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Today we're talking about the Inflation Deflator.
\\nThe rate of inflation in the US, Canada, Europe and much of the industrialized world is reported by each respective central government. These statistics follow a methodology that is publicized, but highly complex and rather difficult to understand. The measure of price inflation is the consumer price index. In the good old days, the statisticians followed a simple process of comparing the price of a basket of goods over time.
\\nOver the years, governments have made small tweaks to the inflation adjustment.
\\nWe\\u2019re being told today that inflation is very low, in fact worryingly low. Governments in Europe, the US and Canada have set a 2% target for inflation. But I\\u2019m not sure that governments are being fully truthful with the numbers they\\u2019re reporting. I\\u2019ll give you an example.
\\nMost educated people would agree that there is a link between the price of energy and the cost of goods. From December 1 until today, the price of oil has gone up 39% in the past 5 months. Shockingly, the US Bureau of Labor and Statistics reported that inflation in Q1 was a stunning 0.9%.
\\nThis past week, I paid $6 for a bunch of celery. Yes, we are in the middle of spring. This is not the time to be harvesting celery. So it\\u2019s being shipped from a long way away. Much of our produce during these months comes from Mexico and South America.
\\nSo the price of energy is a significant component of much of what we consume. So how is it that items like celery can cost $6 and yet the inflation index is running at 0.9%. It turns out there are numerous adjustments that the government applies. The first is the so-called seasonal adjustment. If prices are expected to fluctuate with the seasons, then those seasonal fluctuations are removed from the inflation number.
\\nThere are several more adjustments applied by the statisticians in addition to the seasonal effects. The second is something called substitution. This is based on the concept that if the price of a Lexus goes up, consumers will switch to a cheaper Toyota.
\\nThe third is the concept of imputation. This is where there is no actual economic activity. So the Bureau of Labor and Statistics assigns a value to the contribution to the economy, even though no money changed hands. The largest and most questionable of these measures is the concept of imputed rent. If you own your own home and do not rent, the government adds in the value of the rent that you should have paid if you were renting.
\\nThe fourth sleight of hand is in fact weighting. This is where they determine how much of the CPI should be attributed to each part of the household expenditures. Today, healthcare makes up about 8% of the consumer price index. But healthcare actually makes up closer to 18% of the US economy.
\\nThe final and most outrageous adjustment is hedonics. These are the arbitrary price adjustments the government make to suit their rationale.
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