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Is the US government wildly understating the inflation rate? No, it isnít
AEI ^ | January 17, 2013 | James Pethokoukis

Posted on 01/17/2013 10:06:53 AM PST by 1rudeboy

Image Credit: BLS

It’s hard to find much inflation in the US economy right now. As measured by the Labor Department’s consumer price index, prices increased by just 1.7% in 2012. The core CPI, which excludes food and energy prices, rose by 1.9%.

Nor can much inflation be found in an alternate measure, the Commerce Department’s personal consumption expenditures prices index. It rose 1.45% for the twelve months ending last September. Excluding food and energy, it rose 1.58%. Federal Reserve Chairman Ben Bernanke prefers the PCE price index because he believes it better reflects changes in consumer purchasing habits.

But some skeptics say those government-generated statistics are nonsense. The numbers are skewed — perhaps intentionally — to show inflation much lower than what it really is. Instead of 1% to 2% annual inflation, prices have actually been rising at 10% a year, maybe even faster.

Now, extraordinary claims should require extraordinary evidence. So the burden is on the inflation hawks here. As it is, the Labor Department has specifically and thoroughly rebutted many of the criticisms of the CPI, including charges that when the price of steak rises, the Bureau of Labor Statistics swaps it out for cheaper hamburger. Or that Social Security payments are indexed to a CPI measure that doesn’t include food or energy.

In particular, critics question how the BLS currently a) assumes consumers will purchase the cheaper of two types of products, and b) takes into account, for instance, that a $1,000 computer today is a whole lot more powerful than one 15 years ago. Those are just two of the modifications the BLS has made over the years in how it measures inflation.

But what if BLS still calculated inflation the way it used to back in the 1970s? The agency studied that exact question in 1999, and found the new approach gives only a modestly lower inflation reading:

Over the 21-year period of the study (December 1977 to December 1998), the CPI-U-RS increased 141.2 percent, compared with 163.9 percent for the CPI-U. The figures represent an average annual increase of 4.28 percent for the CPI-U-RS and 4.73 percent for the CPI-U; the average annualized difference between the two measures is thus 0.45 percent.

In fact, there’s considerable academic literature suggesting that Washington continues to overstate inflation rather than understate it, such as this paper by Robert Gordon of Northwestern University:

This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year.  …  This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today’s bias is at least 1.0 percent per year or perhaps even higher.

One final reality check — especially clarifying if you believe Washington is intentionally cooking the books — is MIT’s Billion Prices Project, which uses an algorithm to track prices online, including most of the products and prices found in the CPI. It has inflation running at less than 2% over the past year:

Now, inflation might well be far higher in the future than it is today. And of course, the inflation rate experienced by any one individual may differ, perhaps considerably, from a broad national index. But inflation overall, much less hyperinflation, isn’t a big problem right now.



TOPICS: Business/Economy; Government
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It should be important to consider that, according to this blog, the Weimar Republic went from "normalcy" to hyperinflation in the space of three months. But that "fact" does not absolve a rational observer of economics of claiming that hyperinflation is here, now (like those bozos over at Shadowstats.com).
1 posted on 01/17/2013 10:06:55 AM PST by 1rudeboy
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To: Toddsterpatriot; Mase; expat_panama; 1010RD

I thought I’d give the hornet’s nest a good whack.


2 posted on 01/17/2013 10:08:43 AM PST by 1rudeboy
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To: 1rudeboy

All I know is that my grocery bill has gone way up over the past few years. And even for items that have not gone up, the amount in the bag or box is less. You open the bag and 2/3rds of it is empty. My utility bill has gone up about 10% too. I guess if I ate less and drove less and sat around in the dark, my bills would be lower and I wouldn’t be contributing to inflation.


3 posted on 01/17/2013 10:10:02 AM PST by Opinionated Blowhard ("When the people find they can vote themselves money, that will herald the end of the republic.")
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To: 1rudeboy

Inflation is not a problem unless you have to send you son or daughter to college, or buy insurance of any kind, buy food or gasoline. < sarc > So if you are a self sufficient farmer with no kids, forgo health insurance and have your own supply of methanol that you produce yourself then there is very little inflation< /sarc >


4 posted on 01/17/2013 10:12:38 AM PST by central_va ( I won't be reconstructed and I do not give a damn.)
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To: Opinionated Blowhard

The government also takes into account shrinking package sizes when calculating inflation. So if your 36oz. can of coffee shrinks to 34oz., with the price remaining the same, it counts as price inflation.


