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Worst Inflation Rate In 17 Years

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The sky is falling! Everyone panic! We are facing a recession! That’s the reaction Yahoo was probably going for when they plastered that on the front page of their Yahoo Finance page. The article itself repeated an announcement by the Bureau of Labor and Statistics that the CPI increased by 4.1% in 2007, compared to 2.5% in 2006. I bet you probably broke out into a cold sweat as your dollars were slowly losing their value (hint hint: the dollar is tanking internationally, so you should break out in a cold sweat, just not over inflation… yet) but let me try to put this all in perspective.

First off, let’s look at the core inflation figures, those are prices excluding fuel and energy. For 2007, that inflation figure is 2.4%, less than the 2.6% of 2006. Now, part of that is because some prices rose while housing numbers fell but ultimately non-food and non-fuel inflation was reasonable… not the “worst in 17 years.”

Also, consider that oil is at $100 a barrel, a figure that hearkens back to the days of yore when OPEC held us over the barrel. Even with higher prices for sweet light crude, our inflation is still 0.1% away from what experts generally use as a measure of average inflation. That’s right, the worst inflation rate in 17 years, 4.1%, is exactly 0.1% greater than the 4.0% number most experts use when calculating long run figures. How can 4.1% be horrible if 4.0% is the average?

Granted, Yahoo only said it was the worst rate in 17 years, which is accurate. However, I think by using that language and piling onto the mess that was created by the subprime market and all the financial companies taking huge writeoffs, they are playing into the hysteria. Worst in 17 years? Perhaps numerically but it’s not that bad, is it?

(You want to know what I’d like someone to discuss? The impact of the lost tax revenue as a result of these writedowns…)

{ 13 comments, please add your thoughts now! }

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13 Responses to “Worst Inflation Rate In 17 Years”

  1. I’m already cheap and shop at the discount grocery but they have jumped as well. I keep track of inflation by watching one or two products. For a few years the price of Shasta cola at Grocery Outlet was 1.99 per 12 pack. This week the price was 2.29 a 12 pack.

    A substantial and quick jump in cost to yours truly the cheap one.

    I can live fine on simple tap water but I bribe some of the local kids in the neighborhood with pops for inside information on who is causing trouble and vandalizing things.

    With all cost of living taken in I figured out that even with the nice raises I’ve been getting I’m making less then I did five years ago at my job.

    Ridiculous.

  2. Traciatim says:

    Well, if they didn’t write to scare the buhjeepers out of everyone, they wouldn’t get as many hits as the next news site, and then lose their advertising dollars. So you can’t blame them too much.

    If yahoo has “Inflation only 0.1% above average” all the news readers go about their day. If it has ‘OMGWTF! Inflation causing meteor strike to kill MILLIONS!’ all the good minions start IM-ing it to their friends and all of a sudden you get lots of advertising dollars.

  3. Jason says:

    I think core inflation is misleading. Like you said, it doesn’t account for food or oil prices, however those two factors effect the buying power of EVERYONE. You can’t get around the price of food and you can’t get around the price of oil.

    I am begging to think that the “core” inflation rate is a nice way for the “experts” and elected officials to get those of us who are worried to shut up about inflation.

    If you don’t like oil, look at gold.

  4. I guess I was under the impression that 3% was used as the average inflation figure. Anything above that does suck, but of course with rising oil prices its not surprising. Its worth mentioning, but the exclamation mark might be going a bit far. But hey, thats what media is for – exaggeration and misplaced emphasis.

  5. Re: money says:

    I’m all FOR informed population, but I think media is exercerbating the issues but shaping our perception with their use of sensationalist language.

    Should a crash of 1987 style happen today, I have no doubt the media will make things worse, unlike the correspondents back in 1987 (they tried to contain the panic, not by lying, but not making it out worse than it was). Their job is to report, not create a storm in a tea cup every time.

    Ah, it’s all for the advertising dollars, I know, but still… It’s frightening when you realize we’re at their mercy in a way.

  6. Tom says:

    You forget one major thing. The “inflation” calculation has been repeatedly adjusted and manipulated to appear low. Social Security checks and other government expenses (e.g. bonds) are indexed to inflation. The government has an incentive to keep this number artificially low any way it can.

    Visit http://www.shadowstats.com and you’ll see the “real” inflation rate is somewhere around 7% and has been for a few years now.

  7. Minimum Wage says:

    Some blogger (I forget who) suggested that food and energy was excluded to reduce the amount required to meet cost of living increases for things like Social Security.

  8. Kirk says:

    Tom and Minimum Wage are correct. This number is misleading as it was changed during the Clinton Administration to ensure a lower core rate.

    The Bureau of Labor and Statistics now uses hedonics in its calculations. This keeps prices artificially low. For example, say you bought a computer five years ago for $1,000. If you bought a computer today, you might still pay $1,000, but you will certainly get more computing power than the computer from five years ago. Rather than use today’s computer in its basket of goods and services, BLS uses the computer from five years ago. Now you probably can’t even buy a computer that existed five years ago (except on the secondary market like ebay), but the government assumes the cost of computers has gone down. The reality is computers aren’t cheaper. You can’t find these old computers so you must buy a modern one that costs the same as it did five years ago.

    Inflation is going to be a problem going forward. Since the early 90s, we have experienced low inflation due to the outsourcing phenom. This is pretty much over. China and India are close to capacity. Sure they can still outsource more, but so much has been outsourced that the capacity is lower. The Chinese and Indian workers will now have the ability to demand higher wages. This cost will be passed to us. Also, these economies are growing at almost double digit rates. This creates inflation, which they will pass along to us. Just be ready for higher costs.

  9. MoneyNing says:

    I heard China is putting in a lot of measures to build up their benefit system (read minimum wage like the US). These types of things will just cause business expenses to go skyrocket and hence our cost to do the same.

    Better work hard because everything is going to cost much more in the future :)

  10. jim says:

    I think the difficulty China faces now is that the worker base is enormous there, it’s difficult for someone who is employed to demand better benefits when another person is waiting in the wings to replace them for less pay. Right now the supply for labor exceeds the demand for labor, hence such lower prices, but that’s not a situation that will last forever.

  11. mbhunter says:

    Why do I suspect that “core inflation” means “rate of price increase of things, except of things that are rising in price really quickly”?

    People have to eat, and most people have to drive to work. The more the core inflation statistics are used, the more the important price increases are downplayed.

  12. planner says:

    The sky isn’t falling, but the economy might be. The dollar is down. Inflation is a concern. The Fed all but promising continued rate cuts won’t do much to help either. The subprime mess and tighter credit markets are also as big an issue as you are worried about.
    China is growing quickly. What have inflation numbers been there? Higher than here, but they still have tremendous growth coming and have manipulated and pegged their currency so it favors them in global markets. When things are going your way and the economy and markets are providing decent real returns after inflation it is not a big problem.
    Maybe those inflation numbers, by themselves, shouldn’t make you afraid. What about the combination of problems facing the U.S. at a time when other global powers are growing? Stocks are down about 10% this month. Credit markets are still recovering. Real estate has not yet stabilized. Put them together and I think they should make headlines and be discussed.

  13. its worse than is being reported.


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