How Government Should Cheat on the CPI

ilene's picture

It's bad enough that the government measures inflation as "core inflation" excluding energy and food, as though we aren't buying those things. But now members of both parties want to save money by switching to another measure of inflation that substitutes the favorite things you buy for inferior products you don't want - because if you switch from steak to hamburger, then the new hamburger at the old price of the steak means NO INFLATION. Your life style may plummet, and your health may too, but that's besides the point, according to Bloomberg's mindless analysis.  ~ Ilene

How Government Should Cheat on the CPI – by Bloomberg Businessweek

Courtesy of Dr. Paul Price (at Real Money)

Those who fill our own gas tanks, pay utility bills, contract for our own healthcare and purchase groceries know intuitively that inflation has been quite high over the past few years. Government agencies tell us we’re wrong and that prices have only risen 2 – 3% annually. They love to speak about ‘core inflation’ which excludes food and energy. Please raise your hands if you don’t partake of those items and thus don’t care about their costs.

This week’s Bloomberg Businessweek (Apr. 30 – May 6, 2012 issue) proposes a bipartisan deficit fix they say would produce $300 Billion in combined savings and tax revenues over the next decade. How would they accomplish this? Switch from the current standard CPI calculation – the Bureau of Labor Statistics market basket of 80,000 goods and services weighted to reflect what they claim are consumer spending patterns - to the BLS’s chained CPI.

What is chained CPI? The BLS says that when prices for specific items go up, consumers often substitute lower-cost goods instead of buying their old favorites. While the standard CPI measures the same basket of goods every month the chained CPI would assume steak lovers would trade down to hamburger or Granny Smith apple fans would settle for lower priced oranges should apple prices surge. Bloomberg suggested that consumers might even react to price increases in one item by going to another category altogether. If ‘bacon and eggs’ gets too expensive, why not simply have some cold cereal?

This alternative measure of including price substitutions is literally an apples-to-oranges comparison rather than noting the change in prices of exactly the same goods and services from the month before, as the average person would expect.

The chained CPI would assume that higher absolute prices force people to ratchet down their standard of living rather than pay more to maintain their normal choices. BLS says that this would lower reported CPI by 0.25 to 0.35 percentage points versus the apples-to-apples standard CPI calculation.

The Congressional Budget Office [CBO] estimates that the lower, chained CPI, would save $112 billion in Cost of Living [COLA] adjustments to Social Security recipients alone over 10 years. They see another $33 billion in COLA savings from other indexed Federal spending such as pensions, plus adjustments of tax brackets, exemptions, credits and deductions.

Bloomberg notes that many people’s wages would then be rising faster than the newly adopted CPI index, generating another $90 billion in extra taxes due to bracket creep over the next decade. They claim it would also reduce interest payments on the debt from inflation-linked Treasury bonds [TIPS] by $44 billion more over the next 10 years.

Businessweek’s editorial mindset is to skew the reported numbers to lessen government outlays while raising taxes without any fanfare or public debate.

Bloomberg thinks that retirees, savers and taxpayers should all accept lower standards of living in order to fund $300 billion in extra taxes and/or forgone COLAs. Those who bought TIPs thinking they were getting true inflation protection, via honest reporting of government statistics, can go straight to hell. Do NOT pass GO, do NOT collect $200.


Source: Bloomberg Businessweek's "Chained CPI Switch Is a Slam Dunk, Even in Election Year"

Sadly, Congress and the White House seem incapable of agreeing on substantive measures to tackle the $10.4 trillion mountain of U.S. debt.


But there is one long-overdue piece of important business that can and should get done: The adoption of a more accurate gauge of U.S. inflation that would yield immediate savings and help put the economy on firmer ground. The fix has already been endorsed by lawmakers in both parties, the Obama administration, many economists and a series of bipartisan deficit-reduction panels. Best of all, it would help shore up Social Security. Trustees for the retirement fund on April 23 projected it would run dry in 2033, three years earlier than last year’s forecast. (my emphasis)


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My thoughts: 

"All you can do is prey for a quick death, which you aint gonna get..."

