The Inflation Measurement Scam — John Hellevig

In a recent report, we revealed the outrageously widening income and wealth gap and sinking standards of living in the United States. In reality, the situation with income and wealth inequality and stagnating wages could be yet much worse, because there are obvious problems with the official inflation figures, which are designed by the government to understate actual prices increases. To start with the inflation measure employed by the Federal Reserve (CPI) is a broad average purporting to reflect prices increases for all consumer goods and services. 

Herein lies the initial problem as the consumption habits of Americans are so different. Some of the products whose prices have risen less or decreased tend to be those that have a bigger weight in the purchases of the rich, whereas prices for goods and services that represent a bigger part of what the less fortunate (i.e. 80% of Americans) need have gone up much more. Especially this concerns, healthcare (both health insurance and medical care), education, and housing (in particular what concerns first-time homebuyers and rentals), which all have risen substantially more than wages over the last two decades. This is perfectly illustrated by below chart, which shows how much said services have risen over average pay rises....

Averages can be very misleading without deconstruction. Deconstruction of US inflation reports presents a very different picture of distributional effects on the growing inequality that is adversely affecting social and political functionality.

Awara Blog
The Inflation Measurement Scam

John Hellevig

See also

A Russian monthly salary of $1,600 gives at least the same standard of living as $6,000 in America

A more competitive market economy and socially just society gives Russians much more value for money

People in Russia and developing nations often look with awe and envy at the United States salary levels, thinking that the comparatively high salaries over there means that people are affluent. But the problem is that the other side of the seemingly impressive nominal salaries is a punitively high cost of living. In many countries, like in Russia, you get the same standard of living for a fraction of the American cost. Let’s see how it works out with a sample case....

Russia VS America: Real Income Comparison

FRBSF — Can We Rely on Market-Based Inflation Forecasts?

Conclusions

We find that market-based measures of inflation are poor predictors of future inflation. In particular, they perform much worse than forecasts constructed from survey expectations of future inflation, which incorporate all the information used by professional forecasters. Interestingly, a simple constant inflation rate corresponding to the Federal Reserve’s 2% inflation target consistently performs best. While our analysis is based on a short sample that displays a lot of volatility during the Great Recession, our results appear quite robust as they are consistent across two subsamples.

Our results add to the discussion about how much attention policymakers and professional forecasters should pay to market-based inflation forecasts. These measures mostly reflect current and past inflation movements, and do not contain a lot of useful forward-looking information. Idiosyncratic market forces and inflation risk premiums appear to be important drivers of market-based inflation expectations. Overall, it is important to keep this caveat in mind when interpreting market-based inflation expectations.

FRBSF Economic Letter
Can We Rely on Market-Based Inflation Forecasts?
Michael D. Bauer, senior economist in the Economic Research Department, and Erin McCarthy, research associate in the Economic Research Department
ht Mark Thoma at Economists View