Consumer Price Index Has Been Reconfigured Since Early-1980s So As to Understate Inflation

Shadow Government Statistics ^ | April 8th, 2013 | John Williams

[T Ruth]

Sub-Headlines:

• CPI no longer measures the cost of maintaining a constant standard of living.

• CPI no longer measures full inflation for out-of-pocket expenditures.

• With the misused cover of academic theory, politicians forced significant underreporting of official inflation, so as to cut annual cost-of-living adjustments to Social Security, etc.

• Politicians look to expand further the concept of artificially-suppressed cost-of-living adjustments in current budget-deficit negotiations [in 2013], through the use of the Chained-CPI (see Special C-CPI Supplement at end of this document).

• Use of the CPI to adjust retirement benefits, private income or to set investment goals impairs the ability of retirees, income earners and investors to stay ahead of inflation.

• Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported GDP.

[T Ruth]

This article is a long read. I have only posted the leading sub-headings. Mr. Williams runs an interesting web site.

What makes this topical is that Obama's corrupt government is introducing next month an "improved" version of the CPI: Effective with the release of the January 2015 CPI on February 26, 2015, the Bureau of Labor Statistics will utilize a new estimation system for the Consumer Price Index. It appears that the devilish details are concealed within the "Constant Elasticity of Substitution (CES) formula." "The use of the Constant Elasticity of Substitution (CES) formula for initial and interim estimates of the C-CPI-U, and the new quarterly revision schedule for C-CPI-U indexes, are possible because of this new system." Mr. Williams explains the concept of the CES, but does not use the BLS terminology.

The situation has been concisely summarized by another writer thus: "[W]e can make two observations: your currency has been devalued, and this devaluing is not reported as inflation. Standard of living improvements due to technological advancements have been withheld from those who are on fixed incomes and those who keep their wealth in dollar-denominated investments." -- Marotta on Money

[skeeter]

In the early-1990s, political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger for more-expensive steak).

Thats the most stupid thing I've ever heard. Typical governmental logic.

Abe was wrong, you can fool all the folks all the time.

[1rudeboy]

In the early-1990s, political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger for more-expensive steak).

Yup, probably the most stupid thing Williams has ever written. But he has subscriptions to sell, and people eat this sort of stuff up [pun intended].

[skeeter]

So its not true?

[1rudeboy]

Item substitution is only assumed to occur within categories. Hamburger and steak are not in the same category. Consumers are assumed to substitute different kinds of hamburger when its price changes.

[skeeter]

I understand, but does the official CPI calculation still make this same assumption?

I've wondered why the rate of inflation has stayed so low recently in spite of the rise in the cost of energy, all the new cash in the system etc. It seems like the old rules no longer apply.

[1rudeboy]

Common misperceptions about the Consumer Price Index

Currently, the price of energy (gas in particular) is falling, by the way.

[T Ruth]

Item substitution within categories still validates Mr. Willams's point.

There is a small grain of truth at the bottom of the quality adjustment theory, but this theory has been used as cover for political manipulation of the CPI. The federal government has obvious political and financial incentives to do so.

[A CA Guy]

Works against lanlords unlucky enough to be dealing with raising rent on rent controlled tenants.

[1rudeboy]

Hamburger is not in the same category as steak. Mr. Williams' point is not valid (or validated), and you don't have to be a student of the English language to see it. False is false.

[Sam Gamgee]

I think consumers are at the point that they believe what they experience rather than the phony government numbers.

Keep in mind that net GDP is measured by deducting the CPI from nominal GDP, so the result of underestimating inflation is overestimating the GDP.

[T Ruth]

Yes, I think you are right.