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cynicalskeptic's picture

Has ANYONE in the history of unbacked fiat currency EVER gotten back the same buying power that they paid for a government bond  ('Inflation protected' or not)?  

Government bonds are a huge con game - with the interest paid never matching the REAL inflation that occurs.    The whole 'inflation is good for everyone' meme is a crock.  Over the course of my life I've seen inflation bring the cost of houses from tnes of thousands to hundreds of thousands,  the cost of cars rise from thousands to tens of thousands and a simple candy bar go from 5 cents to over a dollar.      If you have been lucky ernough to find an investment that appreciate in value (not necessarily even keeping pace with inflation) you have to pay capital gains tax on that appreciation.

You're screwed on many levels.  You lose purchasing power to the inflation caused by goernment proflagacy and then pay taxes on the 'capital gains' that occur on the value of any assets you own due to that same inflation.


rsnoble's picture

BTW don't forget the 12oz for 20oz trick.........same price, same size bag.  Just 2/3 air now.

Anyone eat a Hungryman tv dinner lately? Seriously go buy one.  It should be renamed Hungry3yearold girl.

Save me the fucking nutrionist bullshit. Watch Dr. Oz lately?  What is that guy in his 50's? Looks like shit to me.........he won't live any longer than me I can see that right now.

rsnoble's picture

Why would Ben Stinky give a fuck even if he does buy his own goddamn groceries? As if the grocery bill is a grave concern for that poor fucking asshole sack of dog shit!

Justaman's picture

There is no inflation protection except perhaps PMs once the Feds stop manipulating them.  

strangeglove's picture

I know, ive been drinking Jim Beam instead of Jack Daniels since 2007 now. Im actually starting to like it too.

ThisIsBob's picture

After a couple, its hard to tell the difference between Port and Night Train.

odatruf's picture

Shudder.  The day I switch from Makers Mark to a lesser bourbon is the day I will raise the white flag.

strangeglove's picture

You get used to it Bob Evans is even cheaper!

ebworthen's picture

"Old Grand Dad", mmmmmm.....

The Alarmist's picture

No, when you trade down to the generic Bourbon at places like Aldi it is over. Even the poor Russians hung in there to the bitter end, drinking perfume and anti-freeze to cope with their miserable lot.

The Alarmist's picture

" I had the most absurd nightmare. I was poor and no one liked me. I lost my job, I lost my house, Penelope hated me and it was all because of this terrible, awful Negro. "

- Louis Winthorpe III in Trading Places

Life imitates art ... art shits on life.

AldousHuxley's picture

life = art


but appreciation of life/art depends on one's experiences.


seeing something as "art shits on life" indicates that someone has been shat upon in his/her life. well, monkeys throw shit back. civilized humans take shit in.

Canucklehead's picture

CPI is relative.  No one truly knows whether the previous way of calculating the CPI was accurate.  I think everyone would agree that it wasn't precise.

The obvious solution is the MIT computerized index calculator model.  As it is computer code based, there is a chance it too may be tweaked.  The solution to that potential problem is to have a few other entities publish a similar index.  Transparency will allow those interested to use the data in a reasonable manner.

Now the "true" use of CPI is that of a political football.  The BPP can be simulated a few times (in a proprietary manner) and correlations determined.  If CPI does not properly track "true" inflation, the variance can be measured and presented for political purposes.

How does the tweaking of CPI affect the big picture?  As everyone understands we have an unsustainable situation at hand, politics will be used to bring this variance into line.

Draw your own conclusions and govern yourselves accordingly.

AldousHuxley's picture

Government controls CPI...not the numbers but the supply of goods and services underlying CPI measure.


Healthcare costs going up? socialize it and produce more Doctors. Like a GPA of 4.0 and 3.95 matters in real life. Doctor supply is artificially controlled by the government.


Hospital costs going up? government can build more of it.


Food costs going up? government can get rid of subsidies and trade barriers (yes, we dont' have free sugar tariff). also getting rid of food stamps means less demand so prices will go down.


