Is CPI Manipulated?
I got quite a bit of negative feedback to my post Calculate Your Personal Inflation Rate because in it I stated that inflation numbers are not, in fact, manipulated by the government. Well, that statement really upset the tin-foil-hat conspiracy theorists. I got a few emails telling me how wrong I am without any supporting evidence. I got some others accusing me of being a “government shill,” whatever that means (I have never worked for the government or a government contractor nor do I stand to gain personally from lying about inflation). I got yet more emails whose authors at least went to the trouble to put together something resembling a coherent argument. Kudos to them. As it turns out, most “the government lies about inflation!” theories revolve around a few common misconceptions and flat-out falsehoods. Since I enjoy stirring the pot, here are my rebuttals to a few common criticisms (some culled from email and others from this editorial on gold-eagle.com. Keep in mind that gold-eagle.com, unlike me, has a vested interest in spreading the idea that the government lies about inflation.
Misconception: The government excludes food and energy prices from official CPI, which understates the true inflation rate
No they don’t. This is an extremely common argument and it’s also the easiest to prove wrong. These people, of course, are refering to Core CPI numbers often reported by the media. It is true that core CPI excludes volatile items such as food and energy because the short-term volatility of those items can make it difficult to determine what price increases are due to short-term supply and demand imbalances and which are due to a systemic rise in price, which is what the CPI was designed to measure. However, core CPI is a inflation index, not the inflation index. The CPI-U For All Urban Consumers is the most comprehensive CPI index, and is widely reported along with core CPI by the government and media. In fact, I don’t recall many instances where Core CPI was reported where CPI-U wasn’t. You might find this hard to believe, but CPI-U does include food and energy costs. It includes shelter as well. In fact, pretty much the only thing it doesn’t include is the street price of illegal drugs, although they may find a way to measure that soon. The CPI-U is prominently displayed on the BLS website and widely reported by the media, so it’s more than a little intellectually dishonest to point at the core CPI and claim the government is deliberately excluding food and energy prices to mislead the public. Anybody with an internet connection, a newspaper subscription, or a television set can easily see otherwise.
Misconception: The Federal Reserve stopped calculating M3 money supply in order to hide how much money is being printed from the public
The Federal Reserve did actually stop calculating M3, but it wasn’t to mislead the public. According to the Fed press release,
“M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.”
There you have it directly from the horse’s mouth, M3 was discontinued not to mislead anybody, but because it was expensive to produce and judged by the Federal Reserve Board to be a useless measure for their purposes. Shouldn’t we be happy a government agency voluntarily chose to cut costs and not waste our tax dollars?
“Ah hah!” says the conspiracy theorist right about now. “You’ve been fooled! The cost-cutting crap is just an excuse. The real reason they discontinued M3 is to hide from the public how much money is being pumped into the system!” Well, that argument doesn’t hold water for several reasons, chief among them being that M3 was never made unavailable. As it turns out, the Federal Reserve was never the only institution that calculated the M3 money supply, so the fact that they don’t anymore does not make M3 any more difficult for the public to obtain. Furthermore, if you read the press release cited above, the Fed still reports all the components used to calculate M3 and the formula is taught in Economics 101 textbooks, so you could actually calculate it yourself pretty easily using Excel. There have always been and still are plenty of sources calculating M3. Here is one of my favorite sources that calculates M3 using data from official sources. If this is a conspiracy to lie to the public, they’re doing an extraordinarily horrible job. If the Fed really wanted to hide M3, they would stop releasing the component data. Any 5th grader could calculate M3 given the component data, so it’s not like you need a PhD in quantitative methods or anything.
This rebuttal doesn’t even deal with the fact that growth in the M3 money supply is not equivalent to consumer price inflation, so the entire premise that the government could actually cover up inflation by lying about M3 growth is a false premise to begin with. Many people think growth in the money supply is the same thing as consumer price inflation, but this is false. There are two kinds of inflation, monetary inflation (growth of money supply) and consumer price inflation (systemic rise in the price level). In a closed monetary system, monetary inflation and consumer price inflation are equivalent. Luckily, we do not have a closed financial system. We can import foreign currencies and export dollars at will, which changes the equation dramatically. The differences between monetary inflation and consumer price inflation and how they influence each other can be subtle and belongs in another post. I plan on writing about it shortly, but for the purposes of this debate, it’s only important to know the two are not equivalent.
Misconception: The government uses hedonic adjustments to understate inflation
Like the M3 misconception, this one has a kernal of truth, but the implications are completely misinterpreted due to lack of experience in statistical methods and a fundamental misunderstanding of what exactly inflation is and how it’s calculated. A hedonic adjustment is a substitution of one product for another. The theory goes that if steak gets too expensive, people switch to hamburger. Since people don’t eat as much steak, its weighting in the CPI goes down and that of hamburger goes up. This, according to the conspiracy theorists, is a lie. But those people don’t understand what inflation actually is and how it is measured. Inflation is a systemic rise in prices across the board as represented by actual consumer behaviour. It is not meant to reflect the rise or fall of any particular product but rather a representative basket based on what consumers actually spend their money on. Some argue that lowering the weight of steak and raising the weight of hamburger understates inflation because it reflects a lower standard of living. That is an illogical statement for two reasons,
- Whether or not hamburger reflects a lower standard of living is subjective to begin with. Just because you prefer steak doesn’t mean everybody else does. Furthermore, they may prefer steak but cut back in order to spend more money in another category due to reasons having nothing to do with rising prices. This represents a personal choice by the consumer, not inflation.
