Inflation Rate Versus The Force Of Inflation – Douglas E. Castle


The Douglas E Castle Consultancy

rsz_the_force_of_inflation_-_the_douglas_e_castle_consultancy_-_2014_The inflation rate is simply a government-calculated (you might already be skeptical) statistic which is based upon comparing the cost of a “market basket” of goods with the cost of the same basket from an earlier period. If the cost of the basket goes up, we have inflation; if it goes down, we have deflation — or at least less inflation. Sadly, inflation, as measured, doesn’t take into account several key factors, such as:
1) A change in the composition of the market basket of goods;
2) The true, adjusted value of the dollar;
3) The availability of credit to consumers to make purchases – available credit (i.e., financing things which we cannot afford) drives prices higher, but also affects which of the goods in the market basket we’d eliminate from our consumption if we couldn’t leverage those purchases over time;
4) The availability of employment benefits paid to employees which enables them to get some of the market basket goods as part of their compensation — so that they don’t have to buy them from earnings, savings or on credit;
5)  Sharp increases in the costs of services and goods in increasing demand, but which are excluded from the market basket measurement;
In addition to all of the foregoing flaws in simply computing the rate of inflation (the cost of acquiring the market basket full of goods), government economists fail to compute a more meaningful statistic; I’ve called it the Force Of Inflation. The Force of Inflation is the true effect on how well the economy is doing. It is the difference between the increment of inflation (in dollars or percentage points)  and the actual increment (in dollars or in a percentage) of increase or decrease in the real income to consumers. This Force Of Inflation is a measurement of our ability to actually afford things.
For example, if inflation is measured to have risen 1% in a fiscal quarter, and real consumer income has dropped by 5% on average during that same period, the Force Of Inflation may be 6%. It means that our ability to purchase what we require to live has decreased by 6%. And the consumers feel this more than the inflation rate per se.
The takeaway here is that inflation by itself measures nothing of importance to consumers in a country’s domestic economy, but the differential, or Force Of Inflation truly tells a story about economics and economic recovery. Especially when the distortion in statistics caused by excessive access to credit is adjusted. How many “middle class” families could buy a car, a home or appliances and computer toys without credit? And credit is a self-fulfilling prophesy in terms of inflation — the cheaper and more available consumer credit is, the more that the costs of goods, in or out of the market basket, will rise.
Douglas E. Castle
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