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Worst Inflation Rate In 17 Years

Posted By Jim On 01/19/2008 @ 12:12 pm In Personal Finance | 13 Comments

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…)


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