The Truth About Inflation
As recent debate on the pages of this Web site has shown, there is a divergence of inflation views. There's plenty of misinformation and spin out there, too.
I believe the economy is experiencing robust inflation, and has been for some time. While energy certainly is a part of that -- crude oil has run from $25 to as high as $70 -- inflation is not just confined to energy.
What Is Inflation?
Inflation is the rate of increase in general prices of all goods and services. It also can be described as a decrease in the purchasing power of money.
Regardless of your definition, inflation occurs when goods and services cost you more than they did previously. As this happens, your money becomes worth less than before.
How Is Inflation Measured?The Bureau of Labor Statistics
The So-Called CoreSpeaking of torture, the CPI core is a measure of inflation with food and energy removed. By taking out the more volatile elements, economists ostensibly avoid having a single outlying month disrupt an orderly data series. More numerically literate observers might think a simple moving average would do the same thing. It would reveal when prices are rising, while smoothing the impact of one-time price spikes. Yet this is not how most economists report CPI. One has to wonder why they have been reporting inflation data excluding energy 48 months into a robust move upward in oil prices. That hardly looks like removing a one-time "outlier." The CPI ex energy measure is misleading, as it makes inflation appear far more benign than it really is. But don't think it's just energy; lots of other items have also risen in price. The CRB Index, for example, has been in a strong uptrend since October 2001. Yet despite all these rising prices, the core CPI rate has remained remarkably stable. In addition to energy and other commodities, education expenses have outpaced median inflation, as have health care costs. But the biggest factor not reflected in the CPI basket is the cost of housing. Home prices have gone up dramatically -- the National Association of Realtors' Housing Affordability Index is now at 14-year lows. But you cannot tell that from the CPI.
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