Wednesday, June 18, 2008

The inflation rate

I checked out the Statistics Canada inflation report. The report dated May 21, 2008 puts inflation at 1.7%.

I think if you live in Canada you wouldn't agree inflation is 1.7. Everyone eats and most people drive or use power in some way. If you've been to the gas pumps or grocery store then I'm confident your personal cost of living has increased more than 1.7%.

I know the government talks about something called a core index (whatever that is), some obscure thing most of us regular folks don't grasp.

I think a lot of people just believe the government underreports the inflation rate and just accept it. I got to thinking about why the government would report inflation as lower than it really is. I came up with some good reasons without thinking too hard about it.

I suspect a big reason is financial obligations. A lot of government entitlement and pension programs and such are superannuated programs. Which means the payout rises in step with inflation. That's good for recipients but bad for the taxpayers who are funding these programs. I remember a flap in 1985 about indexed pensions - it's the last paragraph on the page. Instead of de-indexing pensions directly the government effectively de-indexed them by just defining and reporting inflation as lower than it really is.

It's hard to blame the government in a way since if they paid out the indexed entitlements at the true rate of inflation then the nation and its taxpayers would be financially ruined. They just achieved deindexing in a stealthy way.

Another reason to underreport inflation is to make the people feel good about their standard of living. If prices are rising very slowly then that is good. Especially since wages aren't rising too quickly. So if someone gets a 2% raise and is told inflation is 1.7% then he feels he's getting ahead and is more likely to be happy with how the government is managing the economy.

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