No Raise for Seniors: Inflation Rate Higher than Zero? – It May Be– Economists Calculate 08/09 Annualized Rate of Inflation between 4.2% & 1.3%.

Those receiving Social Security Benefits will not be entitled to a “cost of living” raise this year due to a negative rate of inflation. A negative rate of inflation should mean that one’s paycheck should go further, yet, it appears that consumer goods and energy prices are constantly increasing, to the point, where individuals are making tough choices when it comes to essentials.

In reviewing the data available on how inflation is calculated, one is instantly confounded with a variety calculation methods, depending upon who is doing the calculating, the rate for 2009 is either -5 or +4.2%, with the later appearing most likely when one considers the ever increasing costs of groceries and utilities (The rise in utilities due to fluctuation in fuel and stateand federal fees and taxes affecting telephone, oil, etc.) The question then arises, what is the actual rate of inflation? The answer, even the economists don’t agree on the calculation of the rate, therefore, it is almost impossible for the person of average intellect to get a handle on which is correct. Obviously, if the rate of inflation were to be a negative, it would impact on an administration, and should there be several to choose from, it is quite possible that the lowest available data would be used.
The agencies that have the rate of inflation in mind:

The Department of Labor which calculates the Consumer Price Index, and may or may not, depending upon who one believes, be including consumer goods (which is sternly denied upon visiting the site). According to the Department of Labor, the U.S. is currently experiencing a negative rate of inflation due to lower than average fuel costs during the past few months.

The Bureau of Economic Analysis (data currently unavailable: comparison between BEA Personal Consumption Expenditures and the Department of Labors Consumer Price Index).

The Federal Reserve which uses a method of calculation which produces a “Trimmed Mean Inflation" (Definition below), and utilizes data from both the Department of Labor and the Bureau of Economic Analysis, the results herefrom August 2009, show a PCE with an annualized increase of 4.2%, when food and utilities are excluded, that annualized rate of inflation drops to 1.1%, when it is “trimmed”, the annual rate of inflation in August was actually 1.3%. (Based on a one month annualized rate of inflation.) However, to further complicate the matter, the rate is then calculated two more times, using August data, annualized at six months and then annualized at 12 months – which at 12 months, the “trimmed” rate of inflation, is a tad higher at 1.6%.

What we find is that three different government bodies, have three different methods of determining the rate of inflation – the two that make the most sense, and are easiest to follow, are the BEA (Bureau of Economic Analysis), and the Federal Reserve Method, (which in essence, finagles the numbers so that what one actually has is some sort of average between the BEA and DOL). In any wise, to suggest that the rate of inflation, for personal consumption and energy, is less than zero – is somewhat disingenuous, even for the President, (or one should say, his advisors.)
If one uses the uses the annualized inflation rate from the Federal Reserve, conservatively suggesting a rate of inflation in August of 1.6% coupled with an unemployment rate of 9.8%, the misery index is currently at 11.4% or chasing the 20.1% enjoyed in the last days of the Carter Administration. Therefore, the annualized cost of living increase that so many of the seniors and those on fixed incomes depend upon, may become of more import as 2010 approaches, should the rate of inflation increase.


“Trimmed Mean Inflation” Definition

In any given month, the rate of inflation in a price index like the Consumer Price Index or Personal Consumption Expenditures (PCE) can be thought of as a weighted average, or mean, of the rates of change in the prices of all the goods and services that make up the index. Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are—like a skater’s best and worst marks—thrown out, or “trimmed.” The inflation rate is then calculated as a weighted average of the remaining components.