5 posted on 01/17/2013 10:13:08 AM PST by 1rudeboy
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To: central_va

College tuition has been rising at a much higher pace than inflation for decades. Gasoline prices are down (significantly) since this summer.


6 posted on 01/17/2013 10:14:57 AM PST by 1rudeboy
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To: Opinionated Blowhard

“Excluding food and energy, it rose 1.58%”

Of course food and enegy were not included!


7 posted on 01/17/2013 10:15:28 AM PST by marstegreg
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To: 1rudeboy

See this CNBC article from April 2011:

Inflation Actually Near 10% Using Older Measure

http://www.cnbc.com/id/42551209


8 posted on 01/17/2013 10:17:46 AM PST by Dave346
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To: 1rudeboy

As someone who shops very cheaply for groceries, I can attest that low-end prices have risen signficantly over the last 3 years or so. Used to be you could find chicken legs for 49 cents a pound at times, now the cheapest you see are 79 cents. Potatoes? Used to be able to commonly find them for 99 cents for a five-pound bag, the last time I saw them at the price the spuds were very poor quality. Fair quality spuds are 1.49 a bag cheapest now. Store-brand tub margarine? Gone from 1.99 to 2.99.

Other examples abound. Those are significant percentage increases for someone on a very tight food budget.

And this is why a lot of people question the official inflation stats - their own eyes are telling them something very different.


9 posted on 01/17/2013 10:18:25 AM PST by dirtboy
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To: 1rudeboy

The price for a gallon of gas is coming down. This has nothing to do with Obama, but he’ll sure take credit for the results. Those dirty oil companies may actually wind up saving us. I think a lot of the trouble in the Middle East stems from OPEC looking at our new found energy reserves and realizing that the golden days are coming to an end.


10 posted on 01/17/2013 10:18:47 AM PST by blueunicorn6 ("A crack shot and a good dancer")
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To: marstegreg
Of course food and enegy were not included!

Except, of course, when they were included. The author takes care of that canard by including both figures (included and not included).

11 posted on 01/17/2013 10:18:56 AM PST by 1rudeboy
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To: 1rudeboy

A study in 1999? Those graphs appear to be diverging and it’s over 13 year old data. What are the differences between the old style inflation calcs and the new style ones today?


12 posted on 01/17/2013 10:20:41 AM PST by garbanzo (It's the end of the world as we know it and I feel fine)
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To: 1rudeboy
But that "fact" does not absolve a rational observer of economics of claiming that hyperinflation is here, now (like those bozos over at Shadowstats.com).

You get a lot of this stuff on ZeroHedge and elsewhere too. There is an "end is near" crowd of economic bears that instinctively try to paint the worst picture possible at all times. Things are bad enough as it is, there is no need for exaggeration. If you believed the bulk of opinion on ZH, gold should be worth triple what it is now, the EU should have been broken up already and Americans should be rioting in the streets over hyper inflation. Instead Wall Street has run up nicely over the last couple years and anyone who invested wisely did pretty darn well.

It is certainly true that the economy and markets are not healthy (and may well be a house of cards that could implode in the future), but that doesn't mean they will collapse tomorrow, or that hyperinflation will occur in the near term, or that we won't have some good growth quarters, or that there isn't a ton of money to be made.

13 posted on 01/17/2013 10:21:55 AM PST by Longbow1969
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To: Dave346

Interesting comment I saw once about Shadowstats . . . by the time an actual economist crunches, and then refutes its numbers, it’s gone and reposted its BS a dozen more times.


14 posted on 01/17/2013 10:22:15 AM PST by 1rudeboy
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To: 1rudeboy

This guy is an idiot.


15 posted on 01/17/2013 10:24:26 AM PST by Born to Conserve
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To: 1rudeboy

About that graph from 1978 to 1999. Notice the gap between the old method and new method grows every year, basically doubling every 10. So a gap of 20 points in 1999 would become a gap of 40 points by 2009 and close to 50 by now. Basically, it is gradual negative compounding of the CPI, which was, IMO, the intention all along of the changes.


