Real inflation. Consequences

From our personal experience we are inclined to believe that the official inflation rate doesn't reflect the real cost increases. If we kept a record of our expenses, we would see that the official inflation is more or less a joke.

There are many tricks to "doctor" the numbers. They change the basket of goods very often overweighting the ones with less increase and underweighting or even removing the ones with big increase in price (such as healthcare). Also the official rates usually don't take into account the "difference in size for the same prize".

Where the official inflation averages 2.3% a year, some private institutions believe real inflation is more than 7% per year. Can you imagine what would be the consequences of applying the real inflation rate?

1. Social Security. Beneficiaries would ask for higher increases and immediately an already-collapsed system would sink.

2. Bonds. Bond holders would demand higher coupons just to keep up with inflation. The biggest bubble of all times, the bond market, would receive a death penalty.

3. Debt. The only way to maintain the system is to reduce the government and private debt through "invisible" inflation. You keep on borrowing but in real terms you are reducing your debt. When the "invisible" becomes "visible", it doesn't work any more.