Housing prices going up? government can liberalize construction permits....California has plenty of land. Just the rich elites want restrictive policies to limit building permits so their old ulgy homes go up in value.


Gas prices going up? government can cut fuel taxes. Also negotiating better deals with Iraq and Saudis help too.


Education prices going up? government can bypass banksters and provide education directly without loans like elementary education.


Government has the power to kill people. Yes, government can control inflation especially US where only primary dependence is oil. Most people don't need shit made in China anyways.


brokenspoke's picture

If food stamps were cut 50% I bet steak would drop at least 25% in price.

onlooker's picture


If cost of living goes up, Government workers and Social Security recipients get more money. If the numbers were not a lie, monthly raises would be above my pay grade to grasp. They would be LARGE.


Not to say the U.S, Government does not lie for other reasons also. There is political unrest/re-election, reduced spending and investing, and tax fraud. There is also the unfriendly foreign government that might use the accurate information for negative purposes.


Tax fraud?? How would reduced tax payment be a result of the Government spinning numbers? Well, if there was a concept that the Government was a thief and liar and was intent upon screwing the Citizenship, the citizens might be less inclined to be honest in paying money to the villain.


Yes, there is an incentive for the Government to be less dishonest in reporting all core information to the Citizens. There is also a benefit for Government to loosen the restraints and inhibitors for Citizens running small business. As the economic collapse continues, there are opportunities for small operators and novel concepts.


Things go better when the Government works with the people and not against the people. In that things are not working well now, Government might be wise to observe the Golden Goose and Golden Egg story. Government can destroy the Citizens but can not itself survive for long afterward.

Stuck on Zero's picture

Austerity for workers.  Audacity for shirkers.

AldousHuxley's picture

bring on Austerity.


Let's see how many business can survive when the poor Americans have to face reality and has to stop buying shit at Walmart.


Largest supporter of food stamps and government welfare is Walmart.


Old rednecks without social security will be living with the son in law's spare bed rooms like China or Russia and won't be complaining a bit about inflation because they are lucky they have food to eat.

Haloween1's picture

Anybody who knew how to read could see this coming since the mid - 1970's.  For 40 years, it's been no secret that demographics would cause a big problem starting about now,  The last time an adjustment was made to Social Security taxes was 1982, and at that time they claimed that Social Security was "fixed" until 2013.  So, Presidents Bush 1, Clinton, Bush 2 all knew this was coming and blew it off as somebody else's problem after they were out of office.  Now, it's going to be "grab yer arse" and do what you can.  The blame, if you're looking for someone to blame goes to yourself for ignoring the impending problem, and not noticing that anyone was doing anything to fix it.  Secondly, the blame can be laid at the feet of Bush,Clinton,Bush for being political animals rather than statesmen.

Either way, if you didn't pay attention over the last 50 years, and didn't make alternative plans, now you're going to pay.



odatruf's picture

Haloween - you are 100% right in my view. Voters and non voters in the US should point the finger at themselves. We have continued doing the same thing over and over again and I am not sure we even expect or deserve different results.  I can only conclude that we are looking forward to the ass fucking we will be soon taking. 

Long on lube.

PS - and Cruel Aid is right that Congress is just as bad - worse in my opinion - as far as not doing anything for decades.

Cruel Aid's picture

I don't know why you leave out congress. Congressional gridlock yields nothing and in owning both houses they see their opportunity to apply cronyism , ie: still do nothing constructive.

And yes blame yourself for counting on SS. Who here is ass deep in debt due to living large?

snblitz's picture

And yes blame yourself for counting on SS

The Fed is the one that drove all fixed income investments to zero.

The Fed among others is diluting the value of my savings to zero.

Exactly how does one prepare for retirement?

Many cultures now and in history have no concept of retirement.  That is my current plan, work till i die.

But then the young can not get jobs.  I suppose they can continue to live with mom and dad.

