Understanding Inflation – Part 6 of 6

CPI is the measure of inflation provided to us by the government. In parts 1-5 of this series, I talked about how the current CPI calculation varies from the way CPI was calculated prior to 1983. The graph below says it all.

Courtesy of ShadowStats.com

The above graph is courtesy of John Williams’ Shadow Government Statistics website. Mr. Williams is an economist who exposes and analyzes flaws in government reporting data. The above CPI graph reflects the CPI as if it were calculated using the methodologies in place in 1980 (prior to the ‘83 and ‘99 changes). As you can tell by looking at the graph, CPI calculated using 1980 methods (the blue line) is far in excess of current CPI (red line) calculated after the various changes made by the Bureau of Labor Statistics (BLS).

I cannot vouch for the accuracy of Mr. Williams’ graph. What I can say is that I wish I could vouch for the accuracy of Mr. Williams’ graph, which would be easy enough to do if the BLS would simply publish the CPI as it was calculated previous to the changes made in 1983 and 1999. They already have the base calculation. They simply take it and make the changes to it that I discussed in the previous segments of this series. If they already have it, I say publish it alongside the adjusted CPI (which they claim is more accurate). I argue that we should let the financial markets decide which CPI is more accurate, but then again, I am always on the side of more transparency.

I have heard that most economists think that CPI in its current form — with all the changes — is more accurate than the CPI given to Americans from 1921 – 1982. If CPI as a measure of inflation was significantly overstated for 62 years, where were the economists during that time? Were they fooled? If not, why didn’t they speak out during those six decades? If inflation was dramatically overstated during those 62 years, the economists seemed to have missed it. If inflation was overstated for six decades, were interest rates way off the mark too?

I would like to think that the inflation as represented by the government is accurate. However, the inflation that we feel as individual consumers is probably the real rate of inflation. It seems to me that luxury items sometimes get cheaper. Unfortunately, it seems like have-to items get more expensive — sometimes drastically so. I’m glad that plasma televisions are coming down in price, but it seems like education, health care, food and energy are all going up. We can live without plasma televisions, but we cannot live without the necessities of life.

In the end, I am skeptical about the government’s inflation numbers. I think that the government is playing games in order to intentionally understate inflation. I only hope that inflation isn’t understated to the extent that Mr. Williams thinks it is. Because social security cost-of-living adjustments are tied to CPI, that makes for a powerful incentive to keep CPI low. If Mr. Williams is right and social security payments should be double what they currently are, I wonder why the AARP hasn’t done an in-depth investigation on this issue. Perhaps they aren’t aware that the measure of inflation presented to Americans today isn’t the same one they received from 1921 to 1982. Or perhaps they know that increasing social security benefits would break the bank, so why bring it up.

One thing that Congress could do would be to pass a law allowing long-term capital gains to be adjusted by inflation. That would give the government an incentive to keep inflation in check (lower inflation meaning more taxes on capital gains), and it would give the wealthy an incentive to be a watchdog group to make sure that inflation wasn’t understated (understated inflation resulting in higher capital gains taxes). I’m probably just dreaming, though.

by Wade Young