Monday, May 09, 2005

Position - Inflation

The Wall Street Journal today had a piece on the construction of the CPI. I have always hated it and as someone with an economics background I can tell you that the artifice is like much of economics - something that generally works, but don't look too deep.

The vast majority of us do not buy a car, house, move and rent somewhere new, buy a refrigerator, a computer, furniture, stop in an emergency room EVERY MONTH. But those are part of the Index. A lot was made of hedonics and frankly, that is just another system by which people who are supposed to know why something works (but don't) use to explain their explanation to those that think they know that they know why things work the way they do.

Get it.

Here is the basic problem with economics. Take 5 families, each with two parents and three kids (two boys and a girl), working for the same company, living in the same neighborhood, earning exactly the same income, driving the same cars, having the same education. Now, follow one family for 6 months, account for every single penny they spend, how they spent it and use that information for two purposes: predict (with reasonable certainty) how they will spend their next 6 months of income AND, use the info to determine how the other 4 families spent their last 6 months of income. You know what you will find? You will be able to predict next month, and maybe most of the next month with the family you have specific information about, but the other 4 families....way off, not just with one, but with all 4. Now try it with 140 million....

Here is my inflation: our property taxes went up $55 per month this year, milk costs $2.89 a gallon (last year $2.29), eggs were .99, now 1.49, bread was 1.89, now 1.79, my favorite ham was 3.89 a pound, now 4.89 a pound, gas was 1.78 a gallon, now 2.18.

CPI should have 3 reported rates: established (for those whose life this year will be mostly like last year); initial (for those starting out) ; and transitional (for those with declining needs).

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