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the CPI figure in now way represents true inflation (long)

Discussion in 'The Pub' started by carri27, Nov 18, 2007.

  1. next time your boss offers you a payrise based on CPI argue for more based on the REAL CPI.

    from an economic newsletter i receive (for free) by John Mauldin.

    "Cooking the Inflation Books

    Just for the record, I want to state that I know as does nearly everyone else who pays attention to the CPI statistics that they are bogus. They do not reflect the real world that you and I, gentle reader, live in. So, while it may look like I take them at face value, I do so only because the Fed pays attention to the number, (nod, nod, wink, wink) and makes policy based upon it. So, let's look at how the calculation of the CPI has been politicized and how much of a difference it makes, and then go on to the expectation for statistical inflation in the near future.

    John Williams writes an excellent monthly letter on all types of government statistics called the Shadow Government Statistics at www.shadowstats.com. One of the things he points out that during the Clinton administration, the way the BLS calculates inflation was changed. He calculates his own inflation number using the old pre-Clinton inflation model. Using that methodology suggests that inflation is at 7%. And if you use other methods, inflation might even be substantially higher. Look at the chart below.


    Since the CPI is used to calculate the increase in Social Security payments and a host of other items, calculating inflation is important. I the early 1990s the arguments in the press was that inflation was over-stated. Michael Boskin, chief economist in the first Bush administration and Alan Greenspan were among the chief proponents for a new methodology of accounting for inflation.

    Quoting Williams: "Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

    "The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

    "The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.

    "Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

    "Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third."

    Then to confuse the process even more, the BLS uses something called hedonics, from the root word hedonism. Essentially, the adjust the price of an item based on the "pleasure" or increased value you get. Thus, they don't price automobiles based on the sticker price, but on what you get for your money. If the manufacturers load in more items like new electronics or anti-locking brakes that were not standard the year before that means you are getting more value for your dollar, so therefore the price in terms of inflation goes down even though you may be paying the same or even more to get out of the car show room.

    The same is true for computers. We clearly get more power every year, so for the BLS the price of computers are going down, although it seems to me that the price I pay for a top of the line computer is about the same as it was five or ten years ago.

    If the government mandates an additive to gasoline that costs 10 cents more, that is not included in the inflation numbers, because we get a new, improved gasoline that pollutes less. Supposedly the pleasure of breathing cleaner air reduces the costs to our pocket book, or something like that.

    My health insurance costs have tripled over the last ten years, and I know that is the experience of many of my readers. Yet, the BLS has medical costs rising by less than 50% for the last ten years. Their data suggest the cost of housing has risen by about 30% over the last ten years. Again, that is not the experience of many of my readers.

    Social Security expenses are $657 billion per year. If Williams is right (and I think he is) that under the old methodology that expenses would have risen by a third, then that means we are spending $200 billion a year less. Add $200 billion to the deficit. And then watch politicians panic.

    I am not one to suggest conspiracy, but if the CPI reflected the real world, the US government would be spending far more money on Social Security and a host of other pension programs. The crisis we will be experiencing in about 8 years would have already hit us. Thus, there was an incentive for leaders to find economists who could argue for new, more "progressive" methods for calculating inflation. Notice that this was done by the BLS without any protest from Congress.

    None of this was done behind closed doors. The BLS, to its credit, is extremely open about how it calculates CPI, and you can get an enormous amount of detail on their web site about prices of things like tomatoes in very part of the country going back for decades.

    But the way we calculate the CPI is not going to change. No administration will want to go back and add in an extra 4-5% a year to Social Security and other government pension programs. So, let's return to the prospects for a rise in the CPI in the near future, which will have policy implications for the Fed.
  2. This refers to the US's economy. Can it be applied here? ie. does the CPI calculation here work the same as what is applied in the US?

    Granted, you gotta wonder at a lot of the stats that the government uses to drive economic and other policies.
  3. No it doesn't exactly apply here - we use different measurements, though they are broadly based on the same set of ideas.

    For the record these types of inconsistencies are well known to the economists who devise and use these measures and that's why several different measures, each with different weightings and baskets of goods, are used.

