How Phony Inflaiton Statistics Fool Us
It's no secret. Inflation isn't calculated the same now as it was then. What's then? Then is before 1980.
Starting in the 1980s, government inflation calculations were first changed. If you remember, the U.S. had gone through a period in the 1970s when inflation skyrocketed and people were fearful that their dollars would become worthless. Well, in fact, they were worth less at the end of the 1970s. Then, almost miraculously, Paul Volcker, the new Federal Reserve Chairman, solved the problem. He recognized that allowing inflation to continue at high rates would eventually destroy the US dollar. He raised interest rates (among other things) and inflation calmed down.
Meanwhile, the government decided that the way the inflation rate was calculated needed changing. In 1978, they decided that the components of the CPI needed updating. They looked closely at what consumers actually purchased and made some changes so that the CPI more accurately reflected consumer purchases. That did make some sense at the time. But then the real fun began.
In January 1983 housing prices were replaced with owners' equivalent of rent because rents are more stable. The thinking was that house prices rose and fell with booms and busts in the housing market more than rents. The excuse for this change was that using owners' equivalent of rent instead of actual home prices would "smooth" out the bumps in the index and provide a more accurate and reliable number. The thing is, the owners' equivalent of rent is a number concocted by government bureaucrats. Whereas the decision to change the CPI to reflect actual purchases used the prices of real items that people bought, this change adjusted the CPI based on a made-up number. You can argue that the methodology used to derive the number made some sense, but the fact is it is a made up number and if the methodology is questionable or not fully accurate, it skews the accuracy of the index in a way that's different than just replacing some items with other items.
You don't have to be an economist or government statistician to understand this. Just use your reason and common sense. You see that, right?
Anyway, that sort of monkeying continued until they came up with "hedonics" which basically says that if the price of steak goes up, they won't include steak anymore because people will probably switch to hamburger, so they'll replace the higher price of steak with the lower price of hamburger.
You can look all this up if you want to dig down more into the details. But the point is that over time, the CPI has been artificially held down by these sorts of techniques.
John Williams calculates the rate of inflation using the government's methodology from 1980 - before the real monkeying began. While the numbers change from month to month, a recent comparison showed the "new" CPI around 2% whereas the older methodology would have inflation at 10%. That's a big difference. (For more, click on this link to John Williams' "Shadowstats" website.)
What's really striking, however, is what this says about our economic growth over the last 40 years. If inflation really was a lot higher, then a lot of what passed as growth is really attributed to the growth of inflation and not real productive economic activity. For example, here's an analysis contained in an excellent article by Jim Quinn:
"Retail sales in 1992 totaled $2.0 trillion. By 2011 they had grown to $4.7 trillion, a 135% increase in nineteen years. A full 64% of this rise is solely due to inflation, as measured by the BLS. In reality, using the true inflation figures (i.e., from Shadowstats - ed.), the entire increase can be attributed to inflation." (See Jim's whole article - which focuses on the the coming debacle in commercial real estate - by clicking here.)
Think about this. That's just one example. Can you imagine how this distorts growth figures over the last 40 years?
Yet, we know that people really do have more "stuff" these days than they did in 1980, right? So what accounts for that if the economy hasn't been more productive, if people's earning really didn't increase as much as what the numbers say they did? You know the answer: debt.
We've borrowed our way to a false prosperity and now we're paying the price. And along the way, the distortions in government-reported inflation kept telling everyone the economy was firing on all cylinders.
Let's hope more Americans join with the old British rock band, "The Who": We won't be fooled again!
Starting in the 1980s, government inflation calculations were first changed. If you remember, the U.S. had gone through a period in the 1970s when inflation skyrocketed and people were fearful that their dollars would become worthless. Well, in fact, they were worth less at the end of the 1970s. Then, almost miraculously, Paul Volcker, the new Federal Reserve Chairman, solved the problem. He recognized that allowing inflation to continue at high rates would eventually destroy the US dollar. He raised interest rates (among other things) and inflation calmed down.
Meanwhile, the government decided that the way the inflation rate was calculated needed changing. In 1978, they decided that the components of the CPI needed updating. They looked closely at what consumers actually purchased and made some changes so that the CPI more accurately reflected consumer purchases. That did make some sense at the time. But then the real fun began.
In January 1983 housing prices were replaced with owners' equivalent of rent because rents are more stable. The thinking was that house prices rose and fell with booms and busts in the housing market more than rents. The excuse for this change was that using owners' equivalent of rent instead of actual home prices would "smooth" out the bumps in the index and provide a more accurate and reliable number. The thing is, the owners' equivalent of rent is a number concocted by government bureaucrats. Whereas the decision to change the CPI to reflect actual purchases used the prices of real items that people bought, this change adjusted the CPI based on a made-up number. You can argue that the methodology used to derive the number made some sense, but the fact is it is a made up number and if the methodology is questionable or not fully accurate, it skews the accuracy of the index in a way that's different than just replacing some items with other items.
You don't have to be an economist or government statistician to understand this. Just use your reason and common sense. You see that, right?
Anyway, that sort of monkeying continued until they came up with "hedonics" which basically says that if the price of steak goes up, they won't include steak anymore because people will probably switch to hamburger, so they'll replace the higher price of steak with the lower price of hamburger.
You can look all this up if you want to dig down more into the details. But the point is that over time, the CPI has been artificially held down by these sorts of techniques.
John Williams calculates the rate of inflation using the government's methodology from 1980 - before the real monkeying began. While the numbers change from month to month, a recent comparison showed the "new" CPI around 2% whereas the older methodology would have inflation at 10%. That's a big difference. (For more, click on this link to John Williams' "Shadowstats" website.)
What's really striking, however, is what this says about our economic growth over the last 40 years. If inflation really was a lot higher, then a lot of what passed as growth is really attributed to the growth of inflation and not real productive economic activity. For example, here's an analysis contained in an excellent article by Jim Quinn:
"Retail sales in 1992 totaled $2.0 trillion. By 2011 they had grown to $4.7 trillion, a 135% increase in nineteen years. A full 64% of this rise is solely due to inflation, as measured by the BLS. In reality, using the true inflation figures (i.e., from Shadowstats - ed.), the entire increase can be attributed to inflation." (See Jim's whole article - which focuses on the the coming debacle in commercial real estate - by clicking here.)
Think about this. That's just one example. Can you imagine how this distorts growth figures over the last 40 years?
Yet, we know that people really do have more "stuff" these days than they did in 1980, right? So what accounts for that if the economy hasn't been more productive, if people's earning really didn't increase as much as what the numbers say they did? You know the answer: debt.
We've borrowed our way to a false prosperity and now we're paying the price. And along the way, the distortions in government-reported inflation kept telling everyone the economy was firing on all cylinders.
Let's hope more Americans join with the old British rock band, "The Who": We won't be fooled again!
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