Its not my concept, proposal nor do I even necessarily agree with it; I posted it for its interest factor.
It is a point of interest that WE are a higher income group, so according to the article, may be getting the shortest stick from the CPI.
What I *have* proposed is picking a basket of goods, measuring the price, then measuring the price of the same basket of goods, no funny adjustments, no 'taking things out'.
What exactly is wrong with that idea? Or maybe someone can explain what CPI is really supposed to measure? I thought it was supposed to measure inflation.
Another interesting article, for those who dont have all the background...
If you think Enron-type accounting is dead, think again. No, it’s not a Fortune 500 company where made up numbers and slick tricks are still in vogue, it’s the US government with its Consumer Price Index (CPI) numbers, released every month. Traditional media, however, still has no clue. Not surprising since most newspaper writers are English majors and couldn’t tell CPI from GDP. As for your TV anchormen and women, well, let’s just say that looks are more than everything and finding the right makeup is more important than finding the right story.
CPI is the benchmark for measuring inflation, and is important because social security, and pension benefits for many companies are automatically indexed to adjust for the increase in CPI. But our government is unique in how it determines CPI. Instead of just measuring the change in prices for a set basket of goods (the way it used to do it), the government makes hedonic adjustments too. What are hedonic adjustments? Simply put, they factor in changes in the quality of what is measured. A standard entry model computer can do much more today than what a entry model computer could do a year ago, and in theory this sounds somewhat reasonable, but reason stops when adjustments are made to everything from textbooks to motel rooms. Take a history textbook for example. Since every year, there is more history to report on (the year 2005 is now history), the government says the QUALITY of textbooks also increases every year, and so higher prices for these new textbooks are adjusted downwards to reflect the gain in quality from adding 2005. How about motel rooms? Now that more motel rooms have internet access, the quality of these rooms are better, or so says the government. Again, prices are adjusted downward. And what about cable television? The government thinks that including an additional 100 useless music channels means that the quality of cable has improved, no matter that I’ve never tuned into one of these channels and can live perfectly without these “improvements”. Another downward adjustment for inflation. Are you getting the picture?
Now you think these hedonic adjustments would be enough for our government to get the inflation numbers it wants, but not so! The government also adjusts for the “substitution” effect. In short, if beef prices rise, more consumers will switch to chicken, and the fact that they’ll make this switch means that they’ll gain more in utility (pleasure) from eating chicken then they would have from purchasing beef at the higher costs. Therefore, the CPI should be adjusted downwards to reflect this switching effect. While this is true in economic theory, it completely misses the point of having a CPI, which should measure increases in prices for a set basket of goods, not for an price increase in a set living standard or utility. This is cheating and is totally against what the CPI was created for in the first place!
And since the CPI is so important, even our GDP numbers are affected as GDP is always adjusted for inflation. The lower the CPI, the higher the GDP. The Economist, my favorite magazine, is on to this game. In the Feb. 16th issue, The Economist writes,
“Europe could rejoice in further upward revisions to growth if its governments were to adopt American statistical practices. Price deflators there take more account of improvements in the quality of goods, such as computers, and thus a given rise in nominal spending implies faster growth in real terms. By using higher inflation rates, the euro area understates its growth relative to America’s…On past experience, Europe’s statisticians should add half a percentage point to their first guesses of GDP growth. By also switching to American practices, they could boost growth even further. Instead, their cautious ways are making Europe’s economies look more dismal than they are, and gloomy headlines are discouraging consumers from spending. Perhaps Europe should outsource the compilation of its statistics to America, and then watch the boom”.
The fact that The Economist regularly understands and reports on these “tricks” and subtleties is why it puts all other news magazines to shame. And the fact that our government has to use Enron-type tactics to calculate inflation should put our elected leaders to shame. Perhaps you now know why I, along with other libertarians, distrust the government so much, no matter who is in power. These adjustments were first put in by the Clinton Administration.
