Simply
described, inflation refers to a sustained increase in the general price level.
Inflation is calculated as an average since not all prices rise, some remain
the same, and some even drop. Rapid inflation and currency depreciation can
occur if money is overprinted (quantitative easing), by increasing the money
stock without the backing of goods and services to justify the printing.
The
Bureau of Labor Statistics (BLS) calculates the unemployment rate and two types
of inflation: The Consumer Price Index for all Urban Consumers (CPI-U) and the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The
traditional measurement has been CPI for all consumers, by using a “basket of
goods” which changes over time. The “basket of goods” used to calculate
inflation include eight major categories with more than 200 groups:
-
food and
beverage
(cereal, milk, coffee, chicken, wine, snacks, restaurant meals)
-
housing (rent, owners’
rent, fuel oil, bedroom furniture, water and sewage fees)
-
apparel (men’s shirts
and sweaters, women’s dresses, jewelry)
-
transportation (new cars,
airline tickets, gas, car insurance, car tolls, auto registration fees)
-
medical care (prescription
drugs, medical supplies, doctor’s services, eyeglasses, eye care, hospital
services)
-
recreation (TV, cable,
pets, pet products, sports equipment, admission tickets)
-
education and
communication
(college tuition, postage, telephone services, computer software and
accessories)
-
other goods and
services
(tobacco, haircuts, personal services, funerals).
Sample
goods in each category are chosen “using scientific statistical procedures.”
For example, in the apple category, a 4.4 pound bag of golden delicious apples,
U.S. extra fancy grade is used. As a consumer, I prefer Gala and Fuji apples.
http://www.bls.gov/dolfaq/bls_ques3.htm
Sales
and excise taxes directly associated with the price of specific goods and
services are also included in CPI calculations. Income, Social Security taxes,
investments such as stocks, bonds, real estate, and life insurance are not
included by the Bureau of Labor Statistics (BLS) in CPI calculations.
Since
inflation rate has been reported for January (1.6 %), February (2.0 %), and
March (1.5 %), (http://www.usinflationcalculator.com/inflation/current-inflation-rates/) and prices in
grocery stores and at the gas pump contradict the rosy picture, I am not
convinced that food and gasoline prices are included in the CPI currently.
Generic
CPI is important because it is a powerful policy control. CPI-W is used to
calculate cost of living adjustments (COLAs) for Social Security retirement
benefits. CPI-U is used to calculate “annual inflation adjustments to personal
income tax brackets,” affecting outlays and revenues. Outlays are
government-speak for spending. www.fas.org/sgp/crs/misc/RL32293.pdf
Since
2002, the Bureau of Labor Statistics (BLS) published a Chained Consumer Price
Index for all Urban Consumers (C-CPI-U) in order to report CPI “free of
substitution bias.” Substitution is an economic term which refers to consumers
who change their buying pattern as a direct result of changing relative prices.
Consumers buy goods and services more when their prices increase slower over
time. If prices rise sharply, consumers substitute those goods.
Policy-makers
believe this substitution effect protects consumers from the full effect of
rising prices. Neither CPI-W nor CPI-U entirely accounts for substitution thus overstating “the impact of inflation on
consumer well-being.” (Julie M. Whittaker, The Chained Consumer Price Index:
What Is It and Would It Be Appropriate for Cost-of-Living Adjustments, May 8,
2013)
If
I have to switch the quality and type of food I buy (substitute it) for a
cheaper or different alternative, it does affect my standard of living. I have
insulated myself from higher prices (inflation) but the quality of what I eat
has gone down.
Accounting
for consumer substitution, the Chained Consumer Price Index (C-CPI-U) has
increased less than CPI-U or CPI-W.
Politicians argue that less cost of
living adjustments (COLAs) should be made to various benefits.
To
decrease the budget deficit, lawmakers recommended in reports such as the “2010
Simpson-Bowles” and the April 2013 President Obama’s Fiscal Year 2014 Budget, a
government-wide replacement of the CPI-U and CPI-W with the Chained Consumer
Price Index (C-CPI-U) “when calculating
automatic adjustments to inflation-indexed federal tax programs and individual
tax provisions.”
Wage
rates, pensions, interest payments on bonds, income taxes, and many other
benefits would be indexed based on the Chained Consumer Price Index which would
take into account the substitution effect.
Indexing
Social Security benefits, federal and military pensions based on the Chained
Consumer Price Index formula will decrease the population’s standard of living if
prices increase at an above-average rate. The elderly spend more on health care
and prices for such services have increased at an above-average rate. (CRS
Report RL32293, Julie M. Whittaker, May 8, 2013, p. 14)
The
U.S. Congressional Budget Office (CBO) has calculated that, if the Chained
Consumer Price Index (C-CPI-U) will be used:
-
Government
revenues between FY2014 and FY2023 will increase
by $123.7 billion from the indexation of tax code provisions.
-
The
cost of living adjustments (COLAs) for Social Security benefits will result in
a decline in outlays of $127.2
billion in the same time period.
-
The
cost of living adjustments (COLAs) for federal and military pensions would decline in outlays of $37.5 billion in
the same time period.
(Julia M. Whittaker, CRS Report RL32293,
May 8, 2013, pp. 15-16)
Once
again, switching formulas to the Chained Consumer Price Index (C-CPI-U) and
manipulating the math, the government out-of-control spenders win and the retirees,
the elderly, the pensioners, and the saving taxpayers lose.
No comments:
Post a Comment