Home > Inflation: How The Government Lies About The Real Inflation Rate (UUP, UDN, TLT, TBT)

Inflation: How The Government Lies About The Real Inflation Rate (UUP, UDN, TLT, TBT)

March 8th, 2012

David Zeiler:  More experts are saying what most Americans have suspected  for years – the real inflation rate is much higher than the government is  willing to admit. Officially, the U.S. Bureau of Labor Statistics (BLS) says  the inflation rate, or Consumer Price Index (CPI), for 2011 was 3%.

But a report issued last week by the non-profit group American Institute for Economic Research (AIER) says the U.S. inflation rate  for 2011 is far higher – 8%.

AIER used criteria based only on common daily expenditures to more accurately reflect how inflation affects consumers. Their index excluded less-frequently purchased items, like  automobiles.

Economic consultant John Williams, an outspoken critic of  the government’s economic statistics, contends things are even worse.

Using the government’s old methodology from 1980 – before  politicians started to monkey with the formula – he calculates the real  inflation rate is north of 10%.

That’s more than triple the government’s figure.

Among the few in government who see this as a problem is  Republican presidential candidate Rep. Ron Paul, R-TX.

“You know this  argument that the prices are going up about 2%, nobody believes it,” Paul  bluntly told U.S. Federal Reserve Chairman Ben Bernanke during a hearing last  week. “People on fixed incomes – they’re really hurting, the middle class is  really hurting because their inflation rate is very much higher than the  government tries to tell them and that’s why they lose trust in government.”

Changes to the Real Inflation Rate

Over the years, the government has made a series of  adjustments to how it calculates the CPI, ostensibly to make it more accurate.

However, critics like Williams say the inflation rate  formula has been changed to serve political ends.

“Government data are biased in politically correct directions and increasingly have diverged from common experience and reality since the mid-1980s,” Williams says on his Web site, Shadowstats.com.

Changes to the CPI began under the tenure of Fed Chairman Alan Greenspan, who set the stage in the early 1990s by publicly complaining about how the CPI overstated inflation.

By 1999, the CPI had incorporated the idea of “substitution.”

Instead of simply measuring how quickly prices were rising, the CPI added consumers’ reaction to those price changes to the formula.

Successful bargain hunting means inflation isn’t hitting you as hard, the government said, ignoring the impact such adjustments have on a person’s standard of living.

real inflation rate“The old system told you how much you had to increase your income in order to keep buying steak,” Williams said. “The new system promised you hamburger, and then dog food, perhaps, after that.”

Another adjustment, “hedonics,” adds value to goods based on how much better they are than previous versions.

“Now we don’t take the real prices of computer chips, for example, but their price deflated by capacity, so every Moore’s Law doubling of chip capacity halves the price,” explained Money Morning Global Investing Strategist Martin Hutchinson. “Of course, doubling chip capacity doesn’t double the functionality, so the whole “hedonic’ theory is rubbish.”

Or, as Williams puts it: “When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air.”

Why Government Lies About the Real Inflation Rate

The government has strong motives for masking the real inflation rate.

Here are at least three:

  • Political Gain: This should surprise no one given the self-serving attitude that permeates Washington. Elected leaders know positive economic news, such as inflation that’s under control, sound good in campaign speeches and can make the difference in a close election. In non-election years, fudging numbers like the CPI serves to avoid public pressure to do something to fix it. Government statistics that show inflation is not a problem keeps the issue off the public radar, regardless of the reality.
  • Big Savings: Many government entitlements, most notably Social Security payments, are linked to the CPI. Lower official numbers mean lower payouts. The ploy has saved the debt-ridden U.S. government billions of dollars, but has taken money from the pockets of American citizens. Williams says Social Security payments would be twice as high each month if the CPI formula had never been changed. It’s no wonder so many seniors struggle to make ends meet. And it could get worse. Last fall’s debt super committee suggested basing Social Security increases on a variant of the CPI that would lower payments even more.
  • Keeping Interest Rates Low: Although not responsible for the CPI, the Fed prefers it stay as low as possible to obscure its own inflationary policies. Fed policies like quantitative easing and holding interest rates near zero should have pushed inflation much higher – but the CPI’s mutant methodology made sure that didn’t happen. If the CPI were reported accurately, the Fed would be forced to raise interest rates, which in turn would slow the economy and slam the stock markets. That’s not a headache the Fed or the elected leaders in Washington want. And then there’s the bonus of allowing inflation to devalue the dollar to help reduce the nation’s $15 trillion debt burden.

