Walter J. “John” Williams is an economist with a website called Shadow Government Statistics..
It leads off with an arresting graph claiming to show a big gap between the true rate of inflation and the official Consumer Price Index (CPI):
I don't know if I am qualified to opine as to how accurate this chart is, and to be honest I haven't delved deep enough into the supporting materials to form a view.
But the bones of the argument are simple: the revised official Consumer Price Index (CPI) is a lie, since it leaves out food and energy, and these goods are a major part of household purchases. As the prices of these goods are rising much faster than the items in the basket tracked by the CPI, the series fails to capture the real measure of inflation.
A corollary of this conclusion is that most workers' wages, which were barely keeping up with the CPI if that, have in fact been eroding in real terms (while the richest get much richer).
Why might a government design a misleading CPI in this fashion? The answer is overdetermined. There may be some technical advantages to ignoring cyclical commodities (those pesky 'seasonal adjustments') and manipulated foreign / exogenous commodities, but surely these must pale in the face of the importance of food and fuel?
One cynical reason is that the rate of increase of lots of federal transfer payments are based on the CPI. Keep the CPI down and the feds don't have to pay beneficiaries as much. Should payments to social security beneficiaries be much higher?
Another reason that I can imagine (and this is just my idea, not one I found at Shadow Government Statistics) is sort of Straussian. Inflation has a psychological element: people raise prices (or wage demands) in an effort to at least keep pace with inflation, thus spurring more of it. If inflation gets out of control, especially if coupled with lousy monetary and fiscal policy, this competition to stay ahead/stay even can even lead to hyperinflation. One way to keep inflation lower than it might otherwise be is to persuasively mislead people as to extent. If people believe the CPI is a good measure of inflation, and they are therefore deluded into believing that inflation is 2-3% lower than it actually is, that must surely have a significant anti-inflationary effect.
At least until it is found out. Note that Williams also argues that if inflation is measured right, the GDP deflater grows too, shrinking the true measure of GDP…. Do we have national money illusion too?
This is something that I’ve long believed to have been an issue myself. It has never made sense to me that the government tells people their cost of living has increased by X, excluding two of the largest household expenses. I can’t go to the local gas station and say “well, I’m not going to pay the higher gas price because that is just a seasonal fluctuation and doesn’t have any impact on how much money it costs me to live.”
Obviously, there are fluctuations that happen, which need to be accoutned for in some fashion (maybe some sort of normalization or weighting scheme), but to simply exclude these itmes from CPI makes even less sense.
The CPI does not exclude food and energy prices. Based on the Survey of Consumee Expenditures (the 2005 survey is at http://www.bls.gov/cex/csxann05.pdf), the current weight assigned to food (as a broad category) is 12.8% of the CPI; the weight assigned to energy is more difficult to calculate. However, the weight for “utilities, fuels, and public services” would be 6.9%, and the weight for “gasoline and motor oil” would be 4.3%.
There is a version of the CPI, called the “core” CPI, which does exclude energy and food. Energy and food prices are more volatile–they both rise and fall more than do prices for most other categories of consumer purchases. Since 1960, the rate of inflation has averaged 4.17% per year using the total CPI, and 4.14% per year using the “core” CPI.
It’s not clear to me that anyone is doing anything that’s nefarious here. How one would construct the charts shown in the post is also something I don’t understand, and cannot replicate.
Donald A. Coffin
Associate Professor of Economics
Indiana University Northwest
I have nothing to say about the CPI except that I’ve never seen the logic of core CPI given that, in an era of rising gas/oil/energy prices (notoriously sticky on the upside), the cost of everything that remotely involves transportation or climate-control or heat will inevitably rise. That most especially includes food, in which oil-derived inputs from producing and processing must be huge.
Walter Williams. Yes, he once spoke at my campus. The topic involved his usual sharply-worded dogma that taxation is theft. Williams graduated from Temple, did his graduate work at UCLA, and at the time held a faculty position at George Mason. Every one of those fine institutions is public. After he spoke I intended to ask him when he had repaid the taxpayers of Pennsylvania and California for his education, and how he justifies taking tax dollars from Virginians to put in his own pocket. I kick myself every time I see his name in public that I didn’t get the chance.
“… Why might a government design a misleading CPI in this fashion? “
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Because that government is guilty of deliberately inflating (debasing) the national currrency for its own financial advantage. The CPI is bogus propaganda.
