Part 2: Why You Can’t Believe Government Statistics – Inflation Numbers are a Myth

September 3, 2008

Consumer Price IndexOne of the most outrageous distortions of statistical data occurs with what the government calls the Consumer Price Index (CPI).  It is suppose to measure inflation or loss of purchasing power, but it does neither.

Families everywhere feel the pain of rising prices when they go to the grocery store, and if you are one of the more than 50 million retirees trying to survive on a fixed income and feel like your annual CPI increase is not keeping up with inflation you are absolutely correct.  Everyone is losing ground each year.

CPI-W (the official gauge) intentionally understates inflation by using voodoo assumptions and sleight of hand manipulations.

CPI-W is based on the Market Basket approach.  Create a Basket of goods that a normal consumer buys and measure how much the cost of that Basket increases year over year.  Sounds simple, but wait.  The government takes two key items out of the Basket that everyone has to have and chooses not measure them – Food and Energy.  By excluding food and energy the rate of inflation was reduced from 6.2% to 2.5% for 2008. But try living without food or energy.

It gets worse.  The government keeps changing what is in the basket to make everything cheaper.  The assumption is that if a product becomes more expensive the consumer will replace it with a less expensive and no doubt inferior product.  For example the government assumes that if steak becomes too expensive the consumer will stop buying steak and will replace it with chicken.  If chicken becomes too expensive it will be replaced by SPAM.  This is not measuring inflation.  It’s measuring life style.

That’s not all.  The valued added or Hedonics is factored into the CPI equation.  It goes like this.  If your basic 27 inch television cost $200 dollars in 2007 but cost $220 in 2008 you would think a 10% increase had happened.  Not true, by the magic of Hedonics the government can look at the 2008 T.V. and estimate that there was $30 of additional value in the new T.V. (such as three inputs vs. two inputs) and suddenly in “CPI world” the television now cost $10 less.  Nice magic, but you still just spent $20 more for that television.

Once last bit of magic —   It is called Geometric Weighing.  In the past, straight arithmetic weighing was used.  If a component made up 10% of the Basket and doubled in price it would make up 20% of the Basket.  With Geometric Weighing if the price of a component doubles the government assumes that you will use 50% less of that component.  By magic, products that increase in price will make up less of the Basket.  For many products this is ludicrous and does not measure inflation.

Why does the government do this?  Two simple reasons.  First, it keeps the cost of Social Security down.  Not a good reason if you are trying to live on Social Security.  Second, it makes our economy look like it is growing faster than it really is.  If inflation is really 6%, but we pretend that is 2% this makes our economy look like it has grown an additional 4%.

Let’s stop the hijinks. Inflation should be calculated as it is, not as the Government wishes it to be.

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Part 1: The Real Unemployment Rate