The Oddities of US Inflation.

Comments Off Written on December 6th, 2010 by
Categories: Inflation

Krugman says “Disinflation Confirmed”. Because if you remove housing from US core inflation the graph still slides downwards.

Let’s see – Core inflation means inflation minus food and energy. Then you remove housing. And as part of inflation calculations you do “hedonic adjustments” – that you can get a BETTER product for the same price – like a TV at $330 has more features than last year, so you reduce the price of the TV in your inflation index price set to say $195. Then they do “substitution” – meaning if the price of beef goes up then people will buy something cheaper, say chicken, so you put the cheapest of the lot in the index. And “reweighing” meaning people use less of what’s expensive, so reduce it’s weight.

After you do all this, and remove food, energy and housing, you find disinflation.

Surprise.

Not that we in India are very accurate, but at least we don’t pretend to know. Our CPI is supposedly at 10%, but that’s acknowledged as dicey, for lack of “field observers” who are currently collecting data for a new index called CPI (Urban), but I think they’re drinking tea and biscuits and complaining of how expensive they become. The US would say substitute it with hot water and bread, I guess.

Statistics, Bikinis and all that.

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The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.