Why Does Inflation Always Seem Worse Than It’s Reported To Be?

Is Inflation On The Rise?

InflationWith every trip to the grocery store, it’s becoming very apparent that prices of goods are on the rise.  Filling your cart with the week’s necessities can be stressful on your financial budget.  This in conjunction with the Fed pumping trillions of dollars into the monetary system causes many to live in fear of worsening inflation in the U.S. 

How Is Inflation Really Calculated? 

Today’s inflation is being calculated using the consumer price index (CPI).  The CPI is essentially a basket of goods used to determine if costs are rising or falling.  However, CPI’s do not include what they consider to be “volatile” measures of inflation such as food and energy.  Yet, as a consumer, where does most of your money go towards?  After paying the mortgage payment, the next two major costs of living are food and energy costs.  So to not figure that into the inflation rate it makes it appear to the consumer that the CPI is not an accurate portrayal of real inflation. 

Calculations For Inflation Have Changed Over The Years

In years past, CPI was calculated as I mentioned, by measuring the cost of an identical basket of goods priced at market costs.  This worked well until 1980 when the debt started to increase and the need to reduce spending was brought to our attention.  However, the desire to reduce spending was never there.  So rather than making crucial changes in our fiscal policy, the government changed how they calculated inflation.  Under the Clinton administration, the inflation rate was adjusted by changing the weighting of gods in the CPI basket.  Basically, if it was shown that a good had gone up in price, it was given less weight in the CPI than a good that had gone down in price.  This has skewed the CPI by at least 2.7% annually since that time.  This change has resulted in a dramatic decrease in Social Security cost of living adjustments.  Today, Social Security payments would be double if those changes had never occurred. 

Inflation Is Reduced By Factoring In Hedonic Adjustments

Another factor that has impacted our inflation calculations is the decision that improvements should not impact inflation.  So, according to John Williams of shadow stat, this would look like the following: 

“That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.”

Basically, if you enjoy it more, it didn’t actually cost you more…

These are just a few examples of why it doesn’t appear that the current inflation rate is an accurate representation of the inflation we are seeing in the stores.  Over time our standard living has slowly been on the downward slide.  Inflation is like a stealth tax.  It robs us from our riches, before we even know what’s happening.    As an investor, there is only one real protection against the destructive powers of inflation, and that is an investment in gold and silver.  When everything else is losing value, the price of commodities have held steady and have increased.  If you haven’t yet considered a position in gold and silver, it is high time that you do so.  For more information contact a redhawk advisor near you


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