Our Real Inflation Problem - OZY | A Modern Media Company

Our Real Inflation Problem

Our Real Inflation Problem

By Simon Constable


Because this impacts your budget, and how much you might be able to afford.

By Simon Constable

Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.

Despite these shaky stock markets, some of us are still angling for a shiny new ride — complete with that leather-laden new-car smell. But while you may hear news on the way to the dealership that inflation is still under control, you won’t believe it once a sales rep tells you their full-size American cars will cost you the better part of $40,000.

How can this be, when inflation is supposed to be muted? Part of the problem is the way inflation data gets calculated. Take, for instance, the base price of a Chevy Impala, a full-size vehicle with a price that’s increased at an annualized rate of 3.5 percent per year when you look back to 2009. That’s well above the 2 percent rate of inflation that the U.S. government says it wants to hit, but it’s unlikely that those pesky price hikes on that Chevy actually make it into Uncle Sam’s measure of inflation.

How we measure that inflation matters, because it can have an outsize effect on certain households.

As it turns out, price increases are adjusted for quality, including “structural and engineering changes” that impact things like the safety, reliability, performance, fuel economy and even the comfort or convenience of a vehicle, according to the Bureau of Labor Statistics, the grand pooh-bah behind inflation calculations. So if your new set of wheels drives better than your old clunker and is cozier, then all the extra cash you put toward it won’t actually be counted as a price increase. In other words, there’s not really any inflation. “If you look at new-car price data from the government, they are often falling year to year,” says Kurt Karl, chief economist at insurance giant Swiss Re, in Zurich. He’s not kidding: From 1998 through 2008, the BLS’s new-vehicle inflation index shows declines every year but one.

Sure, buying a new car still requires paying a higher price than you would for an old model — it has all those fancy features bundled in, after all. And part of the issue is that a car without those updated perks simply doesn’t exist as a new car. Look no further than the two-seater sports car I had at college — it was beautiful, but it ran only on fully leaded gasoline, was without fuel injection and had limited safety features (did I mention it also lacked a heater?). Even if such a car could pass today’s government safety requirements, it likely wouldn’t ever be manufactured again, because only throwbacks like me would want one. “I can’t get a new 1995 Volkswagen Jetta, and I cannot get a current model without the new features,” laments Dan Murphy, professor of economics at the University of Virginia Darden School of Business, in Charlottesville.

In terms of inflation, the bundling of features doesn’t matter too much. If General Motors or Nissan wants to add on extras every year, that’s up to them. But for measuring inflation, it’s a problem because the method of transport for most Americans is a car or a truck, and it’s usually the second-biggest expense for most folks. So how we measure that inflation matters, because it can have an outsize effect on certain households, especially those with little room left in their budget at the end of the month.


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