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Why Inflation Feels High While the Government Says It’s Low

By Erin Lale

There’s an old joke about statistics that goes: if you have one foot in a bucket of ice and one foot in a bucket of boiling water, and you’re a normal person, you say “Ouch! Help!” but if you’re a statistician, you say, “On average, I’m comfortable.”

That’s the situation we have with our economy right now: It’s running hot and cold, and the government thinks it’s doing fine. An example of a statistic that doesn’t tell the whole story is the unemployment rate. The official unemployment rate is high, and the ‘real’ rate is much higher. The ‘real’ rate includes part time workers who want to work full time; full time workers who have accepted lower wages than before; workers in the New Normal economy who patch together part time and freelance income and who accept non-wage compensation like commissions, promises of future stock after IPO, royalties, bartered ads, payment in kind, partnership income, etc.; workers who have given up looking for a job; partially disabled people who previously were able to do some work and now can’t find a job because of competition from the able; students who decided to go back to school because they couldn’t find a job; previously fully employed older adults who accept internships in the hope that it will lead to paying work; and so forth.

Inflation statistics don’t tell the whole story either. The reason government statisticians don’t report inflation is because three economic conditions pertain that regular people and government economists count very differently: 1. Prices for basic, necessary things that people have to buy over and over such as food, gas, and utilities are rising steeply; 2. Prices for things that some poor or middle class people can produce at home, such as artisan handicrafts, have fallen steeply with less demand, and sales have also fallen; 3. Prices for homes, which non-speculators usually only buy two or three times in a lifetime and maintain as an inheritable asset, have fallen precipitously and remain depressed. In the real world, poor and middle class people interpret thing 1 as inflation, thing 2 as loss of income, and thing 3 as loss of capital. The conclusion of all three factors is that we are deep in an economic depression. Government economists, however, average the prices of all three categories and conclude that there is very low inflation and that the economy is therefore in a recovery.

When government spokespeople speaking in the media or on the net announce that they fear the recent news in Europe could slow our recovery, ordinary folks scratch their heads and wonder, “What recovery?” The public is left questioning whether our rulers could really be that out of touch, or if it’s the sort of excellent-wheat-harvest-quota propaganda that the old Soviet Union used to indulge in. The reality is that they simply don’t think like you and me. Statisticians deal in averages, while real people deal in personal experience. Statisticians aggregate and analyze, and look down disdainfully at mere anecdotal evidence. And it is the statistical view from which government economists operate. Like the statistician with the two buckets, they think it averages out to OK if the rich are getting richer and the poor are getting poorer as long as incomes still average out as middle class. And they think it’s OK if the money in your wallet buys less food (higher prices) as long as you also receive less money for your labor (lower prices) because lower prices plus higher prices average out to no change.