Defining inflation harder than it seems
By Barbara Hagenbaugh
USA Today
WASHINGTON — Franklin Adams sees the headlines and hears the economists' statements that there is very little inflation in the economy.
But that's hard for him to believe.
"Every time I buy a plane ticket, I'm shocked," says Adams, 34, of Washington. "Every time I go to the gas station, I'm shocked. Housing prices are insane. That's inflation, right?"
After being on the back burner for several years, inflation has once again become a topic of conversation around office water coolers, gas pumps and boardrooms. It likely was near the top of the agenda when Federal Reserve policy-makers met yesterday to discuss interest rate policy. In a post-meeting statement, the Fed said long-term expectations for inflation were "well contained."
While consumers might be seeing higher prices when buying milk, purchasing a house or paying the electricity bill, a widespread, worrisome gain in inflation is not showing up in the official statistics. That's shining a light on a nagging issue in the economics community: How do you define inflation?
It's harder than it seems, and it's important not just for Fed officials as they consider when to raise interest rates to keep inflation under wraps. It's also key in determining adjustments to federal benefits, such as Social Security payments. Wages, child support and other items that are indexed to inflation depend on gauges of price pressures.
Getting it right is key for the health of the economy. But knowing what is right might never be possible.
The fast-paced nature of the economy makes measurement difficult. Products come and go at rapid speed, notes Michael Boskin, economics professor at Stanford University and head of the "Boskin Commission," which looked at problems with government inflation measurement in the mid-'90s. "Measuring prices and their rate of change in a complex, dynamic market economy, where in a typical large store you may have 40,000 or 50,000 items ... is very, very difficult," he says. "Let alone very difficult to do in real time."
To people such as Adams, a fund-raiser at National Public Radio, it seems a little more obvious. Take clothes shopping: In the past, he found sales. "I haven't had as much luck lately," he says.
Every month, the Labor Department reports the consumer price index. CPI, the most commonly watched inflation index, dates back nearly 60 years. Some 400 part-time workers in 86 regions of the United States fan out every month with handheld devices about the size of a large calculator to collect the going rate for 80,000 items — everything from mangoes to movies to music lessons.
The CPI is used to adjust Social Security and other benefits. It is showing a 1.7 percent increase in inflation in the 12 months through March, the smallest gain since September 2002.
The low growth in CPI is perplexing to some consumers, in part because some of the most visual, in-your-face prices are rising. Prime example: Gasoline prices rose 16.5 percent in 2003 and have continued to climb.
But other costs have fallen. Used-car prices plunged by double digits in the year through March. Computer and apparel prices have also declined.
It's a matter of how each household allocates the family budget, says Mark Zandi, chief economist at Economy.com in West Chester, Pa. "If you're a 50-year-old with someone in college, your CPI is a lot higher," he says. "Or a senior with medical care that is not being covered by insurance. It does vary quite a bit according to who you are and where you live."
Says Roger Cook, 59, a retiree in Lincoln, Calif., "Where we are positioned, I don't see it as a problem." But for some neighbors, especially those who take a lot of prescription drugs, "It's really tough."
Questions — from economists and consumers — are likely to continue, making the Fed's job that much more difficult as policymakers try to stay ahead of the inflation curve. It's always better for the Fed to act to stave off dangerous inflation before it comes rather than trying to play catch-up.
To Jack Andrade, 49, that time might have already come.
"It still seems like everything is going up," says Andrade, a consultant in Smithfield, R.I.
