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Subject:  Re: Implications of Fed pause Date:  8/10/2006  11:56 PM
Author:  jackcrow Number:  17790 of 35576


I'm familiar with the terminology game, semantics or technical usage between the two concepts. Sometimes I'm not sure if its hair splitting or a useful division of ideas. Inflation can and often does create price increases, simple supply and demand economics.

Odd quote at the begining of the article tho
Today, there is actually monetary deflation but twice the rate of price inflation that prevailed a year ago.

I don't think I can agree with this statement. Deficit spending requires and increase in monetary units that support it. For some this is an accounting game, the amount of currency sloshing around may temporarily be less but the debt issued by the govt is backed by a theoritical supply of money to service the debt. In essence each coupon payment increases money in the system, assuming an equal amount of money isn't take out of the system to off set the payment. In a deficit spending mode this can't be true, at least for this simple minded redneck.

Finally, if it still looks as though prices are rising, which will push up the federal government's cost-of-living adjustments (COLAs), especially for Social Security, they deflate it by applying a "hedonic pricing" deflator. This adjusts prices downward according to hypothetical increases in quality, which are of course incapable of being quantified even when not hypothetical. In short, the statisticians make up a deflationary number for each product that is plausibly improving in quantity.

I must say I'm suspicious of anyone who throws out the hedonics argument, too often its used as a quasi-conspiracy theory. Hedonics are not perfect but it is the current winner in the neccesary argument of what to do about real efficiencies gained from product improvements. The hedonic formula are updated/upgraded from time to time using an open public process that we are all welcome to involve ourselves in. Most of us don't have the skill set to understand the potential outcomes of the tweaks and "improvements" to the formulas. Manipulating the formula for a specific outcome and manipulating the informed folks participaiting in the process would take more brain power then I'm willing to give the current administration credit for.

While I have little confidence in any of these official indexes, I do have confidence that the statisticians who compile them are committed to them as "the best that anyone can produce." As bureaucrats, they resist any tampering of the formulas. So, I can see the trend of a particular index.

This I agree with.