(Fortune Magazine) -- My friend Dana, a former real estate investment banker who got out of investment banking comfortably before subprime mortgages hit the fan, has a personal inflation index. It's pegged entirely to the price of filet mignon at the Palm Too, his favorite steak house on the East Side of Manhattan. If the filet mignon is reasonable, all is right with the world. If it seems unduly expensive, Dana gets worried that inflation is spinning out of control. So a couple of months ago he returned from a month in Paris to find that the price of pricey steak had jumped to $38, up from $36. To hear him tell it, not since the Last Supper has an evening meal emanated so pervasive a sense of impending doom.

To be fair, Dana's professional background lends itself to price scrutiny of nearly everything, and being able to afford high-end steak at all puts you in that segment of the population that isn't relying on inflation-sensitive Social Security checks. But it's a little frightening when a guy who just spent several weeks spending euros (now 1.58 to the dollar and climbing) comes back to New York, switches to dollars, and finds himself "aghast" that everything's so expensive.

And Dana's not alone. A March CNN poll indicates that 91% of the population is concerned about inflation. I'd ask a member of the remaining 9% what they're thinking - and what levels of relative fiscal comfort allow one not to be concerned about inflation - but I'm entirely surrounded by 91-percenters. So how do we account for the discrepancy between the Federal Reserve's recent assurances that inflation is under control and the 91% of the population that's worried it isn't?

There are several possibilities: The first is that we're all paranoid. We simply need reassurance from the authorities: Inflation rates are fine, nothing to see here, move along quietly. The second is that the Fed's insistence on focusing on "core" inflation - a measure that strips energy and food from the consumer price index (CPI) because they're theoretically subject to short-term volatility - makes inflation seem smaller than it is, or than we feel it to be when our gallon of milk that was 12% cheaper last year gets swiped across the grocery store scanner, beeping ominously like a tiny alarm bell. (While core inflation was just 2.3% in February, the CPI was 4%.) The third and most disconcerting possibility is that the CPI systemically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. In the words of many a UFO spotter, it isn't paranoia if they're really out to get you.

The first possibility is not to be completely discounted. Thanks to financial paranoia, Bear Stearns (BSC, Fortune 500) found itself hemorrhaging cash a few weeks ago, prompting a rare but always terrifying run on the bank and the eventual sale of the firm at a price that led one anonymous observer to tape a $2 bill to the front door of Bear headquarters, a tongue-in-cheek bid for the remaining assets at a competitive rate. And while merely thinking that inflation is going up is unlikely to cause it to do so, there are certainly real-world consequences from misplaced anxieties. Consumer confidence is the first casualty. When they think their money's not going as far in the future, nervous consumers pull back spending.

But are nine out of ten of us really just paranoid? Or are we just irritated at the Fed's insistence that if we hold still, interest-rate cuts won't hurt a bit, when historical experience tells us the resulting inflation will hurt like hell? If we focus on core inflation, we're told, the underlying trends aren't so disturbing. Take energy and food out of the basket of goods used to calculate the CPI, which is what the Fed does when it reports the numbers to Congress, and things don't look so bad. Just look at the spot on the wall, says the Fed, and ignore the giant needle.

It's true that by focusing on core inflation we can detect certain underlying trends that may be masked by the price volatility of some of the goods in the CPI basket. Post-Katrina natural-gas spikes, for instance, would have distorted long-term CPI trends, even though they were event-related outliers. It makes sense to remove such rarities when looking for underlying patterns in the natural-gas market. But does that mean the entire energy category should be removed? Food and energy are more subject to short-term price fluctuations, but not taking them into consideration at all when thinking about underlying trends precludes the possibility of significant long-term changes that aren't consistent with long-term trend lines for core goods and services. The fact is, food and energy have been going up for quite a while. At what point does a consistent trend upward stop being "price volatility" and start being a material "trend upward"? And what if some of those trends - particularly in the energy sector - are irreversible?

As the usually grim-and-bearish Merrill Lynch (MER, Fortune 500) economist David Rosenberg noted recently to the firm's clients, we've seen similar sustained increases in food and energy before. In the mid-'70s. Just before the Big Recession. But they're not materially important, says the Fed. Pay no attention.

One of my favorite 91-percenters, Fusion IQ's Barry Ritholtz, puts it amusingly: "If you take everything out of the CPI basket that's going up in price, sure, you have no inflation!" Which is sort of like suggesting that if you take away insurgent fighting and the large U.S. military presence, there's no war in Iraq. Not that I want to give anyone in the Oval Office ideas for creative rhetorical devices.

But Ritholtz is more concerned about the third scenario, in which the CPI isn't accurate in the first place. And the difference between the second and third scenario is the difference between miserable and horrible. People like Ritholtz are thinking of the 1996 Boskin Commission, which was established to determine the accuracy of the CPI. The commission concluded that the CPI overstated inflation by 1.1%, and methodologies were adjusted to reflect that. Critics of the Boskin Commission suggest that the basis upon which the CPI was revised doesn't account for the way people actually purchase and consume products. The commission pointed to four biases inherent in the way the CPI was determined that supposedly contribute to overstatement - among them, a bias that doesn't take into account substitution of one good for another and a bias that fails to take into account increases in quality that are reflected in price increases.

But the Boskin critics note several reasonable exceptions to those biases. The Boskin Commission suggests that when customers substitute one good for another, the CPI should treat those goods equally. If Dana orders a hanger steak instead of his beloved filet mignon because the hanger steak is cheaper, Boskin argues that the hanger steak prices should be compared with previous filet mignon prices. It's all beef, right? But critics of the Boskin report point to areas where substitution is so price-driven that consumers are pushed out of the category altogether. What happens when the consumer gives up steak entirely and switches to chicken? (Or to use a scarier example, goes from some health insurance to no health insurance?)

Boskin also says that whatever you're paying in price increases is offset by the additional pleasure you get from better goods. To put it another way, you adjust for improvement in quality over time - a practice called hedonic pricing. So, for example, energy price increases due to federally mandated environmental measures are offset by how much we all sit around enjoying the cleaner environment. (And there's a lot of sitting, because it's not like we can afford to go anywhere anymore.) But, as critics note, quality increases over time are also a reflection of the fact that increased production typically means lower prices, thanks to economies of scale. This may be a matter of splitting methodological hairs, but if it isn't, aggressive estimates put the non-Boskinized actual inflation rate north of 7%. (The We're All Gonna Die estimate is more like 10%, but let's not push it.)

Lest you worry about your future purchasing power, rest assured that your $600 Bush-administered tax rebate will be in the mail shortly, at which point you may be able to afford filet mignon at the Palm. On the downside, it may cost $600 by the time you get that check.

Elizabeth Spiers is the founder of financial Web site dealbreaker.com.