U.S. inflation is deliberate government policy, but the mechanism is subtle and easily hidden. Few Americans have any clue as to what ’causes’ inflation. They only sense the primary ‘symptom’ of inflation… a general rise in prices — falsely attributed to some mysterious, inherent defects in a market economy.
Inflation is an increase in the money-supply, and not a rise in prices. Only the U.S. government can legally increase the money supply via its Federal Reserve central bank — and that they do. The U.S. Dollar has lost 95% of its real purchasing value since the Federal Reserve was invented in 1913. The “Fed” is the engine of inflation in America– that’s why it was created & why it exists today.
The U.S. Federal Government produces as many U.S. dollars as it wishes to spend, at essentially no cost.
But they like to keep such malicious activity at a moderate level to conceal the scam.
Although the government does still occasionally ‘counterfeit’ extra greenbacks outright, the preferred method is known as ‘monetizing the Federal Debt’ — the U.S. Treasury basically puts ink on paper and calls them securities (..IOU’s), and sells them to the Federal Reserve. The Fed buys those IOU’s with with electronic bank account ‘Dollar ledger-entries’ that it creates from nothing. Suddenly and magically, the Federal Government now has brand new “Dollars” to spend.
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” It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning. “
{– Henry Ford, Sr}
DillonB: Isn’t what you describe pretty much what Alexander Hamilton had in mind with the first Bank of the United States?
What you suggest may be the case, I’m sure. I do recall seeing somewhere that in practice moderate inflation (in the 2% or under range) works out better for businesses than actual price stability, were that possible. I do remember the 70s, though, and hold no brief for serious inflation.
As a naive layman it seems to me that the big economic action right now is how the rest of the world (Europeans with Russia mainly) aims to prevent us from exporting our inflation as we were able to do in the Vietnam era because of the dollar/gold peg. What they’re doing instead is making sure oil prices stay high. Ours is the economy most affected by sustained high oil prices and the least prepared to deal with them; everybody else can pretty well live with the consequences one way or another. The effect will be to devalue the dollar against *the* key commodity in our domestic economy without anyone having to make overt moves to devalue it against actual currencies, thereby preserving themselves against invasion and other unpleasantness.
The real beauty is that bush himself and his people will never see it– they’ll be too busy chortling over all the money they’re making from high oil prices.
A few more facts. Which this discussion could use.
1. Over the two years (August 2005 to August 2007), the average annual rate of inflation using the overall CPI has been 2.9%.
2. The Bureau of Labor Statistics does not report an annualized rate of inflation for the core CPI (excluding food and energy prices), because it does not think that’s an appropriate thing to do. You can calculate it if you wish, but why would you? [If you did, the core CPI (excluding food and energy) over the past two years has averaged 2.5%.] It’s designed to abstract from short-run volatility, not to tell a long-run story.
3. The core CPI shows a faster rate of inflation in 11 of the last 24 months. The two indexes show the same rate of inflation 3 times. The total CPI shows a faster rate of inflation 10 times.
4. The core CPI is much less volatile–which is what it’s designed to be. The range of annualized monthly rates of inflation using the core CPI varies from a low of -1.8% to a high of +7.9% (the core CPI fell in 3 months, was unchanged in 1 and rose in 20). The rate of inflation measured by the overall CPI has a range from a low of -9.2% to a high of +15.7% (the overall CPI fell in 7 months and rose in 17). But, again, the average annual rate of inflation over the period isn’t all that different regardless of which you use. And over an even longer term, they are essentiall identical.
5. The BLS also calculates other CPIs, excluding other things. There’s one that’s all items excluding medical care. And one that’s all items excluding shelter. Nobody ever talks about those.
I think if you look at the facts, the conclusion you reach is that the core CPI is not a nefarious means of trying to persuade people that the rate of inflation is lower than it actually is. It’s a policy tool that allows a focus on longer-term trends in inflation–and, as a result, the Federal Reserve tends not to obsess about monthto-month changes in the rate of inflation. I don’t think anyone can argue (successfully) that the Fed has ignored inflation of late.
Donald A. Coffin
Associate Professor of Economics
Indiana University Northwest
Thank you Prof. Coffin. (Doesn’t this blog have great readers?)