16 posted on 01/17/2013 10:24:37 AM PST by dirtboy
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To: dirtboy

Agree. And certainly worthy of more study. The question is, is the divergence as large as the folks who want you to buy their newsletters (or sell you gold) claim?


17 posted on 01/17/2013 10:28:02 AM PST by 1rudeboy
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To: 1rudeboy

“Excluding food and energy”

And there you have it.

and further, meaningless without tracking the employment numbers , and the skyrocketing foodstamp numbers.

and further, behavioral conditioning have many to believe gas prices above 1.00, yes ONE dollar, are “low.”

Massive numbers of government paychecks = price pressures


18 posted on 01/17/2013 10:35:33 AM PST by Varsity Flight (Extortion-Care is the Government Work-Camp: Arbeitsziehungslager)
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To: 1rudeboy

HOUSING!

“Owners Equivalent Rent” is the basis used in inflation metrics for the cost of your housing.

Since the value of houses has been collapsing, the biggest thing you spend money on, housing, has been rapidly declining within the basket of goods the Fed considers.

Therefore, inflation everywhere else can (possibly) be hidden by the rapidly declining value / cost of houses.

Now, did you really experience a reduction in cash outflow because your house declined in value? No?

So, is the Fed really just using a housing bust that killed your Net Worth as a cover for actual inflation everywhere else in the economy?

Quite possibly.

Who will go do the analysis of “Inflation, excluding Housing”?


19 posted on 01/17/2013 10:36:51 AM PST by Uncle Miltie (Before we argue, are you approved to speak by the Bureau of Alcohol, Firearms and Speech?)
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To: 1rudeboy

The truth, as always, is somewhere in the middle. I’ve been around long enough to have a jar of very large grains of salt for reading the rants from the doom-and-gloom crowd. Problem is, we almost did melt down a few years ago, and I have seen little done to address the root causes of that meltdown - in fact, in some areas it is even worse, as Dodd-Frank has instutionalized too big to fail, just for one example. So if nothing positive is done, one of these days the gloomers will probably be right again, albeit probably for the wrong reasons.


20 posted on 01/17/2013 10:36:57 AM PST by dirtboy
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To: Varsity Flight
There I have what? I know what I read. Did you just self-delete as you read?
21 posted on 01/17/2013 10:38:10 AM PST by 1rudeboy
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To: marstegreg

“Of course food and enegy were not included!”

Yep. How convenient. There are liars and there are damn liars.


22 posted on 01/17/2013 10:39:39 AM PST by WKUHilltopper (And yet...we continue to tolerate this crap...)
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To: Uncle Miltie

Not entirely sure how the collapse in the price of my house has changed how much I pay for hamburger. I still buy the same amount (and the price I pay for it has actually slipped a bit).


23 posted on 01/17/2013 10:41:00 AM PST by 1rudeboy
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To: Opinionated Blowhard

You are so correct sir.

From the products I regularly use the inflation is in the range of 10-25%. Exactly as you say...reduced size is inflationary also.

My financial guru poo poos it: that its anecdotal and I’m cherry picking but I am not. I can tick of a list of common everyday items that have risen in price by huge amounts....and if a Republican were in the white house, the press would be screming like a pack of wolves.


24 posted on 01/17/2013 10:41:35 AM PST by Adder (No, Mr. Franklin, we could NOT keep it.)
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To: WKUHilltopper
This is somewhat annoying: if an author does not include food energy, except when he makes certain to include food and energy, does that make him a liar, or a damn liar?

Knee-jerk reactions are difficult to guage.

25 posted on 01/17/2013 10:43:52 AM PST by 1rudeboy
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To: Dave346

bttt


26 posted on 01/17/2013 10:45:11 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: Longbow1969

“Instead Wall Street has run up nicely over the last couple years and anyone who invested wisely did pretty darn well”

Only if ones government dependent paycheck/COLA hasn’t risen proportionately. Cashing out to a 25-30 K vehicle, compared to what shoud be 5K new vehicle. Or cashing out to a 100-250 K house, to what should be a 25 K house.


