Inflation and Government Trickery

Now with Alan Greenspan gone, Ben Bernanke has taken over as Federal Reserve chairman. Many individuals saw the appointment of Bernanke as another mishap of the Bush administration. The new Federal Reserve chairman has stated that there are no plans to decrease inflationary policies and that any deflation must be avoided. That said, Mr. Brandly writes in this editorial of the extraordinary inflation rates that have been appearing in private indexes and the effort the government is putting forth in order to silence public worries of inflation. The author points out that the CPI (Consumer Price Index) is leaving out "volatile" products in an effort to "better" measure inflation.

These volatile products are goods whose prices are rising rapidly and are purposefully being left out of public indexes in an effort to hide highly important data. Inflation often affects certain goods before others and indexes should not ignore those goods that are being affected most by expansionary monetary policy. The Cantilion effect states that inflationary policy sets certain "injection points" and the prices of goods closest to these points often rise much quicker than other market prices. It is not sufficient for government to ignore the prices of "volatile" goods and simply analyze the other products on the market. If the CPI wants to give an accurate account of inflation these "volatile" numbers must be calculated into the data. The reason that Mr. Brandly believes the government is withholding this data from CPI calculations is so that their figures align themselves with consumer and investor expectations rather than give an objective judgment of the situation. In addition, these incorrect inflation statistics hide much of the government spending that has led to these numbers and may give politicians unwarranted public support to increase government deficits.

I whole-heartedly agree with Mr. Brandly's analysis and find it quite enlightening. Few citizens truly understand inflation and the detrimental affects it has on our economy. These new numbers lower the credibility of the CPI and show the massive effort to which government is trying to hide its spending habits. In addition, government can be seen, by manipulating these numbers, as tricking investors and consumers into believing that price increase are less severe than previously estimated. The Federal Reserve needs to provide less inflationary policy and must once again reinstate the M3. By keeping up an inflation rate much closer to our rate of growth, the affects on the citizen's pocket and on the economy will not be as severe. If we are not to remove the Federal Reserve of its post then we must encourage these bureaucrats to alter monetary policy in a way that it keeps up with, and does not outdo, economic growth.