Go Lean…Caribbean

Go Lean Commentary

Money matters in modern life.

So if money matters, then inflation is a consistent consideration for money matters. Think of a Union collective bargaining negotiations; it may be important to peg wage increases to the rate of inflation. The same consideration would apply to pensions and other national safety nets.

The book Go Lean… Caribbean, serves as a roadmap for the introduction and implementation of the Caribbean Union Trade Federation (CU). The CU is to take oversight of much of the region’s inflation monitoring/metering. In fact, Go Lean roadmap has 3 prime directives:

• Optimization of the economic engines in order to grow the regional economy.
• Establishment of a security apparatus to protect the resultant economic engines.
• Improve Caribbean governance to support these engines.

This book is written with the approach that “we manage what we measure”. The CU will measure all aspects of Caribbean inflation and manage the consequential implications. According to the foregoing encyclopedia reference, the measurement method of a Consumer Price Index (CPI) needs a regional administrator, as there can be regional deviations from city-to-city, island-to-island. The CU oversight is a professional, technocratic administration of this important economic metric. This point is detailed in the Go Lean book (Page 153), identifying “Ways to Control Inflation”.

Encyclopedia Definition

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.^[a]

Consumer Price Index

The consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics (a unit of the Labor Department) as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”^[b]

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indexes and sub-sub-indexes are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values. In most countries, the CPI is, along with the population census and the USA National Income and Product Accounts, one of the most closely watched national economic statistics.

Is the CPI a cost-of-living index?

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework.

What goods and services does the CPI cover?

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

Chained CPI in the United States

In the United States, several different consumer price indices are routinely computed by the Bureau of Labor Statistics (BLS). These include the CPI-U (for all urban consumers), CPI-W (for Urban Wage Earners and Clerical Workers), CPI-E (for the elderly), and C-CPI-U (chained CPI for all urban consumers). These are all built in two stages. First, the BLS collects data to estimate 8,018 separate item-area indices reflecting the prices of 211 categories of consumption items in 38 geographical areas. In the second stage, weighted averages are computed of these 8,018 item-area indices. The different indices differ only in the weights applied to the different 8,018 item-area indices. The weights for CPI-U and CPI-W are held constant for 24 months, changing in January of even-numbered years.

The weights for C-CPI-U are updated each month to reflect changes in consumption patterns in the last month.

In January of each year, Social Security (America’s Old Age Pension) recipients receive a cost of living adjustment (COLA) “to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)”[f]. The use of CPI-W conflicts with this purpose, because the elderly consume substantially more health care goods and services than younger people. [d] In recent years, inflation in health care has substantially exceeded inflation in the rest of the economy. Since the weight on health care in CPI-W is much less than the consumption patterns of the elderly, this COLA does not adequately compensate them for the real increases in the costs of the items they buy. [g]

The BLS does track a consumer price index for the elderly (CPI-E). But it is not used, in part because the social security trust fund is forecasted to run out of money in roughly 40 years, and using the CPI-E instead of CPI-W would shorten that by roughly 5 years.[h]

Wikipedia Online Encyclopedia – Retrieved 05-20-2014 http://en.wikipedia.org/wiki/Inflation

Citation References:

a. Mankiw, N. Gregory (2002). Macroeconomics (5th Ed.). Worth Publications. ISBN 978-0716752370. Retrieved May 2014.

b. Consumer Price Index. Bureau of Labor Statistics. Retrieved September 10, 2010 from: http://www.bls.gov/cpi/cpifaq.htm.

c. Losey, Stephen (31 December 2012). “Chained CPI proposal off table for now, lawmakers say”. Federal Times. Retrieved 3 January 2013 from: http://www.federaltimes.com/article/20121231/BENEFITS02/312310001/Chained-CPI-proposal-off-table-now-lawmakers-say?odyssey=tab%7Ctopnews%7Ctext%7CCongress.

d. Robert, Reich (April 4, 2013). “What’s the ‘Chained CPI,’ Why It’s Bad for Social Security and Why the White House Shouldn’t Be Touting It (VIDEO)”. Huffington Post. Retrieved April 11, 2013: http://www.huffingtonpost.com/robert-reich/chained-cpi_b_3016471.html

e. Gibson, Ginger (April 9, 2013). “Republicans applaud chained CPI in Obama budget”. Politico. Retrieved April 11, 2013 from: http://www.politico.com/story/2013/04/republicans-applaud-chained-cpi-in-obama-budget-89831.html.