27 posted on 01/17/2013 10:45:34 AM PST by Varsity Flight (Extortion-Care is the Government Work-Camp: Arbeitsziehungslager)
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To: Adder

What products do you regularly use? I’m simply wondering why I’m missing your 10-25% inflation.


28 posted on 01/17/2013 10:46:08 AM PST by 1rudeboy
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To: Opinionated Blowhard

bttt


29 posted on 01/17/2013 10:47:25 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: central_va

bttt


30 posted on 01/17/2013 10:48:16 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: Adder

bttt


31 posted on 01/17/2013 10:49:25 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: 1rudeboy

Burden is on the inflation hawks eh? How about I Paid 100 bucks to replace a tool that cost 60 bucks 3 years ago.

That is a 10% a year increase in price, ie, INFLATION.

Electrical components are up 200% or more over the last ten years. That is 10% a year.

Got a bag of crimp lugs that have a price tag of 7 bucks a bag on the shelf, Now I pay over a buck a crimp.

Inflation. Of course the Goobermint statistics say there is none, because they dont care about tools or the things that make the country go.

Oh, lets not get into gasoline...


32 posted on 01/17/2013 10:50:14 AM PST by American in Israel (A wise man's heart directs him to the right, but the foolish mans heart directs him toward the left.)
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To: 1rudeboy
4 years ago I was always surprised and disappointed when I went over $200 at the grocery store

Yesterday I topped $400 for the first time.

33 posted on 01/17/2013 10:53:34 AM PST by Mr. K (There are lies, damned lies, statistics, and democrat talking points.)
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To: Opinionated Blowhard

Agreed. Your experience matches our experience. My little wife constantly reports price increases and shock at same; for example: three New York steaks at COSTCO for about $51.00 just a day or so ago.


34 posted on 01/17/2013 10:57:19 AM PST by AEMILIUS PAULUS (It is a shame that when these people give a riot)
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To: Mr. K
Just what the heck did you buy? I haven't had a raise for 4 years, and I'm still feeding myself the same way at nothing close to that sort of an increased outlay.

I did stop eating steak for a while, but my latest flyer has NY strip at $5.99/lb., which is back within striking distance for me.

35 posted on 01/17/2013 10:59:45 AM PST by 1rudeboy
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To: Mr. K

bttt


36 posted on 01/17/2013 11:01:12 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: AEMILIUS PAULUS

bttt


37 posted on 01/17/2013 11:02:07 AM PST by First_Salute (May God save our democratic-republican government, from a government by judiciary.)
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To: 1rudeboy

I tend to go shopping like once a month (if I HAVE to) so admittedly my orders are usually very big.

I just never topped $400 before


38 posted on 01/17/2013 11:10:56 AM PST by Mr. K (There are lies, damned lies, statistics, and democrat talking points.)
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To: 1rudeboy

I don’t know, does it?

Everyone knows we don’t need or have to pay for fuel or even food. It should never be included in assessing inflation.


39 posted on 01/17/2013 11:35:56 AM PST by WKUHilltopper (And yet...we continue to tolerate this crap...)
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To: WKUHilltopper
I have a revolutionary idea: let's calculate inflation both ways--including food and energy, and not including food and energy, and then compare the two!

Oh, wait . . . we do that already.

40 posted on 01/17/2013 11:39:09 AM PST by 1rudeboy
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To: 1rudeboy

The author takes care of that canard by including both figures (included and not included).

I’m sorry, I must of missed it... because it’s a load of crap! According the article, when food and gas are included the figure changes .13 percent (that’s right, 1/10th of a apercentage point)? Do you eat every day? Do you drive every day? Do an overwhelming percentage of americans buy food every day? Have you been to te grocery store lately? Meat is becoming a luxury item. Yet somehow, when including things all Americans buy daily like food(sometimes several times per day)it only changes the rate by .13, there is something seriously wrong with the numbers.


