The Huffington Post carried an article that listed “11 Lies About the Federal Reserve.” Naturally, the list is a mixture of straw men or otherwise untruths in themselves. One of the “lies” listed is that we “Fed-haters” believe that “the Fed is causing hyperinflation.” I honestly don’t know of anyone who would say that the Fed is causing hyperinflation.
Granted, hyperinflation is something that we all talk about as a logical consequence to unbridled fractional reserve banking. But the Fed could continue to pump more and more money into the banking system, and as long as the banks held onto that money, we wouldn’t really see the effects of hyperinflation. The hyperinflation would come when the banks unleashed all that money in the form of loans and credit extensions. As economist Tom Woods explains:
If the banks begin lending and the money multiplier is enacted, an inflationary spiral could easily occur — trillions of dollars of high-powered money would expand via the fractional-reserve banking system into tens of trillions of dollars. The only way for the government to stay ahead of the curve would be for the Fed to keep creating boatloads of new money — which is how hyperinflation happens, after all.
In the Huffington Post’s rebuttal to this supposed myth, the author stated:
But inflation is actually at historically low levels, and there is no sign that is going to change. Core prices have risen just 1.4 percent over the past year, according to the Labor Department — below the Federal Reserve’s target of 2 percent.
The way the Bureau of Labor Statistics calculates the Consumer Price Index (CPI) is similar to how it calculated the jobs number we saw recently that made it look like Obama was doing a great job creating jobs. When you look at the unemployment data, you find that many people considered their part time job their full time job. Also, the BLS doesn’t mention all those individuals that have given up looking for work. So, what we end up with is not so much a back room deal where Obama goes to the BLS and gives them money to manually lower the jobs figure to make his re-election more sure. Rather, the way in which the BLS produce the end result makes the final numbers artificially low. Its sole purpose is to give a better picture than reality.
When the BLS calculates CPI, upon which inflation rates are based, it’s the same thing. The CPI isn’t what it used to be. It used to give us a measurement of the average cost of what it would take to maintain our current standard of living. The CPI’s market basket, which contained everyday items that people bought, was static from year to year. This gave a more accurate picture of any price changes.
But now, it doesn’t give us that information. Currently, CPI numbers are based on Consumer Expenditure Surveys. Over a 2-year period, 7,000 households or “consumer units” are given an Interview Survey, and 7,000 other consumer units are given the Diary Survey. The interview survey is given quarterly for 5 consecutive quarters, and it ascertains large expenditures like house rent, vehicle purchases and utilities. The other survey is self-administered and gathers day-to-day purchases such as gasoline, specific grocery store items and garments of clothing. All this information is then compiled at the BLS.
Besides the obvious sample bias in the relatively small number of survey-takers compared with the rest of the U.S. population, the problem with this new methodology is that it doesn’t take into account when consumers change their buying habits based on price changes. Let’s say you’re used to buying steaks, but as the price of steak increased, you decided it was too expensive, so you switched to something cheaper like chicken or ground beef. On the Consumer Expenditure Surveys, all that will be captured is that you buy ground beef regularly. If most of the sample being surveyed made similar decisions based on cheaper prices, then the BLS will assign a weight to ground beef which will indicate that it’s popular with consumers. The BLS will investigate prices of ground beef in grocery stores and compare them to past prices and indicate on their report whether the price has gone up or down. It won’t take into account the fact that steak prices went up or the reason those surveyed chose ground beef. This is why CPI numbers and inflation numbers never seem like reality. In fact, on the BLS’s own website, they state:
It is important to understand that BLS bases the market baskets and pricing procedures for the [CPI] populations on the experience of the relevant average household, not of any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions…It seldom mirrors a particular consumer’s experience.
So, if it doesn’t ever really reflect reality, what is its purpose? The same as the jobs numbers. It looks better politically to have low unemployment numbers even though many more are being affected by unemployment than the report says. Likewise, it looks better politically to have lower inflation numbers even though we’re all being affected by higher prices at the grocery store and at the gas pump.
One of the reasons this change in CPI calculation occurred was so that Social Security benefits could be decreased. According to the New York Fed:
Social security benefits, paid monthly to almost 30 million Americans, are automatically adjusted for inflation once a year. The goal of this cost-of-living adjustment is to prevent a decline in the purchasing power of retirees’ benefits. Under the current system, the adjustment is tied to changes in the consumer price index (CPI), the benchmark measure of inflation produced by the Bureau of Labor Statistics (BLS).
This way, if the CPI remains low, there don’t need to be as many cost-of-living increases for Social Security benefits, and the government doesn’t have to pay out as much to seniors. This is why so many seniors are being hit the hardest by inflation. They live on fixed incomes that don’t keep up with the real rate of inflation. On the flip side, the government wants there to be some inflation so that their debt obligations don’t look as bad.
No comments:
Post a Comment