As inflation subsides, disinflation seamlessly
fades into deflation. People - accustomed to the deflationary bias of
central banks - expect prices to continue to fall. They defer
consumption. This leads to inextricable and all-pervasive recessions.
Inflation rates - as measured by price indices - fail to capture
important economic realities. As the Boskin commission revealed in
1996, some products are transformed by innovative technology even as
their prices decline or remain stable. Such upheavals are not
encapsulated by the rigid categories of the questionnaires used by
bureaus of statistics the world over to compile price data. Cellular
phones, for instance, were not part of the consumption basket
underlying the CPI in America as late as 1998. The consumer price index
in the USA may be overstated by one percentage point year in and year
out, was the startling conclusion in the commission's report.
Current inflation measures neglect to take into account whole classes
of prices - for instance, tradable securities. Wages - the price of
labor - are left out. The price of money - interest rates - is
excluded. Even if these were to be included, the way inflation is
defined and measured today, they would have been grossly
misrepresented.
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