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Thursday, June 5, 2008

Core inflation and other lies

The U.S. Government, in a ploy worthy of some economically mismanaged third world hellhole, has taken to emphasizing so-called core inflation rather than the higher "headline", or real, inflation.

Core inflation removes the prices of food and fuel from the calculation on the grounds that, since these can be very volatile, using them distorts the month to month comparisons. That is true as far as it goes.

The problem is that it doesn't go far enough.

First, the government persists in using "core inflation' for year to year comparisons. This is a gross misuse since the extreme volatility of prices for food and fuel, which is the excuse for deleting these staple of everyday life from the index, is much reduced when the comparison period is a year.

The second issue is that it is really hard to avoid paying for food and we are severely limited in our ability, at least in the short term, to reduce our fuel consumption.

Creating an index that tells the truth and nothing but the truth, but neglects to tell the whole truth, is not something that criminal courts, for example, look kindly upon.

The reality is that individual consumers have to deal with headline inflation - not core inflation or some other funny number dreamed up by government statisticians who, while they may not be playing politics, nevertheless seem to be wrong. Anecdotal evidence about the cost of food, fuel, clothes, travel, rent, medical care etc. etc. suggests that prices are rising much faster even than the headline inflation index.

Tell us the truth. The vast majority of us are mature enough to handle it and the politicians, if they ever tried speaking truth, would get an interesting surprise.

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