22 November 2010


Core inflation is based upon the core consumer price index, which excludes energy and food. The Federal Reserve can feel justified in printing $600 billion because the core index is so low, having risen only 0.6% in October, the lowest rate on record. Energy and food prices are considered to be too “volatile” to include in the index, which removes it from reality. The problem with this is that to anyone living in the real world food and energy prices are rising, and judging by increasing farm and commodity prices will rise a lot more in the future. Real people in the real world spend a substantial portion of their income on food and energy. If these prices are rising the true cost of living is rising as well and people have less to spend on other things.

If the same gallon of gasoline that cost $2.75 a few months ago now runs as high as $3.25 that is price inflation. If a basket of groceries has increased in price while incomes are stagnant, it costs significantly more. If things that people spend a substantial portion of their income on are not included in the price index, how accurate is it? It is obvious that our monetary policy is being predicated upon false assumptions. The true rate of inflation is clearly higher than the “official” estimate. In anticipation of this we should adjust our behaviors accordingly.

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