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Fudging inflation

<![CDATA[Economist.com | Articles by Subject | Economics focus: Today, however, consumer-price indices are arguably too narrow. Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee, has long argued that central banks should instead track a broader price index which includes the prices of assets, such as houses and equities. America’s core […]

<![CDATA[Economist.com | Articles by Subject | Economics focus:

Today, however, consumer-price indices are arguably too narrow. Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee, has long argued that central banks should instead track a broader price index which includes the prices of assets, such as houses and equities. America’s core rate of consumer-price inflation (excluding the volatile prices of energy and food) rose by 2.3% in the year to January. But house prices rose by much more, 13%, in the year to the third quarter of 2004 (the latest official figures available). These are excluded from America’s consumer-price index (CPI); instead the cost of home ownership is represented by rents. But this can be misleading: over the past year, rents have risen by just over 2%, a lot less than house prices.

If you include home prices, inflation in the United States is running around 5.5 percent. What about incomes? As announced today, <a href = “http://quote.bloomberg.com/apps/news?pid=10000006&sid=aFFH1otg5EWA&refer=home” target = “new”>U.S. incomes are down 2.3 percent from December</a> and disposable income was down 2.6 percent.
But if you look back a year, which is hard to do the way the Commerce Department organizes the information, choosing to emphasize the month-to-month changes and account for the rising cost of housing in inflation, you get a picture of a society splitting in two. Comparing the fourth quarter of 2003 with the fourth quarter of 2004, it appears personal income grew 6.6 percent. However, the growth in personal income during December 2004 was due in large part to a dividend payment by Microsoft, most of which flowed to relatively few people but that drove up average income.
The reality is that the very wealthy are gaining while the middle class is treading water or slipping into poverty, and the poor are being turned into serfs who scrape whatever living they can from the diminishing real incomes paid for manual labor.]]>