8/09/2011

08-09-11 - Inflation - 2

The government has made several significant changes to how it counts inflation. A big one occurred in
1995 (Boskin commission), another happened just in the last two years (chained CPI for COLA), and at some point the Fed changed it's core measure (PCE).

In all cases they claimed to be making the inflation measure "more accurate" , and in all cases, the inflation
rate was revised downward.

Now, ignoring the details of the changes for now, it should be clear the government has a very strong interest
in reporting a low inflation number.

1. It makes their administration look better. If inflation is low, then inflation-adjusted GDP looks better.
There are lots of horrifying statistics about inflation-adjusted median income that are very embarassing to
the US government, and you can make that go away by having a lower inflation number.

2. Lots of federal costs have automatic COLA (cost of living adjustments) like Social Security, Medicare,
federal employee pensions an wages, etc. A lower inflation number directly decreases the amount they have
to pay out.

3. They pay less out for TIPS

Whenever governments can lie for their own benefit, they tend to, so it would be *extremely* surprising if
the reported inflation was actually correct.