Real life Inflation

Government pensions are indexed yearly in accordance with the Consumer Price Index (CPI).  So naturally it should not be surprising to learn that governments have a vested interest in keeping CPI as low as possible year over year.  It was this very logic that prompted a change in how CPI was calculated over 8 years ago, ex-ing out volatile items like food and energy:

“The Advisory Commission To Study The Consumer Price Index (aka The Boskin Commission) was appointed by the Senate Finance Committee to study the role of the CPI in government benefit programs and to make recommendations for any needed changes in the CPI. The Commission's December 1996 report recommended downward adjustments in the CPI of 1.1%. The CPI is the basis for Social Security COLAs and this recommendation, if adopted, would reduce future Social Security COLA increases, as well as impact numerous other government programs.”  For more view the full report: The Boskin Commission Report.

Not surprisingly, after these changes were implemented the core rate of inflation as reported in the CPI has pretty much flatlined over the past 8 years, while the headline rate has jumped up.

This chart reflects the real life inflation that governments in most developed nations have been trying to deny for the past 8 years. Real people know that inflation is building quickly and prices are mounting in almost every major consumer category that counts.  “As you can see, since 2000 the Core has been under-stating inflation for some time now. And, the amount it is off by has widened dramatically. The gap between core and headline is now greater than it was in the early 1980s, and — hard as it may be to imagine — we are only slightly off the spread of the terrible 1970s.” See: Inflation Errors Part II

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