Measuring Inflation
By
William Cate

Knowing the inflation rate for your business or family is
vital to your long term financial planning. Thanks to the Federal Reserve
in Minneapolis, it's now possible for you to easily develop
an individual inflation meter. Also, it allows you to prove to
yourself that the Government is lying about the inflation rate.

The U.S. Department of Labor reports the Consumer Price Index
(CPI). The Government wants you to believe that the CPI is the U.S.
inflation rate. It isn't. Like many Government and industry statistical
indexes, it is intentionally misleading. The purpose of the CPI is to
under report the U.S. inflation rate. The CPI rate is used to adjust
Social Security payments and the real inflation rate would be very costly
to the Government. Consumers relying on the CPI mistakenly have a more
favorable view of the country's economic future and buy more goods and
services, thus creating more jobs and helping ensure the economic illusion
will continue longer.

The Government's primary statistical method for under reporting
the U.S. inflation rate is to carefully select the components that
make up the CPI. The Government chooses items that aren't
responding to inflation. An example would be that single family
residents were used as the housing component until house prices
started to move upward rapidly over a decade ago. Then, the
Government switched to the cost of a single-family rental unit,
which wasn't moving up quickly. The steady rental rates are in
part due to local government rent ceiling ordinances.

Until last year, gasoline prices at the pump were well below the
annual CPI rate and were used as the energy component. The reason
that the gasoline price was low was that our friends in Saudi
Arabia were willing to sell oil to us without adjusting the price
to the real inflation of the U.S. Dollar.

It's easy to find items whose price hasn't adjusted by the
inflation rate. Phone costs have declined in the past decade, due
to
competition and PC prices remain constant, etc. The Government's
secondary method is to have a statistical formula with a strong
downward bias as the result.

The Rule of Thumb in the American business and financial
community is to take the CPI and double it to get an approximate real
inflation rate. Fiscal conservatives argue it should be tripled.

Someone at the Federal Reserve in Minneapolis developed a
calculator based upon the CPI.
[http://woodrow.mpls.frb.fed.us/research/data/us/calc/] It allows you
to determine the factor needed to adjust prices for any year,
starting in 1913. If you want to determine the CPI adjusted price for
an item in 1913 with the same item in 2005, you'll find that you
should factor the 1913 price by 19.8. As a byproduct of where I dined
during my college years, I know that a steak dinner in a middle class
St. Louis, Missouri restaurant was $0.25 in 1913. The restaurant had
its original menu on the wall. Based upon the CPI that steak dinner
should cost $4.93 today. I'll bet you can't get a decent steak
dinner in St. Louis for less than $10.00 now. I know that I can't get
one for less than $20.00 in the San Francisco Bay Area.

You can apply the Fed's calculator to the Government. In 1952, you
could mail a postcard for one cent. If the CPI were accurate it would
now costs you about seven and a half cents to mail a penny postcard.
On the other hand, you can confirm that oil prices have stayed well
below the inflation threshold. In 1957, regular gasoline at the pump
in the San Francisco Bay Area was $0.34/gal. Today, it should be
$2.36. It's $2.69 today, but a year ago, it was $1.79/gallon.

If you are in business, take the past price of your twenty most
expensive overhead items. Note their cost the year that you started
your business. Using the Federal Reserve calculator, determine what
they should cost you in 2005. Calculate the percentage difference
between your current actual costs and the Federal Reserve's calculator
factored price. Average the percentage difference and you have a
percentage adjustment for your business that should be applied to the
CPI to get your business's inflation rate.

For your family, take the past price of the twenty most expensive
costs you incur as a family. This usually includes housing, food, funeral,
college education for your children, etc. Determine their cost in the
year that you were married. Using the Federal Reserve calculator,
determine what they should cost you in 2005. Calculate the percentage
difference between their actual costs today and the Federal Reserve's
calculator factored costs. Average the percentage difference and you have
a percentage adjustment for your family that should be applied to the CPI
to get your family's inflation rate.

If you still believe the CPI is more or less an accurate index of
American inflation, go to your local library. Borrow some old catalogs
from 1913 or later. A useful one is the 1916 Sears catalog. Using it with
the Fed's calculator, you can prove to yourself that not everything the
Government says is true --- or even close to the truth.

I doubt that the folks in Minneapolis wanted to supply proof that
the Government is lying about the CPI. If this article is well
published on the Net, I wonder how long the Fed's calculator will be available to the public?

About the Author

He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]