Reason #52: The CPI and the Myth of Low Inflation

For years, we’ve had to listen to politicians and the media brag about how low inflation is. They’ve used the Consumer Price Index (CPI) to back up those claims. The CPI supposedly tracks increases in the costs of goods to average Americans. But the amount of flimflammery and book-cooking involved in generating this “official” number would make a mob accountant blush.

First of all, many politicians and media types like to cite the “core CPI,” or “core inflation.” This number is always lower than the main CPI. Why? Because the “core” numbers conveniently leave out the costs of energy, as in gasoline, and food-the two commodities that affect the common American the most!

That’s just the beginning of the CPI scam. In the early 1990s, Alan Greenspan and some other Washington whizzes decided to reset the way the CPI is calculated. Ever since then, inflation has been vastly underreported.

Many analysts believe the only way to get the real economic truth these days is to add a full 7 percent to the government’s CPI.

Greenspan’s new formula keeps inflation low by using “substitution.” Used to be, the CPI would monitor a “fixed basket” of goods and note how much each item increased in price over time. For instance, if the cost of T-bone steak went up, that part of the CPI’s basket went up as well. But now if one item’s price goes up too high, the government simply removes it from the basket and substitutes a different, less expensive item. In the case of a T-bone, they might put chuck steak in its place. And if that goes too high, ground beef.

Items in the basket are also weighted differently since Greenspan. If one basket goes up in price consistently, that basket just gets switched to a level of lesser importance in the overall equation. In other words, the CPI emphasizes parts of the market that are dropping in price or rising slowly, and deemphasizes the sectors that are going up more steeply.

Finally, the list price for many goods isn’t even considered in figuring the CPI. Instead, the Index-makers deflate prices using a method they call “henonics.” So, even though a new car costs more than last year’s model, the government doesn’t bother to plug the entire new price into its equation. Instead, a lower number is used. And just how do they justify henonics? They say this year’s model is so much better than its predecessor that the consumers are actually getting more for their money. But wait a minute. What’s that kind of logic have to do with price? It’s called the Consumer Price Index after all.

I know all of this sounds ridiculous, but it’s real. It almost makes me think I was wrong to say we don’t manufacture anything in this country anymore. Our government is mighty talented in manufacturing low inflation numbers. Many analysts believe the only way to get the real economic truth these days is to add a full 7 percent to the government’s CPI. And it’s agreed, if we were to use the pre-Greenspan formula, inflation would be up around 11 to 12 percent right now.

NEXT: Reason #53: Phony Unemployment Figures