The rate of inflation is a pretty important number. In addition to being an indicator of whether things are getting more expensive or not, it is also used to judge the effectiveness of monetary policy, and to adjust the rate of payments for programs such as Social Security, military retirees and survivors, food stamp recipients, and a host of other programs. The Consumer Price Index (CPI), which is the primary measure of inflation, affects payments in some way to almost 80 million people. In other words, it’s a pretty important number.
To calculate the CPI, a complex formula is used to determine the price of certain products in several geographic areas. This is where the games can be played, and where Cash For Clunkers comes in. If a friend (or fellow taxpayer) gave you $100 to help buy a new TV, and you bought the TV for $500, what would you say was the price of the new TV? Well, the number on the price tag was $500. The guy who came into the store at the same time as you and bought an identical TV paid $500, the same as you did. The fact that your friend gave you $100 did not lower the price of the TV. However, in the latest release of the Consumer Price Index according to Bob Arnott (chairman of Research Affliates, LLC), if you were given $4500 from other taxpayers to help buy a new car as part of the Cash For Clunkers program, the $4500 was considered a price reduction of the car, making the car look cheaper and reducing the inflation number.
With the hundreds of billions of dollars being spent on stimulus, this type of game can be played for quite a while, but not forever. A low inflation number helps GDP growth look better because GDP growth is measured relative to inflation. However, at some point, the shifting of money has to slow down and the actual rate of inflation (and GDP growth) will show up. Hopefully, actual growth will have kicked in by then, but this certainly seems like a potential problem in the not-too-distant future.
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The rate of inflation is a pretty important number. In addition to being an indicator of whether things are getting more expensive or not, it is also used to judge the effectiveness of monetary policy, and to adjust the rate of payments for programs such as Social Security, military retirees and survivors, food stamp recipients, and a host of other programs. The Consumer Price Index (CPI), which is the primary measure of inflation, affects payments in some way to almost 80 million people. In other words, it’s a pretty important number.
To calculate the CPI, a complex formula is used to determine the price of certain products in several geographic areas. This is where the games can be played, and where Cash For Clunkers comes in. If a friend (or fellow taxpayer) gave you $100 to help buy a new TV, and you bought the TV for $500, what would you say was the price of the new TV? Well, the number on the price tag was $500. The guy who came into the store at the same time as you and bought an identical TV paid $500, the same as you did. The fact that your friend gave you $100 did not lower the price of the TV. However, in the latest release of the Consumer Price Index according to Bob Arnott (chairman of Research Affliates, LLC), if you were given $4500 from other taxpayers to help buy a new car as part of the Cash For Clunkers program, the $4500 was considered a price reduction of the car, making the car look cheaper and reducing the inflation number.
With the hundreds of billions of dollars being spent on stimulus, this type of game can be played for quite a while, but not forever. A low inflation number helps GDP growth look better because GDP growth is measured relative to inflation. However, at some point, the shifting of money has to slow down and the actual rate of inflation (and GDP growth) will show up. Hopefully, actual growth will have kicked in by then, but this certainly seems like a potential problem in the not-too-distant future.
Like this:
Posted in Market commentary | Tags: bailout, Financial planning, inflation, Investing, linkedin, stock market