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

ilene's picture

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

Individual articles featured in the Market Shadows newsletter become available over the weekend, here on the website.
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rsnoble's picture

My as well go buy an everlasting gobstopper.

new game's picture

watched margin call last nite and i am rilled up again.

see, it directly impacted me as a r.e. broker.

things were fine until green fuck loosened monetary policy to the nth degree.

then human virtue took over, but what rills me is no consequences, or

shall i say delayed consequences as in burn baby burn OR who kilt the m.f'rs.

why are so many people not even angry? are we all that dumb fucked to the point

of being totally clueless? yea 50k is jack shit, but for the future it could be the lottery...

overmedicatedundersexed's picture

people ben kilt for a lot less.

10044's picture

"The Fed's almost unlimited bond buying (money printing) took away the ability of 'the free market' to set interest rates."

No, it's the Fed "itself" that's the cause not its programs.

Westcoastliberal's picture

More government doublespeak.  BLS, CPI, we need to outlaw 3 letter abbreviations of bureaucracy.  Call it what it is, bullshit!

otto skorzeny's picture

I remember being in high school in the mid 80s- you know gas was $1.50 a gallon, a Big Mac was $1.50, and a case of beer was $6- and thinking that $50K would be a great salary- now 30 years later all that  shit has doubled or tripled in price  and now thinking that same $50K is still considered a great salary. Fuck you Fed

rocker's picture

Note to Ilene, I gave you a 5 Star Rating. I agree with you 100%. I just disagree with that other guy. Have a Great Day.

masterinchancery's picture

See Shadowstats for something realistic.

akak's picture

I have to admit that I believe that ShadowStats actually somewhat overstates the true, overall rate of "inflation" (US dollar depreciation) --- but not nearly as much as the BLS disingenuously, maliciously and insultingly underreports it.

madcows's picture

AKAK, I've been tracking my personal inflation numbers for the past 6 years now.  I have inflation this year at over 11%.  Shadow Stats is pretty close to that.  BLS has it at about 2%. 

Food is up 11.36% YoY, Gas is up 5.44% YoY, Clothing is up 6.6%, "Walmart" is up 36%. 

Everyone knows they are being lied to, but is powerless to change it.  You vote out one bum and the next bum punks you even harder.  You can't excape it except to leave the country, and even then, where are you going to go?

SWIFT 760's picture

Ron Paul put it best when he punked Jewnanke... (paraphrase) "see this silver coin, it has the same purchasing power as it did 30 years ago unlike your fiat currency. Fiat currency continually needs more to buy the same item over time..."

Fishhawk's picture

So politicians lie, and when they need a really big lie, they get statisticians to fluff up the edges with lots of false numbers.  Inflation is rapidly approaching the largest tax bite, and the politicians do not fear its impact on their re-election, since the proles do not connect the profligate spending by big govt to their actions.  Spending just happens, and it's nobody's fault.  Bummer.  


ebworthen's picture

If they had to report real inflation they would have to increase lifelong taxed Social Security payments.

Can't have that!  Oh no.  Bail out the banks and insurers and corporations and screw the citizens.

They are working on "chained CPI" which will reduce inflation adjustments for everyone but the bankers.  Yes, your "chains" of slavery are being forged daily.

The whole U.S. Government and Financial system is a Ponzi.

nmewn's picture

Now eb, you know they can't report real inflation, why, everyone would want true adjustments to their "entitlements".

Much better to promote the lie, stay in power offering reform and platitudes and boil the frogs more slowly so they don't jump out.

Peace in our time, Chamberlain ;-)

akak's picture

I always, and instantly, discredit any kind of economic or financial "analysis" in which the laughably lowballed CPI as issued by the BLS is implied to have any relationship to reality --- any ten year-old child with two eyes and a reasonably functional mind can readily see that the CPI is nothing but grossly manipulated and desperate pro-Establishment propaganda.  Who really do they think they are fooling?

Reformed Sheep's picture

The sad reality is they are succeeding in fooling most of the people. Folks here at ZH and similar sites are in the minority by looking at the data beneath the 'data'. The sheer scale of the lies and manipulation is so vast it's hard for a lot of people to believe it's credible, so they dismiss it.

hairball48's picture

Good article.  I'll be 65 soon. I remember the inflation of the 70's very well. And this time it will be different :) 

It'll be a shitload worse. I cannot wait till interest rates rise. The sheeples will shit in their pants LOL!!

Gold bitchez!

MassDecep's picture

If /when interest rates rise, pigs will fly. They will take this ponzi to the BITTER END.

You can bank on that.

Silver bitchez!

Winston Churchill's picture

Me too.

Had just bought my first house.In the space of 12 months my Note went from

6% to 16.5 % interest.No fixed interset back then.At the same time my business

income dropped 50%.A salutary lesson early in life.

vato poco's picture

I'm a mite younger, but I remember the '70's damn well too. These evil days scare me much more than the Nixon/Ford/Carter years ever did. At least then, we could sort of count on the stats coming out of FedGov being in the neighborhood of semi-honest, so we could accurately gauge just how fucked we were. Now? Not only do they blatantly lie their asses off on the inflation numbers; and stopped posting U-6; and M-3, and all the rest.....