- Following that argument to its logical conclusion, the situation quickly devolves into one where we’re tracking the cost of buggies and butter churns in an age of automobiles and stainless steel appliances. It makes no sense to heavily weight a product no longer widely used, regardless of the reason it’s fallen out of favor. The fact is, there is no way to tell for sure why consumers buy more or less of any given item. In the case of horse-drawn carriages, it’s obviously because the technology is obsolete. In the case of steak, who’s to say it’s due to price rather than changing consumer preferences? Such shifts in preferences happen all the time and to simply assume it’s always due to price is absurd.
There are enough misconceptions about the CPI to fill a large book, and I’ve barely scratched the surface here. In particular, I haven’t yet covered quality adjustments, weighting methods (the BLS switched from the arithmetic to geometric mean to determine category weightings), and the effect of oil and commodity prices on future inflation. There are dozens of others I haven’t mentioned because I haven’t had a chance to do the requisite research on them yet. I intend to revisit the subject regularly in the future as the public debate unfolds. If you have a suggestion on a related topic to write about, a question, a criticism, or anything else to say on the subject, please leave a comment. I will try to address all of them either in a comment or in a new post.
Update: Check out this post by Debt-Free Revolution for an opposing view.
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Kyle – maybe you should start an illegal drug index? It would be a public service.
Mike
An illegal drug index is an excellent idea. Unfortunately, I don’t do any illegal drugs. If anybody out there can get their hands on a price list, I will post it up and track them as best I can.
Great post. Great analysis on your rebuttal that I just read today, too.
Great post. Excellent information. After reading all the posts about how CPI is manipulated, I started to almost believe it. I’d believed that food and energy is excluded from the CPI. Thanks for explaining it – now I feel better about buying I bonds in April.
http://www.shadowstats.com/article/56
^ Pretty much debunks every point in this posting.
Nice job characterizing anyone who disagrees with you as a paranoiac. This is my first and last visit to your blog.
Disavow, I never called anybody who disagrees with me a paranoiac. Nothing in that link debunks anything in this post. I have thoroughly researched Shadow Stats and reject it completely due to one simple fact: they don’t cite sources. They make serious accusations but provide no numbers or logic to back them up. Their “calculations” are shrouded in secrecy. Just try reproducing their numbers yourself and see how far you get. The BLS numbers, in contrast, are public domain. You can reproduce them yourself and verify their methodology, which, I’m happy to report, is perfectly sound. The people behind shadow stats claim BLS methodologies are “flawed” but provide no explanation as to how exactly they are flawed outside of the faulty logic I’ve written about. They also provide no methodology for correcting these supposed flaws they for some reason refuse to reveal in the first place. In order to believe Shadow Stats, you’d have to ignore common sense and assume the worst at every turn.
Kyle, I have a more recent post on the April CPI numbers released a few weeks ago, where the “seasonal adjustment” they use in their calculations changes gasoline prices from a positive 5.6% (rising) to a NEGATIVE 2% (they claim gasoline prices went DOWN). While food prices remained a positive number (increasing) the seasonal adjustment and adding in restaurant dining brought that down to just under 1%.
After the April 08 CPI numbers, it becomes rather difficult to defend the current methodology the BLS uses. If you don’t mind a link in the comment body: CPI, Inflation, and Reality is my opinion on the April numbers.
Kyle, your arguments are compelling but disturbing. Inflation is much higher then reported by the government regardless of which set of numbers you use to calculate it.
By the way, doesn’t the government use the core CPI (which excludes food and energy) to calculate the GDP. If they used the actual CPI then the last two quarters of GDP would be negative – which means that we are ‘officially’ in a recession.
And another thing, how can anyone use the ‘official sources’ to calculate the CPI without using the government’s bogus numbers – when all ‘official sources’ are produced by the government.
You can believe all you want in the government numbers, but they just don’t make sense with the double-digit inflation all over the world. How can the dollar lose 8% per year in an import driven economy and yet our inflation be only 2.7 percent? It just doesn’t add up. Somebody is lying and someday the truth will be reviled, but for now I’m not investing in any dollar based assets. The dollar is going to sink like a rock in the river, get out while to still can.
Is CPI Manipulated? Of course it is, so that the government can screw everyone over on pay raises and social security cost-of-living raises. Relax…social security will be there for everyone–it just won’t buy anything!
Let me use an example of price increases: The Honda Civic. In 1980, you could buy a stripped-down Honda Civic for under $4,000. Now, if you believe the government’s 3% inflation lies of the last 27 years, the price would have doubled to $8,000+ (Rule of 72 divided by 3%=24). Instead, the true inflation rate since 1980 has been 6% and the Civic’s price has doubled twice to $16,000+.
