My portrayals of Middle Class decline have been too optimistic?
Thursday, May 22, 2008 at 12:51PM
Skeptic in Economics, Middle Class

Bill Gross (chairman and CEO of PIMCO) has again addressed the problem that the consumer price index ("CPI") understates inflation, especially as a result of methodological changes made by the Bureau of Labor Statistics in the last 25 years for the purpose of making inflation seem lower. The CPI is the most widely used index to adjust incomes and costs from one period to another to put them on an equal purchasing power basis. As a result of the understatement, which he thinks is at least 1%, "real" income gains have been overstated, inflation-adjusted returns on the most conservative debt instruments are negative, stock and real estate prices (being essentially the present values of expected real income streams) are overstated by 5-10%, foreign investments are relatively more attractive than US investments, people whose incomes are tied to the CPI (those under adjustable labor contracts, Social Security recipients, etc.) are not keeping up with inflation. To the extent that the CPI has been understated, especially since 1983, then the decline in real incomes of middle class Americans has been worse than portrayed in my blog posts.

Update on Friday, July 25, 2008 at 08:57AM by Registered CommenterSkeptic
While Bill Gross estimates that the current CPI methodology understates inflation by about 1%, this site suggests that the difference between the old methodology and the current methodology is about 3 percentage points. 
Update on Wednesday, September 3, 2008 at 08:02AM by Registered CommenterSkeptic
Here is an explanation of why the GDP deflator and CPI can tell different stories about inflation and even move in opposite directions.  It's because of imports, especially imports of crude oil at grossly higher prices.  The GDP deflator calculation excludes imports and their price changes.  Thus, if imported petroleum becomes much more expensive, the value of domestically produced goods and services may rise more slowly (because people have only so much to spend), and the nominal GDP will be adjusted downward by less than it would if it were adjusted by the CPI index. 
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