Havana White's picture

"Minus energy and food."  Fuck these lying-ass crooked motherfucking pieces of shit.  I remain perplexed, though, as to why no consumer protectionist group has filed suit to correct the lying about CPI.

ceilidh_trail's picture

They can play whatever games they choose. Our answer doesn't change- hold gold (+miners), energy, resources stocks. Avoid debt. Pray someone rises to the top who actually has morals and drive to restore this country to it's true potential...

Paul the Great's picture

Billionaire Bloomberg thinks the 'little people' need to pay an extra $400 billion while switching down to dog food for dinner.

He's so compassionate.

LetThemEatRand's picture

And aspirin is the inflation adjusted equivalent of [fill in your life-saving medication of choice].

Oligarchs.  They're all the same.

Jim B's picture

More lame games to screw the average American while the gutless politicians hide and shirk their responsibilities! Pathetic! 

Gidas19's picture

One manipulated number gets replaced with another manipulated number, wow... These CPI numbers are all garbage.

Seasmoke's picture

Just work backwards to achieve the numbers and story you need told

DavidC's picture

Just another thought, when the robots are trading on the news created by robots which is, in turn, actioned by figures that have no truth in reality, when this blows (and it will, given the derivatives exposures of the banks and The Fed - currently leveraged up at over 50 to 1), it's going to make 2008 look like a picnic. And when central banks are buying US stocks, does this not just demonstrate the absolute desperation of it all?

I'm feeling a bit depressed today.


DavidC's picture

Stalinist Russia all over again. Manufacturing hitting new records every year, crop harvests increasing every year, living standards increasing every year...except they weren't and aren't.

So when people are eating dirt there will be no inflation. And putting mud into their cars will have no effect on inflation because fuel is not considered in the calculations.

The ironic thing is that the Government is lying to itself as much as the people, trying to convince itself that the whole thing can keep going when the whole momentum means it CAN'T.

King Canute (Cnut) had his throne taken to the waves to show his sycophantic courtiers that he COULDN'T control the waves. The powers that be could learn a lot from that story.


disabledvet's picture

"If i take out Illinois i can keep it going." And "you laugh at disabledvet's check-kiting view." And yet "that's exactly how California pays its bills." With IOU's. PROVIDED the Bank of America accepts them of market capitalism is alive and well people! do not remain trapped by your love of argument...especially your own!

JustObserving's picture

We have more prisoners now than Stalin had - more Stalin than Stalin.

"Over all, there are now more people under 'correctional supervision' in America...than were in the Gulag Archipelago under Stalin at its height."

j.tennquist's picture

Reminds me of New York as the new model for the new concentration camp, but extended nationwide, potentially worldwide.

Via My Dinner with Andre (just the clip)


DavidC's picture

And the prison system in the US is the biggest supplier to the US Army, from what I've read (please correct me if I'm wrong on that, I live in the UK).


disabledvet's picture

that would surprise me actually. the standards are quite fact one question no one asks is "how can an Army so small prevent pretty much any terrorist attack from happening since 9/11 anywhere"? The mantra on George W Bush was "he kept us safe." It's not with "lot's of prisons" that's fer sure. That would be OVER THERE i might add. Trust me "Fox news has all the cover stories covered." How are your newspapers doing over there btw?

LowProfile's picture


How are your newspapers doing over there btw?

Don't know, only old or very curious people read them anymore.  Also don't care.  Fuck 'em.

Peter Pan's picture

The way they can really cheat on the CPI is to discount prices by the rise in obesity as this could be argued to be an example of some form of wealth effect which is not captured by the statistics. Call it another hedonic adjustment.

Ian56's picture

Official CPI statistics already include some switching, it is euphemistically termed "geometric weighting". All they are saying is they will do more of it.

All governments lie about inflation. The US government just lies a bit more than anyone else. 

Chain cpi was known about in 2005 as well and knew it was coming.  

