Sunday, May 18, 2008

Lies to Hide Inflation

The Labor Department is working overtime to to explain away what everyone knows is true. According to the Bureau of Labor Statistics the inflation numbers are tickety boo. Every American, except maybe Bill Gates and George Bush, is watching his pay check shrink in relationship to the necessities (food, fuel, housing) he needs to buy. Yet, somehow, the Consumer Price Index is benign. The official inflation numbers released last Wednesday showed an inflation rate for April of just 0.2% which is hogwash.

How is this possible? As a book I read decades ago (How to Lie With Statistics) explains, it's an easy trick akin to magic. Success in magic rests with misdirection; so too success in statistics. The misdirection methods are varied and complex. The CPI price of gas, for example, went down in April (through a jiggerypokery called "seasonal adjustment") even though it went up at the gas pump. There is the "Core CPI" concept which amounts to trumpeting only those things that don't go up in price. They have thousands of such tricks; I understand only a few of them.

The reason for these lies is to reduce the Federal deficit. Many government programs costs are indexed to inflation. Keeping the official rate of inflation well below the actual rate is a money-maker for the government. An artificially low CPI is a vital part of the scheme to protect the Social Security system. Also, there is a social reason. When the government reports little or no inflation people can be convinced that their personal experience is an anomaly. There is no mass outrage if everyone thinks he is suffering alone.

The Clinton Administration along with a Republican Congress introduced a key philosophical change in the concept if the CPI. Prior to 1996 the CPI used a fixed market basket to calculate inflation. The change replaced the traditional CPI formula with a variable basket. Now the Department of Labor continually adjusted the CPI formula. The effect is a gross and increasing disconnect between the official statistics and reality.
The true rate of inflation, the rate of inflation people feel in their lives, is somewhere near 8 to 10 percent per year.

References: Advanced Personal Finance - 2007, The CPI Is A Big Lie - 2008, Shadow Government Statistics - the CPI - 2006, Bloomberg - CPI data a Lie - 2007, the Fuzzy CPI - 2000, Statistical Revisionism and Wizardry - 2007, The Swamp Hare - 2008, various interesting charts from Shadow Government Statistics

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