Behind the statistics on inflation
IN "Why the numbers don't add up," Petrino DiLeo raises a real issue--government statistics that minimize the inflation problem. However, his article focuses on a minor way this happens, through estimates of "core" as well as overall ("headline") inflation.
DiLeo is correct that the historical data adjustment creating a "core rate" of inflation by excluding price changes for food and energy is pretty much irrelevant today, when these are the two main sources of inflation. But most economists and economic analysts recognize this--not just radicals. News stories in the mainstream media also highlight the overall rate of inflation, not the core rate of inflation.
DiLeo's article also appears to reflect confusion from some recent popular terminology. What DiLeo called the "headline" rate of inflation (and says is not accurate) is, in fact, the same as one of the "other measures of inflation" he mentions later--the Consumer Price Index (CPI). The Bureau of Labor Statistics prepares two different measures of inflation reflecting purchases by different population groups, but the "headline rate" is its most commonly used measurement: the Consumer Price Index for All Urban Consumers, or CPI-U. (See the "Consumer Price Index Summary.")
DiLeo is focusing on an important issue--that the Fed's underestimates of inflation have been one factor stimulating spending and creating the now-deflating housing bubble (as well as previous bubbles).
The article he refers to by Kevin Phillips provides stronger evidence, including three specific ways the CPI data is adjusted that may reduce the inflation rate. Phillips also points out that the bulk of housing price increases are excluded because the Bureau of Labor Statistics says people buy homes more as investments than as places to live, while the purpose of the CPI is to measure the inflation people experience from their spending.
What this shows is the problem with holding up the CPI as a way to measure our overall experience of inflation. Even though rents aren't going down right now, falling prices for this most widely held form of wealth are clearly affecting people's living standards, spending and security.
Finally, I disagree when DiLeo calls the CPI a "subjective" measure. There have been lengthy public debates about which products' prices are measured for the "market basket" of goods purchased by the typical urban consumer, how the CPI should account for changing purchasing habits, etc. These decisions by Bureau of Labor Statistics economists and officials certainly are political, but they aren't just reflections of personal biases, and they are open to serious analysis.
That's the value of a critique like Kevin Phillips' estimating the "real" inflation rate as 3-4 percent higher than the official estimate.
Deborah Goldsmith, Oakland, Calif.
