Here's a reader's counter-point to this weekend's piece on inflation.
Marotta’s argument for inflation being chronically underreported by the CPI is founded on the time-honored principle of selectively presenting data in order to reach a predetermined conclusion. In this case, the predetermined conclusion is to support the almost taken-for-granted conclusion in past articles that inflation has been either double digits or close to it for some period of time, while the CPI and other inflation indicators, as well as all serious economists, disagree with that assessment.
In past articles, one of Marotta’s tactics used to convince readers of his theory was to conflate the concepts of inflation and currency exchange rates – treating them as one, when in fact they are not. Marotta has used the US Dollar’s exchange rate movements against the Euro as a proxy for inflation. It seems this approach is no longer as valid to him as it once was, because the dollar has been essentially flat against the Euro for the last 4 months. This is the first instance of “cherrypicking” the data – when the USD/EUR rate supports the conclusion, pretend that it is a reliable indicator of inflation. When the USD/EUR rate does not support the conclusion, ignore it.
The second example of cherrypicking data in Marotta’s article is this gem:
“Take 2007 as an example. Bread price rose 7.4%, gasoline 8.2%, health insurance 10.1%, whole milk 13.1%, eggs 29.2%, but according to the CPI, somehow inflation was only calculated as 4.1%.”
Marotta chooses to cite five individual prices, all of which had higher than average inflation, in order to imply that the CPI’s assessment of 4.1% inflation was far lower than the inflation of real individual goods. However, this is clearly not the case. To make this clear, let’s look at the food subcategory. Marotta cites bread prices increasing 7.4%, whole milk at 13.1%, and eggs at 29.2%. However, he fails to mention that the “food and beverages” category experienced only 3.9% inflation overall, actually LOWER than the overall CPI! If Marotta was not trying to deceive you by only presenting data that fits his predetermined conclusion, he might have mentioned that inflation in beef was just 4.4%, pork was 2.0%, poultry was 5.1%, and fish was 4.6%. Fresh vegetables experienced 3.2% inflation, and fresh fruit experienced 4.5% inflation. Processed fruits and veggies had just 3.6% inflation. “Other food at home”, the category that includes everything from peanut butter and soup to sugar, butter, seasonings, and spices, experienced 2.2% inflation. If the reader had all the information, he might conclude that Marotta had intentionally misrepresented inflation by selectively noting three of the highest-inflation food items, while ignoring meats, fruits, vegetables, and more. Incidentally, restaurant food inflation was 3.6%.
What about the big picture for inflation? Am I selectively citing the food category because that’s the only place I can tell the story I want to tell. Certainly not. The cost of housing only increased 3.1% during 2007, less than the overall rate of inflation. Most people spend a hefty portion of their paycheck in this category. Clothing actually got cheaper. Drugs and other medical care commodities experienced only 1.4% inflation. Recreation? 0.5% inflation – that’s for everything from DVDs and iPods to concerts and baseball tickets. Communications costs? From telephones to the internet, -0.9% inflation (or should I say deflation?).
Marotta is also selective in his treatment of hedonic adjustments. It is certainly true that you can’t buy a 1970s car now because of government regulations. But even ignoring the fact that this is a problem with government regulations rather than a problem with the calculation of an inflation index, and aside from the fact that even without government regulations there really is extra value in things like seatbelts, this example is not representative of the whole. What about household appliances like washers and dryers that are more energy efficient than ever? Or computers that constantly improve in capability without increasing in price? Well, Marotta does mention computers, but if he REALLY thinks that you need to buy a new computer every single year or it will be impossible to run any software, maybe that explains why life seems so expensive to him! The fact is that in the vast majority of items where hedonic adjustments are used, the old alternatives are either still available (and cheaper than they were several years ago), or have fallen completely out of favor due to the superiority of a new product. Today’s iPod might be more expensive than a walkman was in 1990, but that’s not really inflation. Your flatscreen TV is more expensive than a top-of-the-line tube TV from the 70s, but it’s obviously nicer too, or else you could have gone to target and gotten a TV more similar to the 1970s standard. Is your cable package more expensive than it was 30 years ago? Maybe that’s because you’re getting about 200 more channels.
Where Marotta chose not to distort the data, you start to see the holes in his argument.
“With food, the government adjustments are a little more imaginative. They assume if the price of beef goes up, you will eat less beef and more chicken.”
Is this supposed to sound odd? Because it sounds like a fact of life to me! Also if I buy my groceries from Kroger, and then Kroger prices go up faster than Costco, I might switch to Costco.
“According to their logic, what we called a car in 1970 doesn't even qualify to be called a car today. It wasn't fuel efficient. It had no airbags, no power windows, no power door locks, no heated seats, no tilted steering wheel and no CD player.”
I think things like fuel efficiency, CD players, power steering, anti-lock brakes, seatbelts, airbags, and yes even power windows and door locks are worth something! Does Mr. Marotta disagree?
In conclusion, if you have just one takeaway from this post, look back up at the numbers for inflation in 2007. Or go to http://www.bls.gov/cpi/cpid07av.pdf yourself to see the inflation of anything you want. Curious what inflation was for airline fares or prescription eyeglasses? 1.7% and 2.0% respectively. Look at any piece of the data that interests you and see what really makes up inflation. It might feel tougher at the pump or in the dairy aisle of the supermarket, but that’s not the only place you spend money. The CPI represents AVERAGE inflation over a wide variety of goods and services that people spend money on, and there is a great deal of transparency on the BLS website for those who want to see how the components are weighted and how the calculations take place. The good news for the American consumer is that in 2007, most things didn’t go up in price as fast as gasoline, eggs, and health insurance!
by Bonnie Eaker Weil, PhD. It's reprinted in arrangement with Hudson Street Press, a member of Penguin Group (USA), Inc. Copyright (c) Bonnie Eaker Weil, 2008.
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