When did profits enter into inflation calculations? And why should they? The CPI is an index of consumer goods, which equities and bonds (which are savings), and homes are not.
> we see what some have called an "asset price inflation", a permanent bloat
of fictitious capital allowed to expand without (theoretical) limit, but
also never permitted to "fail". That is why Greenspan strenuously resisted
calls to count "asset price inflation" into the general inflation index
during the dotcom bubble.
More than 80% of stocks are held by about 15-20% of households--at the upper end of theincome distribution. How would counting them make things better? Are you arguing that if they were counted in, Greenspan would have been forced to raise interest rates sooner? How would that have made things better? Greenspan's willingness place a put on the bubble also helped the unemployment rate to fall to 3.9, far below the consensus rate at which most economists would have tightened for fear of inflation. And this was no small part of the reason that real wages saw their first gains in almost 20 years from 97-00.
It should also be pointed out that if the CPI is understating inflation, it means higher real taxes for anyone whose income is growing much faster than the index--since the CPI is also used to adjust tax brackets. Right now, that means the wealthy primarily.
As for the points from the Money article (which Nathan paraphrases, but well
:) ), education and medical care are about 5-6% of expenditure, each. So it
makes sense that they can be way above the index and be consistent with it.
The business about cars and trucks makes perfect sense--their price should
go down when interest rates are low. That's what you would expect and want:
it makes the market for used cars--ie for those with less than perfect
credit, or not enough income to buy a new car--better.
In general, there is at least as much to think that the CPI overstates as understates inflation: as an index it always weights goods whose price increases more than those whose decreases, since it uses previous period quantities in its calculations.
As for the housing thing, I think there is good reason not to count it as a consumption good. The difference between renting and owning is that if you own, you can borrow against the house, which makes it as much like saving as consumption. Moreover, even if you used a home price inflation index like Freddie Mac's for housing prices (current annualized price growth 4.8%), it would add 1/2 a percentage point to inflation, which changes the meaning of the current growth numbers very little, even if you take it right off the top. Whether growth was 7.7% or 8.2% in the third quarter is, relative to both the forecasts and the previous quarters, irrelevant. Whether it will benefit those who have lost their jobs is another question.
Christian