Washington’s Biggest Lie (and Why it Continues to be Told)

Washington’s Biggest Lie (and Why it Continues to be Told)

From The latest Market Shadows newsletter: A Failure to Communicate: Numbers, Rates & Lies

By Dr. Paul Price of Market Shadows

Normal people have no trouble defining how they measure inflation in their own lives. They compare what the same exact purchases of goods and services cost them today versus one-year earlier. It would include everything they spend money on.

Big ticket items like gasoline, insurance (health, life, auto and property/casualty), food and utility bills have the greatest impact. Increases in other major expense categories such as college tuition, property taxes, FICA, Federal, state and local income taxes can also add tremendously to the year-over-year true cost of living.

Those of us old enough to have lived through the 1970s remember the bad old days when prices were escalating at a sickening pace. An item that cost $1 on Jan. 1, 1969, cost $1.31 five years later. At the end of the ten year period, the cost had shot up to $1.92!

The officially reported 1980 CPI increase of 13.91% was the ‘straw that broke the camel’s back’ in terms of what our leaders were willing to admit to. They decided to change the way CPI was calculated to avoid making people even more upset.

Intentionally understating CPI also served to diminish COLA (cost of living adjustments) in government salaries, pensions and social security obligations. It also kept the rates paid on government borrowing somewhat below what would otherwise have been demanded by bond vigilantes. Those nasty lenders insisted on being compensated for the fast-diminishing value of their dollars.

Unions across America used the high CPI rates to justify huge increases in pay and benefits. While inflation calmed down from the roaring period described below the BLS again adjusted their calculation of CPI in 1990 to further understate the truth as most of us see it.

Today’s headline core CPI excludes food and energy completely. That’s impossible for us to do that in our real lives. Remember the old sub-$2 per gallon gasoline prices? How about the health insurance premiums, grocery expenses and electric bills you’re paying today versus four or five years ago?


(Chart above is looking at the compounding inflation starting on Jan. 1 , 1969 – so baseline starting point is on Jan. 1, 1969.)


CPI Year-to-Year Growth

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the U.S. Government’s Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not-seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

The chart below shows the Shadow Government Stats -Alternate CPI estimate. It figures inflation based on our own government’s official methodology for computing the CPI-U in the years through 1980.

Under the old rules US inflation has been in the double-digits for much of the preceding five years. The ‘new’ BLS numbers want you to believe price increases since 2008 have been quite mild.

The Bureau of Labor Statistics also uses a technique called ‘substitution’ to hold down their reported inflation figures. If an item in their index goes up in price they can assume consumer would simply trade down to something cheaper instead.

If your favorite rib-eye steak went from $7.99 to $12.99 per pound you’d simply eat hamburger instead. Have those organic bananas gotten too expensive. Try prunes. Need a replacement for your Lexus? Buy a Kia instead. Presto, there’s no inflation evident in any of those situations according to the BLS.

All these changes in the way CPI is calculated have been duly disclosed to the public. That doesn’t make them any less dishonest when viewed the way most people gauge changes in their real cost of living.



Chart courtesy of Shadow Statistics. The chart above compares the official CPI-U to the pre-1980 methodology for computing the CPI-U. It shows that without the government’s manipulation of the methodology for computing the CPI, current inflation would be nearly 10%.



Fed Chairman Ben Bernanke has put Bond Vigilantes on the endangered species list with his multiple, and now eternal QE programs. Interest rates are no longer useful as measures of present or future inflation.

Bond Vigilantes are people/institutions that insist on coupon rates (i.e. interest rates paid on bonds) being high enough to offset inflation. The Fed’s almost unlimited bond buying (money printing) took away the ability of ‘the free market’ to set interest rates.

This rendered useless the ‘diagnostic’ value of treasury bond rates as a measure of true inflation. Currently, the interest rates on bonds are much lower than actual inflation, making real interest rates essentially negative. That is why I would avoid bonds like the plague.

If truth in advertising were being strictly enforced the BLS might be renamed just the BS.

Please post comments to this article letting others know which view matches your personal, real-life experience.



From The latest Market Shadows newsletter: A Failure to Communicate: Numbers, Rates & Lies

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