Although the BLS Web site devotes an entire page to defending its methodology for calculating the inflation rate, Americans see the reality every time they go shopping or pay a bill.

But with the altered CPI serving Washington so well, even pointed criticism from such prominent figures as Rep. Paul is likely to fall on deaf ears.

“Every single day [the dollar] buys less the next day,” Paul complained to Bernanke. “To me it’s sort of like…a builder had a yardstick that changed its value every single day. I mean, just think of the kind of building we would have.”

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Written By David Zeiler From Money Morning

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  1. NewsView
    September 14th, 2012 at 02:19 | #1

    Consumers can see through the shame. Unfortunately, it’s not just perpetuated in the US but Europe too. The cost of everything has gone up in parallel to the adoption of unbalanced “free trade”, which began in the mid ’80s, around the time they began tinkering with the inflation formulas to mask the fact that those agreements had put in motion a gross domestic job loss, which has only accelerated in the Internet era at a time when cell phone and broadband technology has accelerated job migration to include white-collar professions.

    Food, energy, education, and healthcare are not included in the current method of calculating inflation — areas that have experienced hikes of 40 percent or more in recent years. Recent news reports this year indicate that both Europeans in the UK and Americans have lost nearly a decade worth of accumulated wealth, much of it to wage stagnation and outright loss in the face of similarly devalued currency.

    For the working and middle class, who comprise the bulk of Western consumers, less disposable income remains to sustain “demand” in the form of economic growth. The oft-repeated euphemism that “consumers remain cautious” papers over the reality that demand for goods and services is unlikely to gain momentum before wages increase. However, cost of living increases, too, have been falsely contained by improper inflation methodology, all of which adds up to the persistently high unemployment inflicted by declining purchasing power.

    The politicians need to cut to the chase and admit that one of the reasons we can’t pull ourselves out of this worldwide economic malaise is because we’re omitting almost all mention in the media and the public and political debate regarding where consumers’ incomes are diverted (tied up).

    Living within one’s shrinking economic means translates to fewer vacations, fewer shopping trips, fewer remodeling projects, more people living together instead of marrying, fewer people who should retire having the capacity to leave the labor market and free up job openings for new hires, more childless couples and indebted students putting off the start of their families, the purchases of a home, etc. Eventually “wage depression” comes full circle, meaning fewer people in China and elsewhere in the developing world with jobs — or jobs that pay less — because the Western consumer isn’t buying. When consumers do buy, they drive an even harder bargain, which in the long run also means that corporate profit margins will become even more precarious. That, in turn, means that what happens on Main Street can’t remain distinct from what occurs on Wall Street forever, QE3 notwithstanding.

    What we have here is the very definition of a “race to the bottom”. Conceivably, this could be turned around if we would simply calculate inflation rates more honestly. Nan Mooney, the journalist who in 2008 published “(Not) Keeping Up with Our Parents” observed “The share of family income devoted to “fixed costs” like housing, child care, health insurances and taxes has climbed from 53 percent to 75 percent in the past two decades”.

    Former president Bill Clinton said at the DNC convention that what his administration had going for it was “arithmetic”. Let’s hope the willingness to make peace with the arithmetic of REAL INFLATION comes before it’s too late, and we come to accept unacceptably high rates of unemployment, foreclosures, personal bankruptcies and gad-zillion-dollar state and federal deficits.

    Neither party and neither presidential candidate can turn this deficit spiral around until they acknowledge that monetary policy rests on flawed calculations that mask the true problem and therefore the true answer to reducing the unemployment rate and reinvigorating the economy.

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