Seeing Inflation Only in the Prices That Go Up Published: May 7, 2008 Next week, the Bureau of Labor Statistics will release its monthly report on inflation, and it sure is going to sound strange. Wall Street is expecting the bureau to announce that the Consumer Price Index rose just three-tenths of a percentage point in April. Over the last year, the index has risen only about 4 percent. I’m guessing that doesn’t square with your sense of reality. In my household, we just broke the $60 barrier for filling up our gas tank. Nationwide, the price of bananas is up almost 20 percent over the last year, while eggs are up 35 percent. Costco and Sam’s Club recently began rationing rice, to prevent hoarding. All the while, some of the big-ticket items that have been getting more expensive for years — like health care and college — just keep on getting more so. This contrast between the official government statistics and day-to-day reality has led to a boomlet in skepticism about what the government is up to. Last month, when I did an online Q. and A. with Times readers, I got three separate, thoughtful questions about — of all things — how the inflation rate is calculated. The current cover story in Harper’s, called “Numbers Racket: Why the Economy Is Worse Than We Know,” deals with the same subject. Written by Kevin Phillips, the Nixon aide turned left-leaning commentator, it concludes that the real inflation rate “is as high as 7 or even 10 percent.” This isn’t just an academic discussion about numbers, either. The Consumer Price Index helps determine the size of Social Security checks and affects annual raises at many companies. If the index is wrong, senior citizens and workers are being cheated, and the economy is indeed much worse than we know. So what’s going on here? To answer that question, it helps to go back a few years, to a time when trips to the supermarket didn’t induce sticker shock. In 2003, a pound of hamburger cost all of $2.20. More than two decades earlier, in 1980, it cost $1.86, which means that the nominal price of burger meat rose only 18 percent over a period in which the nominal hourly pay of the typical American worker rose 150 percent. Similar stories can be told about eggs, bananas, bread and frozen orange juice. Food was getting cheaper relative to everything else, as Neil Harl, an agriculture professor at Iowa State University, explained to me, because of a combination of government subsidies, global trade and the rise of industrial farms. During the 1980s and 1990s, though, did you ever stop and marvel at what a small share of your paycheck you were spending at the supermarket? I didn’t. I also didn’t really notice that gas cost less in the late 1990s than it had in the 1980s. Yet lately, every time my wife or I pass a new benchmark for filling up our tank — $40, $50 and now $60 — we have a conversation about it. Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago. There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise. When you dig into the Consumer Price Index, you start to realize just how many things fall into this category. The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor. To top it all off, most people don’t buy any of these items very often. “People tend to remember things they do frequently,” says Stephen Cecchetti, an economist at Brandeis University who studies inflation. “And what do you buy more frequently than gas and food?” But combine the less noticeable trends with some true price declines, like a 5 percent drop in women’s clothing over the last year, and an inflation rate of 4 percent starts to seem more reasonable. Inflation really has gotten worse recently — it was only 2 percent a year and a half ago — but it’s not as bad as it feels. The conspiracy theories about inflation play off these human instincts, but they also depend on two other oddities. The first is the amount of attention given to the so-called core inflation rate. This is a version of inflation that excludes food and energy, which makes it a little like a grade point average that excludes math and French. The core inflation rate does have a purpose. Its movements help Federal Reserve officials base interest rates on underlying price trends, instead of being overly influenced by food or gas prices, both of which can be volatile. But when Ben S. Bernanke, the Fed chairman, talks publicly about core inflation, he can leave the impression that the government is cooking the books. In fact, all the important economic indicators, including real wages, are based on overall inflation, as are Social Security checks and cost-of-living raises. The final piece of the puzzle — and the focus of the Harper’s article — is the way that the Bureau of Labor Statistics has changed the price index recently. Back in the mid-1990s, a committee of academic economists concluded that the Consumer Price Index overstated inflation. To take just one example, years would often pass before the index included new products — like cellphones — and therefore it missed the enormous price declines that occurred shortly after those products entered the mainstream. In response, the bureau tweaked the index. But economists who have studied the changes say they have had only a modest effect on the inflation rate, lowering it by perhaps a half point a year. More to the point, the changes seem to have made the index more accurate than it used to be. “It’s about as accurate as anybody is going to get it,” Mr. Cecchetti said. That said, there is one way in which the official numbers were clearly understating inflation. To track housing costs, the Consumer Price Index analyzes rents, not home prices. (Why? Long story.) And rents didn’t go up anywhere near as much as house prices during the real estate boom. So the index missed the huge run-up in home values that made life harder on anyone trying to buy a first home. Since 2006, of course, home prices have been falling. But rents have kept rising slowly, which means that, as far as the Consumer Price Index is concerned, housing has somehow gotten more expensive during the real estate crash. So when the new inflation numbers come out next week, they will indeed be misleading. They will be artificially high.

