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Answer:
Dear B. Walker,
The
way the rate of inflation is measured, as you've so
cleverly noticed, is somewhat complicated.
The
Two Views
As
consumers we must set aside money on a weekly
basis for food. Those who regularly drive or rent
vehicles must also calculate gasoline costs. These
two items, along with one's mortgage or rent, are
the three largest items in most family budgets, followed
by clothing and education.
The
government has a slightly different viewpoint.
Economists and the Federal Reserve focus on what is
officially called "core inflation." And, surprisingly,
core inflation excludes the cost of food and the cost
of energy.
This
government-driven concept is also called the "underlying
rate of inflation" or the price movements of goods
and services except for food and energy.
The
thinking behind eliminating food and energy goods
is that these items are subject to huge and often
erratic price swings. So, to arrive at a more accurate
gauge of inflation, the government excludes them from
their officially tally. The exclusion also includes
restaurant meals.
Economists
like to point out that prices of food and energy are
seriously affected by: (1) unpredictable weather
conditions on crop harvest, (2) and thus on
the health of livestock and (3) the uncertainty
of OPEC (the Organization of Petroleum Exporting Countries)
in managing oil production and prices.
However,
as you noted in your question, the price of gasoline
has been increasing over the last few months. During
May, it jumped 10.2% according to MSNBC. Last month,
food costs declined, however, for the first time in
seven months. By automatically ignoring gasoline and
food, the inflation rate might be officially underestimated.
The
solution is to also look for the results of the wholesale
or the Producer Price Index. Also issued by
the government, it includes both gasoline and food
prices, along with many other commodities such as
metal, lumber, oil. It does not include the price
of services.
Other
Points
Some
additional information to keep in mind when studying
inflation and/or when analyzing inflation news as
reported by the media...
-
Inflation is a rise in the general level
of prices.
- Deflation
is a decline in overall prices.
- Creeping
inflation occurs when price increases are below
2% annually.
- Accelerating
inflation occurs when price increases become
progressively larger each year.
- Hyperinflation
occurs when price increases are approaching or are
above 10% annually.
- Disinflation
occurs when there's a reduction in the rate of inflation.
- Zero
inflation occurs when there is no annual change
in the price level.
The
Goal
A
low rate of inflation is the overall goal of our country's
economic policy. A low rate not only protects purchasing
power but also encourages investment in the productions
of goods and services and makes U.S. goods more competitive
both at home and abroad.
And,
an under control core inflation rate is good news
for those in the stock market. That's because the
Federal Reserve is less likely to raise interest rates,
which in turn draws investors out of the market and
into money market accounts, bank CDs and some high-yielding
bonds.
More
Info
Because
of your interest in the topic, you might enjoy reading
Norman Frumkin's book, Guide to Economic Indicators
published by M.E. Sharpe, Inc.
Good
luck!
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