While economists and central bankers believe inflation may boost economic recovery, it can also have a dramatic and widespread effect on prices.
Contrary to popular belief, inflation can be defined as an increase in monetary supply.
And while many associate inflation with rising prices, an increase in the cost of goods and services is simply an effect of inflation.
As explained in our knowledge center piece, The Consumer Price Index – Measuring Changes in Prices, the results of inflation—or the movement of prices in the economy, rather—is officially tracked by the Consumer Price Index (CPI), published periodically by the U.S. Bureau of Labor Statistics.
For 2012, the CPI estimates that prices for all goods and services rose an average of 1.7 percent.
Yet many economists, including Peter Schiff of Euro-Pacific Capital, dispute these numbers, claiming the government’s CPI calculations are misleading.
The High Price of Health Care
Very few even try to deny that the cost of health care is on the rise. Unfortunately for some, it is increasing at a prohibitive rate.
According to figures from CPI’s Health Insurance Index, health care costs increased by only 4.3 percent between 2008 and 2012.
Conversely, a survey of health care prices by the Kaiser Survey of Employer Sponsored Health Insurance indicates the cost of health insurance rose by 24.5 percent during the same period—5.5 times higher than government statistics.
So Why the Disparity?
In a perfect world, the statistical variance would not be so extreme.
However, as explained in our Knowledge Center piece, as well as by Peter Schiff, CPI uses divergent methods to calculate changes in prices.
Indeed, regarding health care specifically, the CPI assigns a weight of less than one percent. That means it estimates health care costs eat up only a tiny sliver of an individual or family’s monthly budget.
Obviously, many people’s medical expenses are higher than that. To say the average is less than one percent is clearly suspect, says Schiff.
A Closer Look: Calculating the Consumer Price Index
ShadowStats.com, run by economist John Williams, publishes economic data, including Consumer Price Index statistics.
What’s so interesting about Shadow Stats is that it calculates the CPI in three different ways: using Today’s Method, the Pre-1990 Method and the Pre-1980 Method.
When examining these calculation techniques, it’s not hard to see what Schiff and Williams mean by “misleading information.”
As we mentioned, the Bureau of Labor Statistics’ numbers for 2012 point to a 1.7 percent increase in overall prices for 2012.
Yet if we use the Pre-1980 Method, we find prices rose by nearly 10 percent in 2012. When a person shops for groceries or fills their gas tank, the pre-1980 numbers probably seem more accurate.
Underreporting and the Fed
The widespread underreporting of rising prices benefits the government and the Federal Reserve in two ways.
First, if the numbers show prices rising too fast, the Fed has a harder time engaging in monetary easing (or inflation).
Many economists, most notably Paul Krugman of the Keynesian school, argue that inflation is necessary to stimulate the economy.
Other economists like Schiff, who subscribe to the Austrian school, maintain that inflation only serves to undermine the strength of currency. While there may be some short-term gain, the bubble inevitably pops, leading to a crisis like the Great Recession of 2008.
The second reason for suppression of CPI numbers is Social Security.
Cost of Living increases for Social Security are based on numbers from the CPI. If they rise too quickly, Social Security has to send more money to today’s beneficiaries, which could send the fragile program into a tailspin.
We Want to Hear from You
How have rising prices affected you and your family?
Have you noticed increasing costs on everything from milk, cheese and coffee to gasoline, air travel and health care?
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