Real Inflation: The Magic of Hedonics, Geometric weighting, Substitution, and Seasonal adjustments

I just stumbled on this piece that seems a nice primer on government manipulation of the CPI numbers and other key economic indices that make up the bases for cost of living/inflation adjustments and the like. Is this a good explanation for those of us not well-versed in the economic side of this? Some snippets:
A caller into a Washington D.C. talk show asked a very pertinent question regarding the business of living. "Have they changed the way they measure the rate of inflation? The CPI report in May was zero percent, excluding food and energy. If you take those things out, that is what is primarily driving up everything. What would be the real inflation rate, if you add back everything they take out?"
The caller was smart enough to know something changed and he was right. In the early 90's the government realized it had a problem with rising entitlement costs for Social Security, Medicare, and government pensions. These entitlement payments were indexed by the inflation rate each year. With inflation on the rise it meant these costs were rising faster, thus making government deficits much worse. In order to bring the government deficits under control, it would be necessary to bring rising entitlement costs down. One way to lower entitlements would be to bring the inflation rates down, which would translate into lower Cost of Living Adjustments (COLA).
Doesn't this sort of manipulation make a crash even more likely, the longer we wait to see that there is an actual problem, doesn't it mean that, when the problem actually arrives, the fall will be worse?

This is exactly what I have been talking about regarding the rationality of politicians of both parties. They will continue to practice inaction like there's no pressing problem, of course, until the real problem hits, then they'll blame each other and we'll be left holding the bag.
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"They will continue to practice inaction like there's no pressing problem, of course, until the real problem hits, then they'll blame each other and we'll be left holding the bag. "

Of course.  Until the issue becomes a threat to their re-election, they have no reason to stick their necks out.

The obvious thing to do, beyond taking matters into your own hands, is to create that threat.

Super G, could you please disable the "There's more..." feature? I think it would nicer to just read posts completely without clicking it. Ok, not a big problem but please consider it. :)

While I don't want to defend the under-estimation of CPI at all, and it certainly does disadvantage anyone on a CPI adjusted income, I'm not so sure it makes a crash worse when it does come.

Could this just be a case of letting price inflation, which would seem to be inevitable as energy costs rise, occur quietly (while suppressing the urges that lead to wage inflation) ?

On the downside it results in the poor getting screwed while those who have income producing assets can protect themselves somewhat better from rising costs.

But on the upside perhaps it prevents (or at least slows) the slide into higher (hyper ?) inflation that you get when wage inflation becomes the norm to compensate people for price inflation. When the fundamental force is rising energy costs, the vicious circle of price / wage inflation is only going to result in even more economic damage than rising energy prices will cause anyway...

Just thinking out loud though - personally I'd prefer reliable CPI data and some proper policies put in place to increase energy efficiency and diversify sources of energy...

First, I agree with disabling the "There's more" feature. Not a bid deal, but...

Second, I think we should let it rise. It's the only way to get the government to act. I had wondered what happened to the COLA. It was a big deal for a while in the 90's then everyone seemed to forget about it. I guess they really did just sweep it under the rug.

It is not just the CPI they fiddled with to underestimate it. They fiddled with the methodologies of calculating the unemployment rates, so that they are underestimated. The rest of the world does not do it. It is a political decision made in the US to weaken the Labor movement, and to disempower the poor. These, along with the decimation of the Air-Controllers Union and the decisions made on welfare and social security were a part of the war declared by Ronald Reagan on Labour and the Poor begining in 1981.


This shouldn't be a news flash to anyone. Mark Twain wrote about government and politicians in language simple enough for even Joe SixPack to understand. This is nothing new and surprise is naieve.


Again, this is not new here under our Sun. Money buys people, and big corp managements use it to feather their own nests. Their employees get wages, but the Big Dogs get the bonuses from screwing and lying. Please, show me I'm wrong.

The unholy alliance between corps and government to the detriment of the general populace is what kept our forefathers sleepless when writing the key foundation documents of our country. It has been totally corrupted over time, and this is the reason that looking to government for answers is not going to work. There is no government by the people or for the people any longer. It has all become about money and power. To get into public office is the most life changing thing to happen to any American.

First to go is the moral compass - it is removed because it impedes the politicians ability to make hedonic adjustments. The heart is then disconnected from the head, as this connections causes the politician discomfort when he is forced to screw his electorate. Finally and unfortunately for the rest of us, a partial lobotomy is peformed where gray matter is replaced with cash register logic boards. All you need to do is insert money and pull the lever - cha-ching! You now have what you wanted.

I had friends who became politicians. Past tense on every single one...

Crash is an extreme word.

Does it help hide problems? Sure.

Are the new numbers uniformly less meaningful than the old? I think that's hard to say.

Are they suppressing the CPI, and just telling us COLA? No.

I've read other criticisms of the CPI. The interesting thing for me was when I tried to talk to friends about it - The man on the street doesn't know, and doesn't really want to hear, that the calculation has changed. There is a lot of trust built up for "the CPI." It runs deep.

Based on my limited reading, I think the numbers are being misused a bit, but I think idea of a split in kinds of CPIs was a good one. It was probably too much to hope that one number was going to tell you both the impact of inflation(s) on the middle class, and the imact of inflations(s) on poor and fixed income folks.

I think the best CPI numbers would tell you who in society is being squeezed (if any) and by how much.

When I posted the link to this story last week, the apparent reaction was yawns all around as nobody commented. I guess everyone understands that any information provided by the federal government is suspect, and the article proves that the current credibility gap is bipartisan and longstanding. My own reason for why has to do with placating the Bond Market, which people may not know is many times larger than all US stock markets combined, as grossly understating both CPI and unemployment plays to it, and keeps the massive financial flows coming from abroad needed to keep the economy afloat. I agree that the misstated data won't make the crash any worse when it comes, but it might bring it on sooner once central banks holding US Treasuries learn that their real yield is negative. One might also imagine what any corrective action would do--the debt bubble would pop as interest rates tripled to where they ought to be now.

The elite in their greed have set themselves and the rest of us up for a very big fall. When, not if, now becomes the issue. And another question is, how much will the dollar need to be devalued for it to regain international acceptance as a currency, and what if anything will replace it as the world's reserve currency?

Somehow most websites that predict inflation, depression, gloom and doom are websites run by people who want to sell you gold.

If you look closely, this is one of them. Caveat emptor