    Added to this is the fact that, in most countries, the departments, government bodies, etc, that calculate these figures are independent, safe from political interference, and have no specific interest in altering the figures one way or the other.
  4. It is probably very applicable here. Considering the average CPI wage increase last financial year was what, 3%?

    I can think of 10 products/services off the top of my head that have increased well above this.
  5. but remember with weighting, they include a bunch of stuff in the basket that goes down in price and lowers the overall inflation figure.

    God knows where they find thoese things, cos I sure ain't buyin em.
  6. Well, some big ticket items, including essential services, are set to jump by 15% next year. Petrol prices are sure to follow suit, too. And from what I "understand" this places pressure in interest rates. Why, I don't know as jacking up the rates only hurts those already under the pump. They're not spending any more on luxury items.

    I see a whopper of a recession coming. The same shit happened back in the 80s, just when I bought my first house. I dread to think what will happen if the rates ever go much above 10 percent, given the unprecedented high mortgage levels, these days...
  7. Yes, it is true, the ABS has changed the CPI.

    To many ordinary Australians the actual inflation rate they perceive
    when the go shopping seems to be significantly higher than the numbers
    regularly published by the ABS and some background research suggests
    that maybe the average person might be right.

    The ABS has followed the US 'Boskin' Report. As a consequence the Australian CPI in no way represents the real inflation rate. Why did the ABS make the changes? Simply to copy the US. And because it suits the politicians aims. Most of the changes were made in 1999 and the ABS is planning more.

    If inflation is lower it looks good in a lot of ways. Also, Australian government employees superannuation is paid indexed to the CPI and so are many benefits. This means the government has to pay a lot less in super and benefits, which is the same reason it was changed in the US.

    What they did in the US and have followed here is completely shonky. But don't believe me. Believe a Princeton Economics Professor Angus Deaton. See what he has to say in 1997 about the Boskin report.
    Do a Google search for "Angus Deaton" or Boskin CPI
  8. Yes it does apply here we followed the US

    The ABS followed the recommendations of the Boskin Commission. Most changes went through in 1999 and the ABS is planning more. Of course, the government loves this stuff. Lower inflation makes them and the bureaucrats look good. As were told "We have never had it so good!"
  9. ABS is a government department they do what they are told!

    The ABS is a government department. They do what they are told. Also, they think Boskin was right even though a lot of american economist don't agree with Boskin or his recommendations.

    Do a google search for ( "Getting Prices Right" "Angus Deaton" Letter ) Angus Deaton is a Princeton Economic Professor. He didn't think the Boskin changes were right.
  10. I think someone should raise this in the election

    I think someone should raise this in the election or on talkback radio or on Today Tonight or ACA. We are being cheated!
  11. Maybe we should talk to the Democrats or Greens about it?

    Before it is too late we should make it an issue. Once the election is over the politicians will do nothing.
  12. Maybe John Mauldin would talk about it to a journalist?

    Maybe John Mauldin or someone could talk about it to a journalist or on a news program?

    I did an internet search and here is some of the stuff I found.

    Information on Deaton is at:

    Also worth reading are:






    Here is a quote from someone not so happy about the 'adjustments'.

    "inflation is roughly at least 3% higher than what is being reported",
    which is due to the government implementing the foul and dishonest
    tricks of the Boskin Commission Report.

    These slimy adjustments nowadays being made to inflation calculations
    have come to be called "hedonic adjustments" stemming from the word

    which is found at: http://www.dailyreckoning.com.au/inflation-6/2007/05/01/
  13. .. which have been driven by greed, and the empty promises of so-called financial planners, whose favorite line is that owning two or three houses is "the way to secure your financial future".

    I see that the emotional, social and long-term COSTS of this idiotic illusion far outweigh the possible benefits, and the exposure to the vagaries of the market, as you say, is too terrifying to contemplate.
  14. HEY ADAM, oy!

    What bike do you ride?

    Piss off with the spamming would ya. Same post in multiple threads... 11 posts on the same topic... no intro post, minimal profile info... :roll:

    What are you hoping to achieve before Saturday?