41 posted on 01/17/2013 11:40:24 AM PST by marstegreg
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To: marstegreg
I don't think you understand. The numbers bear-out my experience. That's not to say that you live in an area where the numbers are different . . . I just find it odd that, for example, people on the internet try to convince me that my energy prices are up, when they are down . . . and my food prices are up much more than they really are. It just doesn't make sense.
42 posted on 01/17/2013 11:46:27 AM PST by 1rudeboy
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oops . . . I meant to say that you might live where the numbers are different.
43 posted on 01/17/2013 11:49:16 AM PST by 1rudeboy
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To: 1rudeboy

Who cares what the government says about inflation? I’m the one who shops and I know how prices have changed.


44 posted on 01/17/2013 11:49:55 AM PST by count-your-change (you don't have to be brilliant, not being stupid is enough)
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To: 1rudeboy

Obama also says unemployment has shrunk, too. Ya stupid enough to also believe that lie?

Anyone going to buy groceries knows food has gone up significantly. Clothings has, cars have, medical has, most things have. Allowing Obama and the federal government to make claims otherwise takes a feeble minded gullible idiot to believe it. Who ya going to believe, their numbers or your wallet?


45 posted on 01/17/2013 12:00:33 PM PST by CodeToad (Liberals are bloodsucking ticks. We need to light the matchstick to burn them off.)
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To: 1rudeboy

“I’m simply wondering why I’m missing your 10-25% inflation.”

Maybe you should start paying attention. If you missed it then you simply were not paying attention.


46 posted on 01/17/2013 12:03:56 PM PST by CodeToad (Liberals are bloodsucking ticks. We need to light the matchstick to burn them off.)
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To: 1rudeboy

“that my energy prices are up, when they are down”

You wouldn’t have posted this 1 month ago when gas prices were $3.89. They held there for about three years, and they are still higher than when Obama took office.


47 posted on 01/17/2013 12:06:26 PM PST by CodeToad (Liberals are bloodsucking ticks. We need to light the matchstick to burn them off.)
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To: CodeToad

Just in a space of a few weeks last summer I saw boxes of fried chicken nearly double in price at my local store.

And that’s just one example of how bogus this 2% inflation figure is.


48 posted on 01/17/2013 12:09:44 PM PST by Dave346
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To: 1rudeboy

Just as all politics is local, so is inflation. Which is the problem with an artificial (concocted) metric like CPI.

Spending and prices vary widely from one location to the next, and from one household to another. Which is why we should pick a basket of commodities or PM’s to index to and stick with that, IMO. Less fudge-factor.

Frequent purchase items are definitely up. I remember prices from 1997 pretty well, so I use that as a baseline for my personal inflation index.

1 lb handcut sirloin steak
Then: $1.99
Now: $11.99
16 yr increase: 600%

1 US gallon unleaded gasoline
Then: $1.19
Now: $2.95
Increase: 148%

25 oz. Extra Virgin Olive Oil
Then: $1.99
Now: $5.99
Increase: 196%

Rent, 2 BR 800 SF apt
Then: $475
Now: $750
Increase: 58%

Nothing specific, but I did go shopping for an automobile recently, and prices seemed to be roughly double what they were in the mid/late 90’s.

Prices for manufactured items (once or twice a decade purchases) are relatively unchanged. Everything else is up big. I worked for a medical device manufacturer before doing my own thing now back around 2002, and prices for things like coiled-steel and plastic feed stock were going up by double-digits YOY.

Overall, I’d peg actual inflation somewhere in the 7-8% annual range since the Fed went full retard back in 2001. So, by design I think, CPI is underestimating inflation by a factor of at least two. The cognitive dissonance for people on fixed incomes looking at their COLA adjustments must be astounding at this point. People in lower income brackets whose spending is mostly groceries, fuel, and energy bills, have to be seeing real-world inflation close to 10% since 2005.


49 posted on 01/17/2013 12:13:35 PM PST by CowboyJay (Lowest Common Denominator 2012 - because liberty and prosperity were overrated)
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To: 1rudeboy

I just find it odd that, for example, people on the internet try to convince me that my energy prices are up, when they are down .

So your gas prices have not gone up? In December 2008 the price of gas was 1.65? Have gas prices doubled? Yes. At time have I paid triple that amount? Yes. We’re looking at 100-200% difference in cost. Are you trying to tell me this was factored in? (even where you live)


50 posted on 01/17/2013 12:15:49 PM PST by marstegreg
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