Real inflation at 8%?

Ben Bernanke claims not to worry over the inflationary impact of rising gas prices.  In testimony to the House Financial Services Committee yesterday, the Fed chair said that gas price hikes would temporarily bump inflation upward and reduce disposable income, but that the impact would not be lasting, nor deflect from the long-term trend of stable inflation rates:


Federal Reserve Chairman Ben Bernanke downplayed the long-term consequences of high gasoline prices on Wednesday, while urging lawmakers to establish a careful plan to restore the country’s fiscal sustainability. …

The economy will likely see short-term inflation from higher gasoline prices, which could reduce consumers’ purchasing power, Bernanke said, but maintained that the Fed still expected to see inflation remain subdued in the longer term.

How subdued is inflation?  The current official estimate has the annualized inflation rate at 3.1%.  However, CBS reports that a different measure of inflation puts the rate much higher:

Forget the modest 3.1 percent rise in the Consumer Price Index, the government’s widely used measure of inflation. Everyday prices are up some 8 percent over the past year, according to the American Institute for Economic Research.

The not-for-profit research group measures inflation without looking at the big, one-time purchases that can skew the numbers. That means they don’t look at the price of houses, furniture, appliances, cars, or computers. Instead, AIER focuses on Americans’ typical daily purchases, such as food, gasoline, child care, prescription drugs, phone and television service, and other household products.

The institute contends that to get a good read on inflation’s “sticker shock” effect, you must look at the cost of goods that the average household buys at least once a month and factor in only the kinds of expenses that are subject to change. That, too, eliminates the cost of housing because when you finance your home with a fixed-rate mortgage, that expense remains constant until you refinance or move. …

Over the past year, the EPI is up just over 8 percent, according to the economics group. The biggest factor: Motor fuel and transportation costs are up 21.06 percent from year-ago levels. The cost of food, prescription drugs, and tobacco also have increased faster than the government’s inflation measure, rising 3.56 percent, 4.21 percent, and 3.4 percent, respectively.


The analysis at AIER appears robust and scholarly.  They note that the CPI and their EPI (Everyday Price Index) remained closely correlative until the bubble expansion in the mid-2000s.  The peak of the disconnect hit in 2008, but the two have been significantly unlinked since.  On a year-by-year basis, this chart shows the contrast:

Normally, changing measures means adopting a new metric with little history. In this case, though, AEIR shows that the reliance on relatively rare big-ticket purchases in the CPI does not reflect the actual impact on consumers.  The EPI reflects more accurately the consistent experience of consumers in the marketplace, where escalating fuel costs raise prices on goods across most distribution channels, especially at the grocery store.

The US government will not be adopting the EPI any time soon, of course.  The Obama administration should be paying close attention to it, though.  Consumers who see their buying power rapidly eroding will not respond to claims of having mastered an economic recovery — a dynamic we have already seen, even before higher gas prices have begun to have a big impact.

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