Is the US government wildly understating the inflation rate? No, it isn’t

AEI ^ | January 17, 2013 | James Pethokoukis

[1rudeboy]

It’s hard to find much inflation in the US economy right now. As measured by the Labor Department’s consumer price index, prices increased by just 1.7% in 2012. The core CPI, which excludes food and energy prices, rose by 1.9%.

Nor can much inflation be found in an alternate measure, the Commerce Department’s personal consumption expenditures prices index. It rose 1.45% for the twelve months ending last September. Excluding food and energy, it rose 1.58%. Federal Reserve Chairman Ben Bernanke prefers the PCE price index because he believes it better reflects changes in consumer purchasing habits.

But some skeptics say those government-generated statistics are nonsense. The numbers are skewed — perhaps intentionally — to show inflation much lower than what it really is. Instead of 1% to 2% annual inflation, prices have actually been rising at 10% a year, maybe even faster.

Now, extraordinary claims should require extraordinary evidence. So the burden is on the inflation hawks here. As it is, the Labor Department has specifically and thoroughly rebutted many of the criticisms of the CPI, including charges that when the price of steak rises, the Bureau of Labor Statistics swaps it out for cheaper hamburger. Or that Social Security payments are indexed to a CPI measure that doesn’t include food or energy.

In particular, critics question how the BLS currently a) assumes consumers will purchase the cheaper of two types of products, and b) takes into account, for instance, that a $1,000 computer today is a whole lot more powerful than one 15 years ago. Those are just two of the modifications the BLS has made over the years in how it measures inflation.

But what if BLS still calculated inflation the way it used to back in the 1970s? The agency studied that exact question in 1999, and found the new approach gives only a modestly lower inflation reading:

Over the 21-year period of the study (December 1977 to December 1998), the CPI-U-RS increased 141.2 percent, compared with 163.9 percent for the CPI-U. The figures represent an average annual increase of 4.28 percent for the CPI-U-RS and 4.73 percent for the CPI-U; the average annualized difference between the two measures is thus 0.45 percent.

In fact, there’s considerable academic literature suggesting that Washington continues to overstate inflation rather than understate it, such as this paper by Robert Gordon of Northwestern University:

This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year.  …  This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today’s bias is at least 1.0 percent per year or perhaps even higher.

One final reality check — especially clarifying if you believe Washington is intentionally cooking the books — is MIT’s Billion Prices Project, which uses an algorithm to track prices online, including most of the products and prices found in the CPI. It has inflation running at less than 2% over the past year:

Now, inflation might well be far higher in the future than it is today. And of course, the inflation rate experienced by any one individual may differ, perhaps considerably, from a broad national index. But inflation overall, much less hyperinflation, isn’t a big problem right now.

[First_Salute]

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[First_Salute]

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[First_Salute]

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[DarkWaters]

The Weimar Republic had growing unemployment, rising prices (not yet hyperinflationary), business who were having a hard time passing on rising costs or getting business. All of these where the results of their economic policies prior to hyperinflation kicking in. We have the exact same set up in this country. All you need is a trigger point or a series of them that change the psychology of the population to the realization that the money they (both domestic and foreign in our case) hold in their hands is losing its value, that is when money velocity will increase and ever growing rate. I will also add that this always looks like it comes out from nowhere when in reality it was just simmering below the radar, or a back draft may be a better analogy.

[DesertRhino]

“Even so, I’ve yet to see one reply explain, if the real rate of inflation is 7%, 8%, 10%, or more, why the 10-year treasury is still yielding less than 2%”

Because we are borrowing a trillion and a half a year, and the fed buys the overwhelming majority of the magic money the create out of thin air.
Without the constant QE, the government would need to raise that money from investors, and rates would have to reflect market rates.

With enough fans on the ground, you could make a 747 appear to float like a Harrier. But it isnt “flying”. When the fans of QE stop, as they eventually must, the 747 will smash down hard.

Already our currency is regarded as funny money. The Russians, Indians and Chinese are already talking about creating a gold backed trade currency. You want oil, gas, or manufactured products? Convert your dollars into their gold currency and pay. The Arabs want to, but are holding a ton of Dollars and are riding the tiger for now.

But the world has largely decided we are untrustworthy, and soon, reserve status of the Dollar will be gone. Happened once to the Pound Sterling, and now it’s happening to us.

BTW,,the Germans just announced they are removing all the gold they had stored in New York.

[Mase]

All that financial destruction, and the entire bond market is missing it? Isn't it amazing that all those individuals and corporations are buying bonds that cause them to lose 5%, 6%, 8%, and more, of their investment every year?

Who knew the smart people were all here, while the millions of others doing all the buying are the stupid ones?

[Last Dakotan]

Half a billion un/under employed Chinese have kept the inflation pressures on labor rates in check. More jobs are still moving there.

[CowboyJay]

"Who knew the smart people were all here, while the millions of others doing all the buying are the stupid ones?"

Here's where the smart money has been since 2005:



I think the tacit rule with Fed easing is that the ibanks have to keep the bond market flush or risk having the tap shut off.

Bonds are also a "safe haven" investment, so in a risk-off environment, portfolio managers can point to the marginal gains, and doctored official inflation numbers, and say "well, at least we outperformed XXX this year, and protected the original capital investment". They couldn't care less if their clients are realizing real gains, so long as that big fat paycheck keeps rolling in. RISK AVERSION is the key to longevity in finance.

Meanwhile, if you check what these PM's actually have in their personal holdings, you'll probably find they're long commodities and emerging/developing markets.

[Sam Gamgee]

The government stats are absolutely bogus. We need an inflation rate “for real people”. One can't eat a computer, even if it is better than it was 5 years ago. Shadowstats does a good job explaining why the government manipulates inflation stats. It started with Johnson. By understating inflation, it increases real GDP growth. I agree that inflation is between 2 and 3% - PER MONTH!

[Sam Gamgee]

You are not suppose to believe your lying eyes. Trust what the government tells you.

[Sam Gamgee]

My grocery bills have increased 10 to 20% per year over the last 5 years. Government wants you to fear a non-issue called deflation.

[1rudeboy]

Anyone going to buy groceries knows food has gone up significantly.

You mean, like me? Again, it's funny how everyone knows how much money is going out of my wallet, except me.

[1rudeboy]

My beer price is down, significantly, since Wal-Mart started selling my brand. (Foster’s: proudly union-brewed in the U.S.).

[Sawdring]

(Foster’s: proudly union-brewed in the U.S.).

This discounts everything you have just said on this thread. I might as well quit following it.

[BobL]

Maybe then it’s just us paranoid types, that have seen the price of paper towels and pasta go up by 30% in 3 years.

Yep, just us...

[1rudeboy]

Why would it? Should I take from your comment that you don’t know much about beer?

[1rudeboy]

Brewed and packaged under the supervision of Foster's Australia Ltd., Melbourne Australia by Oil Can Breweries, Albany GA and Fort Worth TX. Union Made. Consumer questions: 1-888-743-7777.

Call them if you don't believe me.

[Toddsterpatriot]

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

GIGO.

[Last Dakotan]

Man, this is such a let down for me, knowing you choose your beer based on the can size, shheez.

Oh yeah, not sure what that has to do with inflation either.