f. “Cost-Of-Living Adjustment (COLA) Information For 2013”. Cost-Of-Living Adjustment (Social Security Administration). Retrieved April 11, 2013 from: http://www.ssa.gov/cola/

g. Wikipedia treatment for the Consumer Price Index. Retrieved May 20, 2014 from: http://en.wikipedia.org/wiki/Consumer_price_index

h. Hobijn, Bart; Lagakos, David (May 2003). “Social Security and the Consumer Price Index for the Elderly”. Current Issues in Economics and Finance (Federal Reserve Bank of New York) 9 (5): 1–6. Retrieved April 11, 2013 from: http://www.newyorkfed.org/research/current_issues/ci9-5/ci9-5.html.

The approach of a CPI (or a Retail Price Index) is not exclusively American; other societies use the same methodology. But the American model is one from which the Caribbean should apply learned lessons; we would NOT want to fall into the American pitfalls of purposefully eliminating significant items from measurement because of political leanings. For example, the US does not include health care in the measurement of the official CPI, even though it may amount to 40% of some families’ spending. This point is highlighted in this article:

Former White House Chief of Staff Erskine Bowles and former U.S. Senator Alan K. Simpson suggested a transition to using a “chained CPI” in 2010, when they headed the White House’s deficit-reduction commission.^[c] They stated that it was a more accurate measure of inflation than the current system and switching from the current system could save the government more than $290 billion over the decade following their report.^[c] “The chained CPI is usually 0.25 to 0.30 percentage points lower each year, on average, than the standard CPI measurements.”^[c]

However, the National Active and Retired Federal Employees Associations said that the chained CPI does not account for seniors citizens’ health care costs.^[c] Robert Reich, former United States Secretary of Labor under President Clinton, noted that typical seniors spend between 20 and 40 percent of their income on health care, far more than most Americans. “Besides, Social Security isn’t in serious trouble. The Social Security trust fund is flush for at least two decades. If we want to ensure it’s there beyond that, there’s an easy fix – just lift the ceiling on income subject to Social Security taxes, which is now $113,700.”^[d]

Replacing the current cost-of-living adjustment calculation with the chained CPI was considered, but not adopted, as part of a deficit-reduction proposal to avert the sequestration cuts, or fiscal cliff, in January 2013,^[c] but President Obama included it in his April 2013 budget proposal.^[e]

Go Lean … Caribbean introduces the CU to take oversight of much of the Caribbean economic, security and governing functionality, covering the realities of healthcare and inflation issues. In summary, this roadmap promotes the Caribbean as a better place to live, work and play for residents and retirees alike. In fact the Go Lean roadmap advocates inviting the aging Diaspora to return to the Caribbean for their “golden years”, this means proactively anticipating pension/medical needs of senior citizens.

Change has come to the Caribbean. The people, institutions and governance of the region are all urged to “lean-in” to this roadmap for change. We need to accurately measure inflation and the stressors that impact it. Rather than “hiding” the facts, as the Americans do, the CU will “manage what we measure”. There are effective tools available to mitigate the risks of inflation, and the integrity of social safety nets (like increasing retirement age or the income ceiling for pension taxes).

The benefits of this roadmap, emergence of an $800 Billion regional economy and 2.2 million new jobs, become imperiled if we ignore important economic indicators, and hide-away from effective solutions. Ignorance and avoidance are not traits of a solution-oriented ethos; they are not technocratic. On the other hand, the CU purports to be a true technocracy!

The following list details the strategies, tactics, implementations and advocacies to impact the CU technocracy:

The foregoing encyclopedic source conveys that much depends on accurate measurement of inflation indices. Inflation is what it is!  Measurement and management of inflation (and its effects) is an art and a science for the CU to master. The Go Lean roadmap “leaves no stone un-turned” for the optimization of the economic elevation of the Caribbean.

Inflation does matter! A prudent, lean, economic stewardship matters more!

Download the Book- Go lean…Caribbean Now!!!