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.

[marstegreg]

The author takes care of that canard by including both figures (included and not included).

I’m sorry, I must of missed it... because it’s a load of crap! According the article, when food and gas are included the figure changes .13 percent (that’s right, 1/10th of a apercentage point)? Do you eat every day? Do you drive every day? Do an overwhelming percentage of americans buy food every day? Have you been to te grocery store lately? Meat is becoming a luxury item. Yet somehow, when including things all Americans buy daily like food(sometimes several times per day)it only changes the rate by .13, there is something seriously wrong with the numbers.

[1rudeboy]

I don't think you understand. The numbers bear-out my experience. That's not to say that you live in an area where the numbers are different . . . I just find it odd that, for example, people on the internet try to convince me that my energy prices are up, when they are down . . . and my food prices are up much more than they really are. It just doesn't make sense.

[1rudeboy]

oops . . . I meant to say that you might live where the numbers are different.

[count-your-change]

Who cares what the government says about inflation? I’m the one who shops and I know how prices have changed.

[CodeToad]

Obama also says unemployment has shrunk, too. Ya stupid enough to also believe that lie?

Anyone going to buy groceries knows food has gone up significantly. Clothings has, cars have, medical has, most things have. Allowing Obama and the federal government to make claims otherwise takes a feeble minded gullible idiot to believe it. Who ya going to believe, their numbers or your wallet?

[CodeToad]

“I’m simply wondering why I’m missing your 10-25% inflation.”

Maybe you should start paying attention. If you missed it then you simply were not paying attention.

[CodeToad]

“that my energy prices are up, when they are down”

You wouldn’t have posted this 1 month ago when gas prices were $3.89. They held there for about three years, and they are still higher than when Obama took office.

[Dave346]

Just in a space of a few weeks last summer I saw boxes of fried chicken nearly double in price at my local store.

And that’s just one example of how bogus this 2% inflation figure is.

[CowboyJay]

Just as all politics is local, so is inflation. Which is the problem with an artificial (concocted) metric like CPI.

Spending and prices vary widely from one location to the next, and from one household to another. Which is why we should pick a basket of commodities or PM’s to index to and stick with that, IMO. Less fudge-factor.

Frequent purchase items are definitely up. I remember prices from 1997 pretty well, so I use that as a baseline for my personal inflation index.

1 lb handcut sirloin steak
Then: $1.99
Now: $11.99
16 yr increase: 600%

1 US gallon unleaded gasoline
Then: $1.19
Now: $2.95
Increase: 148%

25 oz. Extra Virgin Olive Oil
Then: $1.99
Now: $5.99
Increase: 196%

Rent, 2 BR 800 SF apt
Then: $475
Now: $750
Increase: 58%

Nothing specific, but I did go shopping for an automobile recently, and prices seemed to be roughly double what they were in the mid/late 90’s.

Prices for manufactured items (once or twice a decade purchases) are relatively unchanged. Everything else is up big. I worked for a medical device manufacturer before doing my own thing now back around 2002, and prices for things like coiled-steel and plastic feed stock were going up by double-digits YOY.

Overall, I’d peg actual inflation somewhere in the 7-8% annual range since the Fed went full retard back in 2001. So, by design I think, CPI is underestimating inflation by a factor of at least two. The cognitive dissonance for people on fixed incomes looking at their COLA adjustments must be astounding at this point. People in lower income brackets whose spending is mostly groceries, fuel, and energy bills, have to be seeing real-world inflation close to 10% since 2005.

[marstegreg]

I just find it odd that, for example, people on the internet try to convince me that my energy prices are up, when they are down .

So your gas prices have not gone up? In December 2008 the price of gas was 1.65? Have gas prices doubled? Yes. At time have I paid triple that amount? Yes. We’re looking at 100-200% difference in cost. Are you trying to tell me this was factored in? (even where you live)

[Adder]

Here is a small sample by no means exhaustive: [round numbers for discussion purposes.]

toilet paper from big box stores: was 36 rolls for $17, now 30 rolls for $17

Tuna 6 7oz cans for around $10 now 6 5oz cans for around $10
Coffee went from $7 to $9; pasta same price but a 12 oz or 14oz[depending on the brand] box not 16oz
Starbucks went from $14 to $21 in 2 yrs[ large bag]

Peanut butter? huge increases, blamed on a poor harvest in 2011 I think...quick to go up but it never comes down...not much....example: Jiff double jars went from $9-$12 and just recent slid to $11 [tho Sam’s has it less]

Now I admit I do a lot of shopping at Costco but I do comparison shop...Sam’s does the same thing.

My observation is that items in any sort of demand have dramatically increased in price...items with not so much demand have not. Items imported have gone up even tho the dollar competes well with currencies like the euro...imported brews have gone from $7.5 to $9/6pk. Thats steep.

Yes, you can shop and find cheaper items[do I NEED starbucks? No...just a preference] but the point here is that these particular brands have really increased in price for what may be a variety of reasons but much higher they indeed are.

[CodeToad]

In the past 6 months in my area:

1lb salt, $0.69 to $0.79.
30 package toilet paper: $13 to $19.
Coffee: $11.99 to $12.99.
Hamburger: $3.99 to $4.99.
Chicken: $4.99 to $8.50, half sized packages are now $4.00
Deoderant: $3.50 to $4.95.

All kinds of things have gone up, yet, feeble minded idiots let Obama’s administration play loose with the rules and believe them when they say, “Honest, we are fair!”

One of the things the fed does is use store brands as substitutes without telling you that. They use phrases like “similar product” to make the switch. They also shop the sales, so if a sale item is half off they count that as deflation.

[Mase]

give the hornet’s nest a good whack.

Indeed you have. 50+ response, (and it's still early), and all of them are challenging the author's take on the issue. 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%, and has been for a long time now.

Housing/Owner's Equivalent Rent comprises a large portion of the CPI, and I don't know how that has impacted others on the forum. For me, I recently refinanced my home from 5.5% to 3.5%, which is saving me more $500 a month. So, thanks to the bond yields being driven lower by low inflation, my housing costs have dropped significantly.

[JoeA]

Gas prices have gone from 2.75 to 3.29 in 3 years (gasbuddy.com). About 2 bucks a gallon in 2009, now 3.23 and up. Real world data, not Govt. cooked numbers.

[DesertRhino]

Yet, gas prices are almost double what they were 10 years ago. House prices, even post-2008, are far above what they were 10 years ago. Everything we buy is more expensive, but wages are stagnant. The price index also plays a million wretched games, such as replacing the price of steak for the price ground beef, and saying all is fine.

And our government has printed untold trillions of meaningless money.

But keep telling yourself there’s no inflation.
They have a vested interest in proclaiming no inflation, or accurately reporting unemployment. Social Security is tied to inflation.

[DesertRhino]

“Excluding food and energy, it rose 1.58%”

Except for chasing younger women and drinkin’ too much,,, im a awesome husband. lol

[DesertRhino]

Yeah,, both ways. We need to take into account the numerous people who do not use food and energy so we can get to some truly useful numbers./

[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.
Without the constant QE, the government would need to raise that money from investors, and rates would skyrocket.

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 funny money. The Russians, Indians and Chinese are already talking about only accepting payment in a gold backed trade currency. You want oil, gas, products? Convert your dollars into their gold and pay. The Arabs want to, but are holding a ton of Dollars and are riding the tiger for now.

But when the world has largely decided we are untrustworthy, and soon, reserve status of the Dollar will be gone.

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

[First_Salute]

bttt

[First_Salute]

bttt