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Environmentalists' Wild Predictions Now that another Earth Day has come and gone, let's look at some environmentalist predictions that they would prefer we forget. At the first Earth Day celebration, in 1969, environmentalist Nigel Calder warned, "The threat of a new ice age must now stand alongside nuclear war as a likely source of wholesale death and misery for mankind." C.C. Wallen of the World Meteorological Organization said, "The cooling since 1940 has been large enough and consistent enough that it will not soon be reversed." In 1968, Professor Paul Ehrlich, Vice President Gore's hero and mentor, predicted there would be a major food shortage in the U.S. and "in the 1970s ... hundreds of millions of people are going to starve to death." Ehrlich forecasted that 65 million Americans would die of starvation between 1980 and 1989, and by 1999 the U.S. population would have declined to 22.6 million. Ehrlich's predictions about England were gloomier: "If I were a gambler, I would take even money that England will not exist in the year 2000." In 1972, a report was written for the Club of Rome warning the world would run out of gold by 1981, mercury and silver by 1985, tin by 1987 and petroleum, copper, lead and natural gas by 1992. Gordon Taylor, in his 1970 book "The Doomsday Book," said Americans were using 50 percent of the world's resources and "by 2000 they [Americans] will, if permitted, be using all of them." In 1975, the Environmental Fund took out full-page ads warning, "The World as we know it will likely be ruined by the year 2000." Harvard University biologist George Wald in 1970 warned, "... civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind." That was the same year that Sen. Gaylord Nelson warned, in Look Magazine, that by 1995 "... somewhere between 75 and 85 percent of all the species of living animals will be extinct." It's not just latter-day doomsayers who have been wrong; doomsayers have always been wrong. In 1885, the U.S. Geological Survey announced there was "little or no chance" of oil being discovered in California, and a few years later they said the same about Kansas and Texas. In 1939, the U.S. Department of the Interior said American oil supplies would last only another 13 years. In 1949, the Secretary of the Interior said the end of U.S. oil supplies was in sight. Having learned nothing from its earlier erroneous claims, in 1974 the U.S. Geological Survey advised us that the U.S. had only a 10-year supply of natural gas. The fact of the matter, according to the American Gas Association, there's a 1,000 to 2,500 year supply. Here are my questions: In 1970, when environmentalists were making predictions of manmade global cooling and the threat of an ice age and millions of Americans starving to death, what kind of government policy should we have undertaken to prevent such a calamity? When Ehrlich predicted that England would not exist in the year 2000, what steps should the British Parliament have taken in 1970 to prevent such a dire outcome? In 1939, when the U.S. Department of the Interior warned that we only had oil supplies for another 13 years, what actions should President Roosevelt have taken? Finally, what makes us think that environmental alarmism is any more correct now that they have switched their tune to manmade global warming? Here are a few facts: Over 95 percent of the greenhouse effect is the result of water vapor in Earth's atmosphere. Without the greenhouse effect, Earth's average temperature would be zero degrees Fahrenheit. Most climate change is a result of the orbital eccentricities of Earth and variations in the sun's output. On top of that, natural wetlands produce more greenhouse gas contributions annually than all human sources combined.

Hold election under Army supervision: BJP Statesman News Service NEW DELHI, May 7: Alleging large scale “cruelty and brutality” by CPI-M cadres in Nandigram against villagers and party nominees, the BJP today demanded that the 11 May Panchayat polls should be held under the armed forces’ supervision. With the State Election Commission pleading helplessness in acting tough on the perpetrators of violence and the “police acting in tandem with CPM cadres” Nandigram II was being enacted by the CPI-M, the BJP spokesman, Mr Prakash Javadekar, said. He said the CPI-M’s “Stalinist designs” had come to the fore again. He cited an incident of a women being stripped naked and beaten up because she had refused to take part in a CPI-M rally to prove his point. “The BJP would expose the CPI-M’s Stalinist face throughout the country,” he said. Meanwhile, even as the West Bengal government today ordered an independent inquiry into the BUPC (Bhumi Uchhed Protirodh Committee) woman being stripped naked yesterday by CPM activists, the BJP said nothing short of a CBI inquiry would do. Condemning the incident, Mr Javadeakar said people living in Sonchura, Samasbagh, Gokulnagar and Kalicharanpur, who had refused to toe the CPI-M line, had taken refuge in the tehsil office fearing retribution by the cadres. He said that at about 4000 places the the Opposition candidates were being prevented from filling up their forms. Referring to the CPI-M cadres’ alleged excesses, the party spokesman said the CRPF was not allowed to move out of their barracks. Mr Javadekar said the party candidates for the coming polls had to bear the brunt of the cadres’ ire. “The Opposition candidates and voters are being mercilessly beaten up by the CPM cadres and also police when they approach them with their complaints,” he said. Mr Javadekar alleged that CPI-M cadres had snatched voter identity cards of more than 2000 voters. The BJP candidate for Sonchura, Mr Jaydeb Mandal, was hospitalised after he was beaten up by CPI-M cadres, he added. Another party leader Mrs Aarti Mandal’s house was also attacked with bombs, allegedly thrown by CPI-M activists, Mr Javadekar said.