Thursday, May 22, 2008

Is Inflation Understated?

Many people believe that the government systematically understates unemployment and inflation, to give two of the most popular examples. To give one famous example, the consumer price index (CPI) famously excludes such items as food, energy, healthcare, and education. This is because they are "volatile."

Basically, numbers are never collected raw, they are interpreted in relation to theoretical models. These models contain some pretty questionable logic but they produce what critics charge is the point: "official" government data that either misses important events (such as the run up in house prices) or deliberately makes the world rosier than it is.

It's a theory versus real life smackdown!

There is a working paper from the Philadelphia Fed that discusses the shortcomings of the current CPI. Recently, the Bureau of Labor Statistics defended its methodology.

Here's our subject heading for the consumer price index (ignore the Cost of Living Index from ACCRA - it doesn't measure inflation. If you mess with the link, you'll see what I mean).

I'll also throw in this e-book link at no extra charge!

Another great way to read up on this is by using our Factiva business news database.

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