How the Official Inflation Rate Is Manipulated
The government has many ways to manipulate economic information in order to keep the CPI artificially low. Here are a few:
1. Geometric weighting by elimination of goods and services that are going up rapidly in the CPI.
Goods and services that are increasing the fastest such as housing and energy costs are given a lower weight in calculating the CPI - or they are even eliminated entirely. The public rationale for this blatant sleight of hand is that such goods and services are "too volatile" to be included, or that increases are "temporary" or atypical. However, with such manipulation, the CPI ceases to have any connection to reality.
2. Explaining away price increases by calling them quality improvements.
For instance, if the cost of a computer goes up by $100, this price increase will not be included in the CPI if there is also some improvement in the computer's capabilities. Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold the Model T for $300.
3. Ignoring quality decreases.
If we need to adjust the inflation rate for quality increases, don't we also need to modify it for quality decreases?
The post office provides a good example. Sixty years ago, first-class postage was just three cents - and the post office made four deliveries each day. Also sixty years ago, gas stations had attendants who pumped your gas for you, while they also checked your oil and cleaned your windshield at no additional charge. And the price of gas was less than thirty cents per gallon.
4. Assuming consumers will simply turn to less expensive alternatives.
Thus if the price of your steak dinner goes from $19.95 to $24.95, the Department of Commerce simply believes that diners will go to a less expensive restaurant in order to keep their meal costs the same.
Like other CPI "adjustments," such assumptions have little to do with reality and are merely an excuse for manipulating official inflation figures.
5. Exclusion of goods and services if their price is reduced by government subsidies.
For instance, the actual cost of a subway ride in New York City is anywhere from $3.50 to $6.00, but riders only pay $1.25. The rest is subsidized by taxes. But since only the price of a subway ride and not its actual cost appears in official reports, the CPI again appears much lower than it actually is.
Thousands of goods and services in the United States are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system and much of what we eat.
Considering the above list, 7% might be much too low an estimate for the present real U.S. inflation rate!
Next time: we'll discuss the economic consequences resulting from the manipulation of the CPI.
* * * * *
1. Geometric weighting by elimination of goods and services that are going up rapidly in the CPI.
Goods and services that are increasing the fastest such as housing and energy costs are given a lower weight in calculating the CPI - or they are even eliminated entirely. The public rationale for this blatant sleight of hand is that such goods and services are "too volatile" to be included, or that increases are "temporary" or atypical. However, with such manipulation, the CPI ceases to have any connection to reality.
2. Explaining away price increases by calling them quality improvements.
For instance, if the cost of a computer goes up by $100, this price increase will not be included in the CPI if there is also some improvement in the computer's capabilities. Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold the Model T for $300.
3. Ignoring quality decreases.
If we need to adjust the inflation rate for quality increases, don't we also need to modify it for quality decreases?
The post office provides a good example. Sixty years ago, first-class postage was just three cents - and the post office made four deliveries each day. Also sixty years ago, gas stations had attendants who pumped your gas for you, while they also checked your oil and cleaned your windshield at no additional charge. And the price of gas was less than thirty cents per gallon.
4. Assuming consumers will simply turn to less expensive alternatives.
Thus if the price of your steak dinner goes from $19.95 to $24.95, the Department of Commerce simply believes that diners will go to a less expensive restaurant in order to keep their meal costs the same.
Like other CPI "adjustments," such assumptions have little to do with reality and are merely an excuse for manipulating official inflation figures.
5. Exclusion of goods and services if their price is reduced by government subsidies.
For instance, the actual cost of a subway ride in New York City is anywhere from $3.50 to $6.00, but riders only pay $1.25. The rest is subsidized by taxes. But since only the price of a subway ride and not its actual cost appears in official reports, the CPI again appears much lower than it actually is.
Thousands of goods and services in the United States are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system and much of what we eat.
Considering the above list, 7% might be much too low an estimate for the present real U.S. inflation rate!
Next time: we'll discuss the economic consequences resulting from the manipulation of the CPI.
* * * * *
posted by Bob Moser at
6:31 PM
1 Comments:
I agree that the subsitution method is being abused.
Rent does not equal property prices. And 70% of the nation owns now.
And every feature added to a TV is taken out of the price, even if you can not buy a TV without the feature.
The orignal idea if apples spike in price, people will buy oranges instead made sense.
For a real link to a real site that is usually all over this inflation stuff check out:
http://www.financialsense.com/
Its a pretty bearish show or bullish if your into gold.
By
erik, at 6:15 PM
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