If you are an employee of the Government, you are well aware of what COLA means. COLA means "Cost of Living Adjustment", and is an annual adjustment in wages to help offset the rise of inflation. Without a cost of living adjustment, employees of the Government could find themselves behind as prices rise.
The Consumer Price Index (CPI) is used to determine a government employeeç—´ COLA each year. For this reason, the CPI has been massaged in a way to make sure the Government does not have to shell out big bucks during highly inflationary periods.
In fact, since its inception in 1921, the CPI has undergone six revisions or adjustments. Prior to these adjustments the stock market would react negatively to huge jumps in the CPI. So, as a solution, the CPI has continually been a work in progress and revised.
As an example, the components of inflation have been adjusted, revised (through trial and error), and watered down so much that inflation has been in a range of 1-5% since 1991. This makes it easier on the government to manage the COLAs for employees, not to mention being easier on the country's massive financial debt.
Wars have always been a cause of inflationary pressures, as is a fed funds rate of 1%. This being said, it is obvious that the government has big stake in controlling what is reported in the CPI since a larger inflation rate means larger COLAs for employees.
This is one of the reasons we keep saying the CPI is not an accurate indicator of inflation, nor does it reflect what is happening in the real world. At best it is a convenient measure, convenient only for the government and their pocketbook.
So, the next time you listen to the financial channels and get excited about the inflation rate, remember it has been within a 4% range for 15 years. Since everything inflationary has already been removed, you know it is not an accurate measure of what is affecting us.
