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Wednesday, January 26, 2011

Inflation Much Worse than the BLS Claims

asserts Chris Martenson in a FINANCIAL SENSE article,  excerpted below [ emphases mine].

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Inflation is actually much higher than what the BLS claims it is; something that purchasers of college tuition, pharmaceuticals, or health insurance know all too well.

To give the BLS some credit, they must try and estimate a single rate of inflation that applies to everyone equally.  But that is a completely impossible task. An octogenarian living in Seattle on a meager pension and taking lots of prescription medications will have a totally different inflation experience than an 18 year old living in their parent's basement eating Ramen noodles.

But even after spotting the BLS some slack, there are some enormous and glaring errors in their methods that render the official inflation measure hopelessly - and dangerously - inaccurate.

As I mentioned in the Crash Course chapter on inflation, there are three major statistical 'tricks' that the BLS imposes on the Consumer Price Index. They are hedonics, which tries to account for improving quality in products over time, substitution, which is the act of switching to lower-cost items when prices surge on preferred items, and weighting. 

For less-than satisfactory reasons, the BLS only weights healthcare at 6.5% of the CPI, although it represents 17.6% of the total GDP. That's a big problem, because healthcare is the biggest and most consistent source of inflation over the years. 

A big portion of the underweighting of medical care can be attributed to a single category: health insurance, which stands at just 0.49% of the total CPI reading, or less than half a percent:

According to the BLS, the average family is projected to have a total exposure to rising health insurance premiums at a rate of only 0.49% (out of 100%). Given a median family income of $49,077 (the 2009 value), this means that the BLS assumes that the average family contributes just $239 dollars per year towards their healthcare insurance premiums. Yes, I wrote per year, not per month. That's not a typo.

Worse, and compounding this error of weighting, the BLS has somehow calculated that the cost of health insurance has been steadily falling for the past three years.

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