Americans Know Food, Gas Cost More

In March, the president of the New York Federal Reserve, William Dudley, was trying to explain to the citizens of Queens, N.Y., why they had no cause to worry about inflation. Dudley, a former chief economist at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Quick as a flash came a voice from the audience: “I can’t eat an iPad.”

Bernanke is an expert on the financial history of the 1930s.   He was one of the very few people in power back in 2008 who grasped how close we were to another Great Depression. But if we’ve avoided rerunning the 1930s only to end up with a repeat of the 1970s, the public will judge him to have failed.

The Fed has a stock response. It points to the all-urban consumer price index (CPI-U) and notes that it was up only 2.7 percent in March relative to the same month a year earlier. Strip out the costs of food and energy, and “core CPI”—the Fed’s preferred measure—is just 1.2 percent.

To Americans  it’s not the online price of an iPad that matters; it’s prices of food on the shelf and gasoline at the pump. These, after all, are the costs they encounter most frequently. And with average gas prices hitting $3.88 a gallon last week, filling up is now twice as painful as when Barack Obama took office.

If the same methodology that was used in 1980 to chronicle the double digit inflation of that era were in use today, we would have an inflation rate of ten percent right now, according to.  We are entering a massive era of stagflation "inflation may well be the enduring legacy of the Obama presidency."

How the federal government understates the inflation rate:

 1. It excludes food and fuel costs from its rate of "core inflation."  Each month, the Federal Reserve calms national inflation fears by pointing to the low rate of core inflation, currently at an annual pace of just 2.1%.  It reaffirms that the economy is meeting the goal set for it by the Fed of keeping core inflation around or below two percent.

Claiming that food and fuel are too unstable to be included in the inflation rate, it excludes precisely those areas in which inflation is felt most deeply.  In the past year, the cost of commodities from corn to soybeans has doubled and the price of gasoline at the pump is one third higher than it was one year ago.  The average American household budget devotes one-third of its cash to food and energy costs.  Leaving these elements out of the inflation rate has no justification.

 2. It substitutes less expensive products when prices rise  When prices go up, the economists who generate the Consumer Price Index substitute less a expensive alternative product for the one that has risen in price.  For example, if the cost of steak goes up, the CPI does not reflect the increase, but simply replaces steak with hamburger in computing the price index.

 3. It excludes "hedonistic" products as price rises  The Fed adjusts for price rises by dumbing down the luxury elements of the products whose price it measures.  It might, for example, measure the price of cars without air conditioning as a way of avoiding reporting the increase in the cost of automobiles.  Even when the luxury features cannot easily be removed from the product, the CPI economists assume that they are.

 4. In averaging the price of different commodities, it uses a geometric -- not an arithmetic mean.  Since the geometric mean, which compares the square roots of product prices, comes out lower, it understates the rate of inflation.

America knows Obama and the Fed are lying to us on inflation.  We buy the products and see the prices rising.  The Obama legacy will be like Jimmy (the peanut farmer) Carter.  We see inflation rising and it won't stop until government spending is brought under control.

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