This further makes the statistic ridiculous. Bill Gross describes OER as “a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of OER.”
The 1990s brought three more manipulations – product substitution, geometric weighting, and hedonic quality adjustments. With product substitution and geometric weighting, the BLS automatically assumes that if one item increases in price, consumers will substitute a lower cost alternative (or at least use less of the original product). That means I make a recipe using half an egg and can somehow safely store the other half for future use. If I regularly eat apples, I’ll substitute cheaper oranges. Geometric weighting does not factor items that cost the same but weigh less because the manufacturer has decreased the product amount. It’s not “environmentally friendly packaging” that has suddenly shrunk that cereal box and laundry detergent!
Hedonic quality adjustments is a fancy term to trick consumers into thinking they’re getting more for less. The government will tell you that the price increase of a computer, TV, or car is not really a price increase because you’re getting improved and/or more features for that item. Again, the government is making the assumption that you want these extras/improvements. When manufacturers debut new models, the former more basic models are discontinued. The government likes to tout electronics as a deflationary indicator which helps control inflation, yet how many times per month do people buy a new computer, camera, TV, etc. versus gas and groceries?
Other conveniently overlooked aspects of the CPI are all the forms of taxes that consumers pay, insurance costs, home maintenance costs and association fees.
The CPI peaked at 13.7% in March 1980. If the Federal Reserve wishes to avoid a repeat performance, they will back up their recent speeches with monetary policy that makes it clear inflation is unacceptable. Otherwise, by May 2009 the US could break its previously held record.
* The survey is part of a print edition article (“CEOs Predict Tough Times For Economy” by Kelly Evans) in the June 19, 2008 Wall Street Journal.
**Bill Gross is the founder of PIMCO, one of the largest specialty fixed income managers in the world. Former Fed Chairman Greenspan is a consultant to PIMCO. Gross frequently appears on CNBC and in the past has been a staunch advocate of a low Fed Funds rate. This is why his article was so surprising to me.
