December 24, 2010--COLA

I just received my annual letter from the Social Security Administration. Yes, from Social Security. I am old enough. Check out my picture to your right.

It said:

Your Social Security benefits are protected [my italics] against inflation. By law, they increase when there is a rise in the cost of living. The government measures changes in the cost of living through the Department of Labor's Consumer Price Index (CPI). The CPI has not risen since the last cost-of-living adjustment as determined in 2008. As a result, your benefits will not increase in 2011.

Obviously no one from either the Labor Department or the Social Security Administration has been in a supermarket lately or bought a tank of gas.

I gassed up this morning in Delray Beach, Florida and paid $3.05 a gallon. Last April, when we filled up before heading back to New York we paid "only" $2.85 a gallon. Yesterday we were in Publix where we stocked up on groceries. My lunchtime staple, yogurt, which last spring was 5 for $3.00 is now 4 for the same $3.00. A dozen eggs were a quarter more than last year. My favorite guilty pleasure, Haagen-Dazs Five Ingredient chocolate ice cream which had been $2.85 a pint was $3.50.

I could go on, but won't. It's Christmas eve day and I don't want to depress you or myself.

My first thought--Thankfully I am fortunate enough not need any Cost of Living Adjustment (COLA) this year. Maybe, since my taxes will not be raised thanks to the Republicans, not getting a COLA will be my little way of helping the government keep next year's deficit to only about $2.0 trillion.

My second thought--how do they calculate the CPI anyway. I looked that up and found that there is a do-it-yourself way. I like do-it-myself things and since maybe you do as well, take a look at this:

(1) Determine the goods and the time frame for which you are interested in measuring the inflation rate. People often want to know how prices have increased over a year. Suppose, for simplicity's sake, that you are interested in the inflation rate for a basket of goods that includes a gallon of milk, a loaf of bread and a paperback novel.

(2) Calculate the number of units you purchase of these goods and the prices you paid one year ago. For example, suppose you buy four gallons of milk, three loaves of bread and a paperback per month and that one year ago, you paid the following prices: $2.75 per gallon; $2 per loaf; and $7 per novel. This means you spent a total of $24 a month one year ago for these goods.

(3) Repeat Step 2, but consider the prices you pay now. Suppose the current prices are $3.50 for a gallon of milk and $2.50 for a loaf of bread, while the price of a paperback is the same $7. This means you now spend $28.50 a month for the same basket of items.

(4) Subtract the amount you spent per month one year ago ($24) from the amount you spend now ($28.50), then take the difference ($4.50) and divide by last year's amount ($24). This gives you a result of 0.188 (with rounding).

(5) Multiply the result you obtained in Step 4 (0.188) by 100 to obtain the percentage rate increase for the selection of goods you're interested in studying. For this example, the results show that the consumer price index for a gallon of milk, a loaf of bread and a paperback novel increased 18.8 percent in the past year.

That 18.8 percent from their example seemed a little high to me. I did the best I could since I don't keep the kind of detailed spending records I would need to do my calculations accurately, but I nonetheless derived a personal CPI of about 5.0 percent. So how did the U.S. Government come up with their zero inflation story?

Here's how:

In recent years when the government hoped that the CPI would rise as little as possible because any increase would have an enormous impact on the total paid out to Social Security recipients, money the government would have to borrow from China, they invented a new way to compare one year with the next.

Instead of doing it the way outlined above--via a literal comparison of year-to-year expenses for the same things (milk, bread, paperbacks)--some brilliant bureaucrat came up with the concept of "fixed standard of living" (FSL).

FSL looks at year-to-year comparisons, not by comparing oranges with oranges, but comparing oranges with less expensive fruit--fruit that costs the same per pound this year as oranges cost last year. To the Labor Department fruit is fruit. Additionally, if as we all know beef is much more expensive this year than last, they assume people who in 2009 were eating sirloin steak at $8.95 a pound are this year eating $7.65 a pound chuck steak. Both years you're eating beef, but this year you're paying less for it, which offsets the dramatic rise in gas prices.

From a fixed-standard-of-living way of looking at things, any kind of beef is still beef.

Thus, zero inflation and no COLAs.

Five years from now the Labor Department and the Social Security Administration will be in big trouble when trying to find a fixed point of comparison for 50-percent-fat-content chopped meat. They will have traded us down to that and there will no longer be any cheaper beef to consider as its equivalent.

So at that time to claim that there is no inflation, in standard of living terms, they'll have to consider comparing chopped meat to dog food.

But I promised to be merry. Sorry.

Be merry.