From 2005

"Using the CPI's original (pre-Clinton Era) methodological approach of a fixed basket of goods (vs. substitution of hamburgers for steak as estimated by geometric weighting) would leave year-to-year inflation at about 5.7% instead of the official 3.0%. "


Stuck on Zero's picture

Here's the rub.  The costs that are going up the most are the bare basics.  Ferraris, Porsches, and yachts are not going up.  Corn, wheat, beans, oats, and potatoes are skyrocketing.  So as the poor move from hamburger to oats there is going to be a move to faster rising items.  Why?  The new middle class in China can outbid the poor in America and the rich will sell it to them. 

JohnKozac's picture

Speaking of which, "... The new middle class in China can outbid the poor in America..." I read the Perth Mint now focuses its  "high end" coins to the Chinese Middle Class in China and has cut supplies to the EU and USA. I am an 'oil bug' but maybe the Goldbugs here know more about that matter.

Ian56's picture

Yep food and energy about 8% or more. Yachts nothing.

PC's -50% over 2 or 3 years (hedonic adjustment).

smiler03's picture

 "The new middle class in China can outbid the poor in America and the rich will sell it to them. "

Don't be silly, they'll sell it to both (think iPads).

LowProfile's picture




DavidC's picture

Yes, hedonics ARE already used. Maybe it's hedonics on hedonics...?


LowProfile's picture


Again, WHAT THE FUCKING FUCK?!?!!@#$%!!!!!

GeoffreyT's picture

The ass-fucking of retirees (and TIPS holders) has been going on since the late 1980s when Greenspan  - yes, the same Greenspan... career lickspittle to power - was involved in reformulating the CPI: specifically recommending substitution effect, chain linking, and hedonics (and the final twist - owner-equivalent rent).

It was specifically planned, and has been executed according to plan. Governments across the western world have simply decided that inflation, unemployment and GDP will be whatever they decide they need it to be, and they will hedonicise the fuck out of the data until they get the numbers they want.

It was back in about 1994 that John Freebairn - at the time, the Head of the Department of Economics at my alma mater - made the observation that it "stuck out like dog's nuts" that government had altered the way it measured the unemployment rate so that the rate as measured was pretty much meaningless... by the simple expedient of removing people from the labour force and pretending it was the 'discouraged worker effect'.

He went on to assert that governments fully intended to do the same thing to the CPI and GDP measures, in a bid to hide the consequences of excessive fiscal and monetary malfeasance.

This was almost a decade before ShadowStats even existed.

I first wrote about how the BLS was going to continue to ass-rape retirees in 2004, in these posts - "Hedonics - Just for Starters..." and "More Statistical Chicanery..." .

The first one in particular is interesting, in that it includes a chart showing how "Computers and Electronics" were growing like mad in the 'real' GDP data, but actual nominal expenditure on them had been trending down for 5 years, and was lower in 2002 than it was in 1998. That formed the crux of my 2002 thesis that JDSU and other tech heavyweights were even more toast than they had been in 2001.

disabledvet's picture

but why? is it because "headline inflation is a bad thing while actual inflation is good"? nice call on JDSU btw. I believe they were a Canadian company however. Bankers love inflation...provided "it doesn't show up anywhere save for the long end of the bond market." We don't have that now. this is called GOVERNMENT effect "naked capitalism" indeed. the demand theorists have it all wrong because "demand is always there." what is lacking is MONEY...everywhere and always. in that sense "everything is just a financing scheme" when you don't have a gold standard...and we don't of course. indeed no less than Sir Isaac Newton himself was trying to find a way around the gold standard "because it got in the way of applying so many of the cool things going around in his mind." he failed of course...although pretty much everything else has been shown to be beyond belief in surplus now. (diamonds come to mind. why aren't diamonds free? we have TRILLIONS of them!) the answer of course is "i will create demand with higher prices." so now we get "asteroid farming." You laugh! "a single asteroid could contain a trillion dollars of precious metals." to not be like Anderson Cooper and think "the Ridiculist is just that. RIDICULOUS! (hardy, har, har.)" We live in the world of "things that make you go Hmmmm now"! You'd be surprised at what is in fact achievable. Just ask Jeff Bezos. "No one believes so i made 2.4 billion on Thursday."

biopower1's picture

This is hardly intelligible.