into everything else we buy in the form of transportation costs, manufacturing costs, etc. When energy costs rise fundamentally, eventually, the cost of everything rises, and we can buy less stuff with the same amount of money. In other words, inflation.
Food cost isn’t quite so pervasive, but it’s even less optional than energy. You can go without turning on your A/C for a week. You may not like it, but you can do it. You can’t skip eating. So when food costs go up, they hit you immediately.
By creating this separate definition of inflation, the Government can now point to low inflation numbers and be surprised at how well we’re holding down inflation. Gee, isn’t that grand. It’s even lower than expected.
But for those of us who aren’t mired in self-delusion, inflation is how much more we have to spend on our lives overall, to maintain our standard of living. Perhaps that’s why Americans are now living with negative savings; real inflation has increased to the point where we can’t afford our lifestyles. Happily, however, if you just follow the Government’s lead and focus on “core inflation,” you’ll realize that maybe you’re hungrier, further in debt, and in financial trouble, but at least “core inflation” is low. Sleep well, while you can still afford that mortgage payment.