‘Core inflation’ takes food and energy out of the inflation index. Many mainstream economists and Fed members pray at the ‘core inflation’ altar. So what economist came up with the wacky notion. Was it some Einstein type creating a concept that few other earthlings can understand? No.
‘Core inflation’ was created at the behest of Tricky Dicky, himself, Richard Nixon.
Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, reports in his new book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, that, President Richard Nixon asked his Federal Reserve chairman Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation—and thus make inflation look less threatening.
This new-fangled “core inflation” would simply knock out, due to nettlesome “volatility,” nettlesome food and energy prices. The new number could be shouted from the hilltops and blasted through newspaper headlines whenever the true CPI number was terrifying. It’s a number the markets are still too obsessed with today, writes Elizabeth MacDonald, in a review of Phillips book.
But they all mess with the numbers.
In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics decided that housing, too, was overstating CPI.
Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:
*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;
*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.
Under Bill Clinton, Phillips says, the nation’s employment figures were massaged.
In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”
