Is inflation really 10 percent?
Date posted: May 9, 2011
There’s a new study that suggests the main inflation gauge, the consumer price index, is understating the real inflation rate by showing a 5 or 6 percent annual rate. This study says the real annual inflation rate is near 10 percent. Is the report correct? N.C. State University economist Mike Walden responds.
“Well … this really goes to how we calculate inflation. Many people might think, well, it’s easy; you just track the price of things like eggs, butter, bread, cars, gas, et cetera and combine that and you get the inflation rate. The big problem area is that some of those more complicated products like a car or even a house or appliances; they change in their characteristics over time.
“I mean, think about a car. Forty years ago the standard car didn’t have air-conditioning, and it certainly didn’t have the kind of audio components that we now have (and) didn’t have air bags. Those cars today have those things, and they’re worth something. So, what the government does is they try to adjust for these quality changes in products like cars or appliances. And what that means is actually manipulating the current price, and in many cases not backing down that price a little bit to account for, again, the benefit of having these better quality products.
“Well, what one analyst did is say, ‘Well, what if we didn’t do that? What if we simply took the stated prices and then adjust for quality, what would the inflation rate then be today?’ And he’s right, it would be higher — would be about 10 percent.
“But the real question is, Is that an accurate reading? If part of the higher price that we’re paying for something now is because that something is better, then we really shouldn’t count it as a price increase.”
Category: Economic Perspective