The lie of the CPI

Posted by Jason | Posted in Economics, Government | Posted on 30-10-2009

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The International Business Times has a great article on the coming inflation. They highlight below how the government has distorted the true inflation we have experienced since 1983. If the government doesn’t like something, they just redefine it to get the results they want. All Americans know though how much food, energy and housing have increased despite governments claim of low inflation.

3: THE CPI INFLATION INDEX DOES NOT REFLECT TRUE INFLATION

In both Canada and the US, inflation is hurting our pocketbooks, but you wouldn’t know it from the Consumer Price Index (CPI). That’s because the CPI is understated by as much as 7 percent per year according to economist John Williams, who has been tracking US CPI for many years (see Figure 2). In addition, North American investors and consumers seldom hear the “headline” inflation number. Instead, the financial media usually report only the “core” inflation number, which excludes food and energy. This was done, ostensibly, to remove volatility from the CPI. But food and energy account for about 23 percent of consumer spending, so how can they be ignored? Governments have a major incentive to understate CPI because trillions of dollars’ worth of pension funds, health benefits and wage increases for public sector employees are indexed to it.

Today’s CPI is substantially understated because it is calculated using a complex re-weighting formula that is riddled with substitutions, exclusions, hedonic adjustments and geometric weighting. If we were to recreate the CPI using the original 1983 formula, we would discover that even though we have experienced asset depreciation following the credit crisis, price inflation for goods and services has not gone away. And if the monetary authorities had decided to factor home prices into the CPI, the bubble would have been far more obvious from the beginning.


via The Next Crisis: Spiralling Inflation – Part 1 – International Business Times -.

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