Newspaper article St Louis Post-Dispatch (MO)

Figuring Up Inflation Is Hard to Figure

Newspaper article St Louis Post-Dispatch (MO)

Figuring Up Inflation Is Hard to Figure

Article excerpt

Alan Greenspan, best known for worrying about inflationary pressures that few other people see, now says that inflation may be lower than we think.

He recently told Congress that the Consumer Price Index, the most widely used measure of inflation, may overstate the annual rise in prices by between 0.4 percentage point and 1.5 percentage points. But, as early as this week, Greenspan's Federal Reserve Board may be telling us that interest rates need to go higher to fight inflation.

To understand that seeming contradiction, one has to distinguish between the current inflation rate and the change in that rate.

Regardless of whether inflation is really 2 percent or 3 percent, the Fed has to be vigilant if it thinks the rate is heading in the wrong direction.

But because everything from income-tax brackets to Social Security payments are indexed to the CPI, other people in government are as concerned with the level of inflation as with its direction.

House Speaker Newt Gingrich, for one, was quick to seize on Greenspan's statement about the inflated inflation numbers. His motivation: A lower CPI could save the government about $150 billion over five years. And Congress wouldn't even have to vote to raise taxes or cut Social Security benefits.

"Everybody wants to go to heaven and nobody wants to die," said Martin Fleming, chairman of the statistics committee for the National Association of Business Economists. "This is one of those cases that, on the surface, is going to let you do that."

But Gingrich was being unrealistic when he suggested that by knocking a few bureaucratic heads, he could get the CPI right within 30 days. The alleged error involves complex statistical issues that economists are working hard to grapple with.

Some of the problems involve changing spending patterns. We're buying more generic drugs than we were a decade ago, and we're buying more of our clothes in discount stores. Others involve changes in technology and quality. Cars were cheaper in 1980, but they didn't have air bags or anti-lock brakes then. How much of the price change is due to quality improvements and how much is inflation? …

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