Let see, it is expensive to collect M3 data and calculate, yet there is a website with a M3 calculator. Does this mean the website operator has more free money than the Federal Reserve and can publish this information for free?
No, the website is merely using existing inputs. The data is there, so writing a calculator is practically free. Besides, the website is likely profiting quite a bit from offering the free tool. Besides, the Fed didn’t really say it was “too expensive,” just that there was no real benefit from their perspective since it was never used. If there’s no real benefit, any cost is too high.
The problem with the CPI is that it is not an inflation index anymore, but has rather switched to a cost-of-living index (COLI). Both measure impact on consumers – however one measures consumes purchases based on a standard of living vs. the other measuring price fluctuations on a fix basket of goods.
The CPI has been changed so many times in the last 10 years that any year-over-year measurment is hard to track. Hedonics, Geometric weighting, full-subsitutions, etc. If we use pre-1990 calculations the CPI is a lot higher. Even the ILO has stated that our CPI is not really a COLI – however the only deception by the government is not really explaining that difference. I don’t have a problem with teh CPI or the COLI. I have a problem that the government has continued to make changes so that what we are measuring is different but in name it remains the same.
It is clear that keeping the CPI low is important because it also affects Social Security benefits and Treasuries. That alone is a clear reason as to why to keep the CPI low. It is also interesting in that all the changes made to the CPI in the last couple of decades has LOWERED it – rather than kept it the same or increase it.
As per M3 – the FED’s excuse to not measure it as per a cost cutting measure is rather silly. It is still being measured – they just rather refer to M2 (which is also costly to measure) and not refer to M3. I think both Bogel, Paul, Buffet, Walker, and others all make compelling arguments as to why we should continue to measure it.
One thing is for sure – seeing 100s of billions lent at the discount window, opening it up to non-members, and now extending the it from 30 to 84 days is not a sign that things are running smoothly.
Looking at non COLI inflation measurements – it’s apparent that the CPI is not very good at measuring inflation.
From credit lines it would seem that money is very tight – (if I didn’t know better I would think that target rates were at 8-10% and discount 12% – also they must of stopped printing money). However we know that is far from the truth. Money is being poured into the system as we are seeing the largest unwind of leverage in the history of the world.
Now the GSEs only answer is a bailout. Are we to believe that $5 trillion in assets, which $1.5 trillion is non-performing is going to be bailed out by the Fed without the need of printing more money (hence inflation). Only a fool (like Frank) could by such a falsehood.
These are interesting times – and the disparity between government data reporting and what is actually happening on the street (wall street and main street) is laughable if we were not in this mess ourselves.
I am not a conspiracist – but math is math. And 2+2 does not equal 5, no matter how much Bernanke wants to convince us that it is so.
The Federal Reserve Board is not a government agency. The FED is a privately owned bank.
Where is the (real) oversight?
Certainly not in the banking and finance committees in Congress.
If ‘minor’ little details like this get overlooked, I can only imagine the efforts taken on such an endeavor to ‘debunk conspiracy theories’.
Incorrect. The FED is a semi-public institution entirely and completely under the control of the U.S. Congress. The belief that it is a private-owned bank is widespread, but false. The confusion seems to come from the fact that member banks are required to buy “stock” from the FED, but the use of the term “stock” in his case is archaic. This “stock” has no voting rights and is completely different from what we would refer to as stock in the common era. They share no common attributes.
Furthermore, substantially all of the FED’s profits every year are given to the U.S. Treasury. If the FED were privately-owned, the owners would be very unhappy about having their profits always given away.
Kyle, I wish that were true.
But if it were, there would be no deficit. None.
To whom does the government owe money to if it is merely borrowing from itself.
In 2007 $11Billion for IRS overhead to collect $2Trillion in taxes.
That money goes to the Federal Reserve to pay interest on a debt that can never be repaid.
http://www.gao.gov/new.items/d07719t.pdf
A quick (albeit crude) assemblage of the history is here:
http://www.wtv-zone.com/Mary/BIGGESTSCAMINHISTORY.HTML
Can you refute any of those claims or have some other books, videos or online references I can further research.
I am not pushing what I believe, but am seeking out knowledge and understanding of a murky history of the United States that has become the USA.
TIA
If the Feds stopped publishing M3 numbers to save money (as the author stated) why does the author then say the base numbers for M3 calculation are available and can easily be calculated from an excel program. What am I missing? His arguments sounds very defensive and circumvent.
It’s simple, M3 numbers are very expensive for the government to publish. They have to pay statisticians to constantly run the numbers, verify everything, and then publish them. All the inputs used to calculate M3 are publicly-available, however. The U.S. government was NEVER the only entity to publish those numbers, and obviously, all the numbers were slightly different because they used slightly different inputs. The particular source cited above has tracked official M3 to within a very tiny margin of error, mainly due to the (cited) decision to estimate the value of outstanding Euro dollars rather than go through the trouble of collecting the raw data. The calculation is expensive for anybody to undertake, especially the government. When has the government ever done things the cheap or easy way?
You aren’t missing everything, the argument is extremely clear and straightforward. I’m not sure how it could be stated any simpler.