Inflation stats contradict consumer mood

| Saturday, April 23, 2011

As the price of unleaded gasoline shot up about 30 percent over the past year, the nation's overall inflation rate was just 2.7 percent, the Bureau of Labor Statistics reported.

That apparent contradiction can happen, says Antony Davies, associate professor of economics at Duquesne University's A.J. Palumbo School of Business. He calls it "observation bias."

"You get a disconnect between economists saying inflation is low and most people saying, 'Wait, I just saw the price of gasoline jump up,'" said Davies. People think the government under-reports inflation because they see pump prices jump or certain food prices rise, but they don't notice the relatively flat prices on many other goods, such as men's apparel or personal care products.

Shadow Government Statistics, a San Francisco-based newsletter, last week theorized that the nation's inflation rate would be closer to 10 percent if the bureau used a simpler methodology in place before 1980. That's when it started adjusting for changes in technology and the types of goods most people buy.

The online newsletter, begun in 2004, is published by John Williams, a consulting economist who specializes in government economic reporting.

Some follow his thinking. "My numbers say inflation is more like 5 to 6 percent" versus the bureau's 2.7 percent, said Alan Newman, editor and publisher of Crosscurrents, an economics and investment newsletter based in Wantagh, Long Island, N.Y.

"But John Williams may be entirely accurate. Maybe (inflation) really is closer to 10 percent," Newman said.

Other experts put little stock in the idea that government is under-reporting inflation.

"You can argue that some things are overestimated and some things are underestimated," said David Weiss, chief economist at Standard & Poor's in New York. He believes inflation is running "somewhere around 3 percent," and disputes arguments that the rate is much higher.

Many factors go into figuring inflation, measured as the change in the consumer price index, or CPI. The bureau tracks retail prices for about 60 goods and services in 87 markets every month. It collects data from about 4,000 households and 26,000 retail establishments from supermarkets to hospitals to gasoline stations.

"The government updates the market basket more often now, which is a good thing," Weiss said. "So they measure what people buy now, not what they bought 10 years ago or in 1980."

Sure, gasoline cost about $1.26 a gallon in 1980 versus about $3.80 now, Davies said. "But with changes in technology, cars now get about 50 percent better mileage on average than they did in 1980," he said.

In addition, nobody purchased an iPad computer even five years ago, for example, because it didn't exist.

The bureau, in its latest report, found that gasoline prices jumped nearly 28 percent from March to March. In Western Pennsylvania, the price of unleaded gasoline rose 32 percent during that time, according to AAA East Central data.

Experts note that even in a sluggish economy, the cost of gasoline is passed on to consumers more readily than other products because motorists are willing to pay it. So when crude oil prices jump up, as they have amid Middle East unrest, gasoline prices go up accordingly.

"But if the economy is not doing well, most producers can't pass along their costs. It comes out of their earnings," said John Milne, CEO of JKL Milne Asset Management, an institutional money manager in Fort Myers, Fla., formerly based on the South Side.

"There's probably 50 different ways to measure inflation," Davies said. "But no single measure will give us 'the truth.'"

Additional Information:

What's inflation?

The Bureau of Labor Statistics determines the rate of inflation, which measures the change in the price of goods and services over time. It expresses that rate as the consumer price index, or CPI.

• The agency most often describes inflation as the 'CPI for all Urban Consumers.' Historically, it has been based on the price of goods in eight groups, such as food, shelter and fuel.

• Since 1980, that 'CPI-U' was adjusted to reflect changes in the type of goods consumers purchase and in technological changes to those goods, such as a car's gasoline mileage.

Source: U.S. Bureau of Labor Statistics

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