Under control

Our political leaders and even our financial authorities assert that inflation is “under control.”

 They also imply that their diligence will ensure that cost of living increases will remain subdued.

All of this is utter nonsense.

“Core” inflation is cited as the reference mark as it excludes food, energy, and credit components. How can any meaningful measurement rule out those factors?

Most regimes, as long ago as in 18th century France, were aware of the importance of food prices, so they manipulated the charges for food (bread) because that was central to the public’s concern and their rising resentment against inflation. Frequently, the price of foodstuffs has been heavily subsidized to disguise price rises. Of course, in the long run that deterred production; while food appeared to be reasonably priced, it simply became unavailable.

Energy expenses are pervasive in today’s world, and eliminating them from price gauges is absurd. Almost everything has to be shipped from the site of production to the point of consumption. Transportation invariably entails fuel charges, which have doubled over the past 18 months. Also, the price of gasoline has risen four-fold since the 1970s, as have home heating expenditures.

Despite the interest rate cuts by the Bank of Canada and the U.S. Federal Reserve System, banks have not followed by reducing rates on mortgages, installment credit, or personal loans. They remain stubbornly high, far above historic norms. Along with that, lenders now have become more selective in approving loan applications from marginal borrowers unless extra interest payments were forthcoming.

Insurance companies have been raising premiums, reflecting the need to adjust claims because of rising replacement expenditures. Further, higher wages, rent, and other operating expenses have impaired profit margins, so insurance rates have been permitted to move higher; such stealth changes do not appear in the price index.

Another irony of the consumer price index is that user fees, real estate surcharges, and other back door taxes are creeping into the system, but are not included in measuring the cost of living.

With so-called hedonic pricing now commonplace, the actual listed prices are “corrected” to reflect quality improvements. If a computer now has more “bells and whistles,” the posted price is reduced in calculating the price in the inflation index. Also, substitution is allowed, so if an item has climbed in price, an alternative, lower in price, is used. Finally, rents do not rise as much as house selling prices, so to calculate accommodation expenses, rents are used in the index.

If these price adjustments were published by private enterprise, the authors likely would be jailed for fraud, but in government that is called policy, “under control.”


Bruce Whitestone