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Thursday
May222008

My portrayals of Middle Class decline have been too optimistic?

Bill Gross (chairman and CEO of PIMCO) has again addressed the problem that the consumer price index ("CPI") understates inflation, especially as a result of methodological changes made by the Bureau of Labor Statistics in the last 25 years for the purpose of making inflation seem lower. The CPI is the most widely used index to adjust incomes and costs from one period to another to put them on an equal purchasing power basis. As a result of the understatement, which he thinks is at least 1%, "real" income gains have been overstated, inflation-adjusted returns on the most conservative debt instruments are negative, stock and real estate prices (being essentially the present values of expected real income streams) are overstated by 5-10%, foreign investments are relatively more attractive than US investments, people whose incomes are tied to the CPI (those under adjustable labor contracts, Social Security recipients, etc.) are not keeping up with inflation. To the extent that the CPI has been understated, especially since 1983, then the decline in real incomes of middle class Americans has been worse than portrayed in my blog posts.

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