Now they make no bones about the fact they're lying their asses off. They don't even _try_ to make 'em look kosher. They march up to the podium with big sneering shit-eating grins, tell us "Here's this month's batch of bullshit...I mean *honest statistics*", and walk away laughing at us - not caring a damn that we _know_ they're lying to us. What exactly are the proles gonna do to their Federal Masters anyway? "Address your complaints to Jon Corzine, losers!"

I think they can keep kicking the can down the road for longer than ANY of us here think is possible - did anyone here really believe this leaking boatload of fail would still be afloat and making profits for the banksters back in '08? I sure didn't - but you're dead on about one thing, Hairball. When at last the shit -> fan, it's gonna be a shitload worse than they can ever imagine.

Bindar Dundat's picture

Higher interest rates will be good for America. I started my company in 1982 when rates peaked.  I never borrowed a penny and boot strapped my way to build up a $ 200M/year profitable business over thirty years.    

Time to let the natural order of things take control  --  higher interest rates will tame the Feds and bring sanity back to the markets.

seataka's picture

Perhaps not, unlike the 70's prices are all set electronically now, the system has been built able to deal with inflation.

apberusdisvet's picture

Switching from Top Sirloin to hamburger doesn't work; by my reckoning hamburger by the pound has nearly doubled from 1.69 in 2008 to $3.20 today.  I keep receipts.

lynnybee's picture

"  I keep receipts. "  ... & i keep it all in my head, 60 + years of shopping & being price consious.   HAMBURGER MEAT was 59cents, gasoline was 19cents, a burger was 19cents & the fries were 15cents & the Coca Cola was 10cents,  the HERSHEY BAR was a nickel, & a box of graham crackers only cost 38cents ... END THE FED, those assholes have ruined this country.

SheHunter's picture

A cow elk tag costs $45 bucks...add another $20 for diesel and another $20 for beer and eats to pay back friends for helping cut and pack it...the freezer is full for the year and Bernie can just F-- himself.  Its called survival ZH'ers..get with it.

Stuck on Zero's picture

Sorry apberus.  By this time you should have substituted lawn clippings for the hamburger.  No inflation there.


Stuck on Zero's picture

Sorry apberus.  By this time you should have substituted lawn clippings for the hamburger.  No inflation there.


rocker's picture

Hate to tell ya, but to rely on anything from Fear Selling Robert Preacher is a discredit to Zero Hedge.

Prechter has been wrong for Four, (4) Years straight.

Bear's picture

Well maybe next year will be his charm ... As the Bear I've been wrong since 2003 (excluding 2008)

TruthInSunshine's picture

Breaking news: This article is written by Paul Price. WTF does Robert Preacher have to do with anything? Better yet, who is Robert Preacher? Oh, you meant Prechter? He only is mentioned in passing and briefly. The bulk of the article has to do with headline versus actual inflation; do you have any relevant and specific comments on that?

NoClueSneaker's picture

I do not have a qualified comment, ( me dumb ), but I'd like to see an contribution of the Greatest Economist of All The Times to ZH:

Ph.D. of Interplanetar Economy, Sir Terry Pratchett .

( Discworld has a predictable economy, the wizzards are mad, but that's inpriced ). 

ilene's picture

I took down the chart, and will get back to this later. There's a connection in my mind, but I didn't make it.  

rocker's picture

You might want to start by going back a couple of years, which when, Prechter used a dictionary photo paged to the word deflation as a advertisement for his newsletters.

Suggesting in his letters, he said we would have deflation to look forward to. He also said in the same many times, "The FED does Not Matter." Since then I have seen many food items I buy double or triple. Gas go up from 2 to 4 bucks, per Romney in debates, Electricicty has sky-rocketed. Medical insurance doulbled too. Deflation ??? Not.

In his FED does not matter rant he also suggested that the FED can not make the stock market go up or create inflation. As a matter of fact, he suggested the market would start it's crash. To about DJI 1000 or less. Some say he still holds that forcast. While I agree with your assumption that Bonds will end badly. He is not the Tool I would use to confirm any reference of facts that predict anything. His track record is awful.  I could go on. But I think you get the idea now. I think he is not worthy of future economic outcomes.

Probably good that you removed his chart. I here he's fussy about that stuff too.  Promise, I will never tell, not my style. But others ???

Supernova Born's picture

Totalitarianism is how this ends. The statistics are a smoke screen allowing power to consolidate across the globe.

Akrunner907's picture

Why not just talk with John Williams at shadowstats.  

TruthInSunshine's picture

I was referring to rocker's statement, ilene. He happened to pick out the least emphasized aspect of Price's article and then waaah waaah about something that was totally unrelated to it.