Hey Al, You’re a good guy, I’m a good guy, and we don’t want to play this game others seem to like of lobbing posts intended to make the reader feel bad. We know that our nation’s important and likewise the economy.
Let’s get back to the ‘substitution effect’, I was hoping you’d help me see what, how, and where it’s affecting the PCE.
Once again:
In addition to separating out the cost of food and energy from core inflation, there are several biases understating inflation that have been built into the CPI.
Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment in relation to inflation, and to be able to accurately measure how the standard of living one can afford on a given income stands in relation to inflation.
The CPI has been corrupted by the addition of hedonics, the substitution effect, and weighting, soft metrics that are open to political manipulation and artificially lower inflation. The CPI has changed from measuring inflation in relation to a set standard of living to measuring inflation in relation to a declining standard of living.
Corruption of the CPI is important because it is used by the Federal Reserve to justify its money printing policies, to set the interest rate on inflation-adjusted bonds known as TIPS, and by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security). The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported. In addition, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year
More Information Them’s the facts. Insults, name calling, obfuscation, mockery, non-sequitors, changing the subject, and disingenuous comments don’t change the facts.