Inflation in hedonic conundrum

Saturday, April 09, 2005

Apart from "no sports", Winston Churchill is famous for his quote that he only believed in statistics he had falsified himself. Doubt has to be put into the official US inflations figures too when one applies anecdotal evidence.
Just take two everyday items like gasoline and mail.
Today the US postal service applied for another increase for a first class letter stamp from 37 to 39 cents. Add this to the latest increase by 3 cents on June 30, 2002, and the total increase in the price for mailing a letter will have increased by almost 15 percent in 3 years. That is 4,7 percent more every year. Looking at gas prices over the same time period, the picture grows much darker. According to the data of the department of energy, a gallon of regular gasoline cost 1,35 dollars in June 2002. Last week the same fuel went for 2,19 dollars per gallon. Rise in less than 3 years: 62 percent or almost 19 percent per annum.
These numbers put doubt on the calculation of the comsumer price index (CPI), which still manages to stay at exactly 3 percent per annum, although energy costs rose already at an official annual rate of 10 percent last February.
The difference between the much higher prices for mail and gas and the still very benign official rate of inflation is of course no scientifically proven concept for allegations that CPI figures are tampered with. But I like mail and gas as they are exactly the same products for a very long period of time that cannot be raised because of "hedonic" influences. Mailing a letter or filling up a canister has stayed the same process for the last 40 years. This has to be pointed out in contrast to the hedonic influences the Bureau of Labour Statistics applies to so many other items in the basket of goods that is used to calculate inflation figures.
Hedonic influences can be explained this way: A car that cost 10,000 dollars 25 years ago and now has a showroom price tag of 25,000 dollars did not become more expensive because the new model is better and has more features (tell that part about cars getting "better" to an owner of a recent Mercedes and he will laugh or curse you out of his house).
Fed chairman Alan Greenspan considered the abnormally low interest rates on the long end of the yield curve a conundrum. One is left to wonder whether he applies the same term to official inflation figures.
Europeans are not comfortable with the conundrum between official CPI figures and the emptiness in their wallets either. In Austria, for example, the central bank commented the sharp price rises since the introduction of the Euro currency as "felt inflation". No, no, it's not that you get less for your money, you only feel that way...
Austria has already doctored its CPI statistics: Goods and services that rose most had simply their weigthings reduced. To give a simple example: How can I tell my landlord that because of these statistical changes, I will from now on pay my rent for only 27 days per month since the weighting of rental expenses has been reduced!? And I dearly hope my plumbing will not break down for a few months more, as the statistical expenses for a plumber have been reduced too! So is my plumbing in a conundrum or should I just call this the immoral process of hiding true inflation?


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