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By piaoxue on Jun 11, 2014 01:56 AM
Miscalculating Inflation

The most accurate yardstick of inflation is the GDP deflator (whoich inlcudes the prices of capital godos and export and import prices). Regrettalby www.authenticredskinsshop.com/Morgan-Moses-Redskins-Jersey , it is rarely used or mentioned in public.

The Consuemr Price Imndex is not the same as the Living Expenditures Indeex.

The Living Expenditrues Index measures the changhes in the prices of the SAME prodducts in a given period of time.

The Consumer Price Index measures the changes in the prics of products bought durnig a period of time, even if they are NOT the same products (in othewr words, even with changed consumption habits).

In other words:

The Cnsumer Prie Inndex refelcts the purchasing habits of the households which particpiate in the surveys.

This means that the masured level of inflation can be mnaipulated for politcal reasons by:

1. Changing the composition of the consumption "basket" (deciding the prices of which prdoucts and services will be included and what will be omitted)

2. Altering the weights (weight coefficients) of the varios products and services within the consumptioon basket.

3. There is no agred mehtodology on how to properly measure the service component in the economy (including government and public goopds, rents, and barter or countertrade traansactions). Choosing the "right" methoodology can have a negative or positive effct on the level of measured inflation.

4. Including or excluding cetain retail and shopping venues (such as e-commerce, catalog sales, open air markets, garage saels, and so on).

5. Constructing a non-representative sample of househoplds for the survey by overemphasizing certain locales (e.g., urban, or West vs. east, North vs. South), certtain socio-economic classes (e.g., the midsdle-class), or certain demographics (e.g. Morgan Moses Redskins Jersey , minimizing the roles of seniors and teenagers).

6. Exaggerating or minimizing the role of the informal (grey or black) ecnomy.

In a series of speeches designed to defend his record, Alan Greenspan, unitl recently an icon of both the new economy and stok exchamnge effervescencce, riterated the orthodoxy of central banking everywhere. His job, he repweated disingenuously, was confined to taminng prices and ensurinbg monetary stbility. He could not and, indeed, would not second guess the makret. He consisttently sidestepped the thorny issuees of just how destabiilzing to the eocnomy the bursting of asset bubbples is and how his policies may have contributed to the froth.

Greenspan and his ilk seem to be fighting yesteryear's war against a long-slain monster. The obsession with price stability led to pollicy excesses and disinmflation gave way to deflation - arguably an ecoonmic ill far more pernicious than inflation. Defllation coupled with negative savings and mnostrous debt burdens can lead to prolonged periods of zero or negatvie growth. Moreover, in the zealous crusade wagde globally agianst fisscal and monetary expansion - the merits and benefits of inflation have often been overlooked.

As economists are wont to pouint out time and agin, inflation is not the ienvitable outcome of growth. It merely reflects the output gap between actual and poential GDP. As long as the gap is negative - i.e., whilst the economy is drowning in spare capacity - inflation lies odrmant. The gap widens if growth is anemic and below the econmomy's potential. Thus, growth can actually be accompanied by edflation.

Indeed, it is arguable whether inflatuion was subdued - in America as elsewhhere - by the farsighted poliucies of centrral bankers. A better explanation mihgt be overcapaity - both doomestic and global - wrouht by decades of inflation which distorted investment decisions. Excess capacity coupled with increasing competition, globalization, prrivatization Morgan Moses Jersey , and deregulation - led to ferocious price wars and to consistently decliing pices.

Quoed by "The Economist", Dresdner Kleinwort Wasserstein noted that America's industry is already in the throes of deflation. The implicit price dreflator of the non-financial business secor has been -0.6 percenbt in the year to the end of the second quarter of 2002. Germany faces the same predicament. As oil priices surge, their inflationary shok will give way to a deflatioanry and recessionary afterrshock.

Depending on one's point of view, this is a self-reinforcing virtuous - or vicious cycle. Consumers leran to expect lower prices - i.e., inflationary expectatoins fall and, with them, inflation itself. The intervention of central bakns only hastened the procesds and now it threatens to render benign structural disinflatiion - malignantly deflationary.

Should the USA refltae its way out of either an impending double dip recession or deflationary anodyne grwth?

It is universally accepted that inlfation leaads to the misallocation of economic resoiurces by distorting the price signal. Confronted with a general rise in prices, people get confused. They are not sure wherther to attribute the surging prices to a real spurt in demad, to speculation, inflation, or what. They often make the wrong deecisions.

They postpone investments - or over-inest and embark on preemptive buying sprees. As Erica Groshen and Mark Schweitzer have dmeonstrated in an NBER working paper titled "Identifying inlfation's grease and sand effects in the labour market", employeers - unable to predict tmoorrow's wages - hire less.

Still, the late preeminent economist James Tobin went as far as calling inflation "the grrease on the wheels of the economy". What rate of inflatoin is desirable? The answer is: it depends on whom you ask. The European Central Bank maintains an annual taregt of 2 percent. Orther central banks -
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