Tuesday, May 10, 2011

What's the Real Inflation Rate?

There has been some debate lately over what the nation's true inflation rate ought to be. People have noticed some dissonance between rising prices for things they purchase every day and an official inflation rate that's still historically somewhat low at around 2.5 percent. Gasoline is the main culprit here, although staples like meat and milk have also been increasing in price. It's hard to believe inflation isn't a problem when you're shelling out extra a couple times a week, every time you fill up the gas tank or stop into the grocery.

In the latest issue of Newsweek, Niall Ferguson argued that the only reason the "official" inflation rate is so low is that the Bureau of Labor Statistics keeps revising the way it figures that rate. Ferguson claims that if inflation were still being calculated as it was in 1978, with the same proportion of consumer items, the true inflation rate would be around 10 percent.

But there's a good reason that the BLS has revised its formula: American spending habits have changed. Back in 1978, we spent 13.4 percent of our personal income on food; now, that number is down below 10 percent. It makes sense that the BLS would reduce the impact of food prices on the inflation number, and increase the impact of things like electronics - which we spend a lot more on today than we did in 1978. Of course, that doesn't make it any easier to take when you're paying $25 for a couple of steaks at the A&P.

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