Both the U.S. and European calculations of the inflation rate downplay price rises for real estate. Decreasing the CPI, because the quality of goods such as computers and cars has improved, may have its merits. If I have no choice but to buy the current model at the current price, I do not save any money. My “felt” inflation rate is higher. People that cannot afford new computers or cars to begin with would feel the rate that mainly applies to basic items like food and energy. Focusing on the “core” rate excluding those two has some merit during periods of fluctuation. During periods where food and energy keep going up in price for years the felt inflation rate also exceeds the core rate.
This divergence has real consequences. From 2002 to 2006 the U.S. Energy Information Administration reported the following annualized rises in residential consumer prices for the following products:
- Electricity 3.9%.
- Natural gas 7.4%.
- Gasoline 12.1%
The annualized increase of the CPI for all Urban Consumers was 2.3%. Social security recipients and others who receive pay increases based on the CPI thus got less than their increases in energy inflation for five years running. The situation looks similar for many food and medical items. Understandably, the felt inflation rate for many people is much higher.
Rippling Through the System
The problems continue. Many numbers such as GDP are adjusted for inflation. From 2002 to 2006 the U.S. Bureau of Economic Analysis reports a respectable average GDP increase of 4.7%. If the new calculations understate inflation significantly economic, growth could actually drop below that of Germany's 1.6%. An ironic thought, since Americans like to deride the German economy for its sluggish growth. It underscores how incorrect numbers can easily distort perception from reality. Not to say, though, that European statistics are immune to this. The problems are not as well documented, but there is anecdotal evidence. For instance, Germany introduced government-subsidized jobs. These allow employers to hire people at very low wages. Even though these earners cost the government almost as much as an unemployed persons, they are not counted in the unemployment statistics. This is similar to the U.S. Bureau of Labor Statistics discounting discouraged workers.
All the conspiracy theories notwithstanding, many problems with the numbers may have simpler causes. Imagine collecting employment statistics in a country with 300 million inhabitants and 50 state bureaucracies like the USA. Even Germany with its registration requirements and a fairly well-organized administration estimates that as much as 20% of GDP goes unreported due to “black labor,” i.e. work done without documentation to evade taxes.
As BusinessWeek discussed, government statisticians may not even know how to correctly calculate such complex numbers as GDP.
Bad Boy Media
Interestingly, journalists get blame from both sides. One group chastises them for ignoring the problems with the numbers and focusing on the “feel-good” ones like core-inflation. Understandably, media organizations whose revenue depends on people feeling good about the stock market have a vested interest in emphasizing the positive. Conversely, people like Wesbury blame them for spreading pessimism. Certainly, sensationalist headlines help sell news for others.
Obviously, the bad headlines alone could drive the people to confusion and despair. Just like there is no one economic number for everyone, there is no one headline for everyone, either. Most likely, a combination of the above factors causes many, many people to feel bad about the economic outlook. As the reasons differ, it will require many different changes for people to feel better, no matter what the economic numbers suggest.
