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How Much Does The CPI Understate Inflation?
Submitted by The Consumer Price Illusion
Estimating the Effect of Hedonic Quality Adjustments on the Consumer Price Index
Having an informed debate over Hedonic Quality Adjustments is difficult due to the lack of comparable consumer price indices. A few exist, however, and today we will look at an index compiled by PriceStats, an off-shoot of MIT’s Billion Prices Project, which scrapes the internet for prices and compiles a daily index that aims to track inflation in real-time.
The time series eschews hedonic and seasonal adjustments and relies on sampling over 5 million products to produce a very different look at inflation (CPI included for comparison):
Since starting calculation of the index in mid-2008, PriceStats inflation series has remained consistently above the CPI as reported by the BLS. Considering the differences in methodology this provides an estimate to how much Hedonic Quality Adjustments have been used to understate the head-line CPI figures. Currently, the CPI uses quality adjustments on over 32% of the items used in its calculation.
Annual inflation figures show a similar story, occasionally showing divergences greater than 1.5% in the two measures of annual inflation:
In addition to being used as a benchmark for policymaker’s worldwide, CPI’s influence a myriad of payments:
- calculating cost-of-living adjustments to social security and federal retirement programs,
- calculating payments on over $700 billion worth of inflation protected securities (TIPs)
- determining pay-bands in public and private entities
- cost of living adjustments to collective bargaining agreements
- determining IRS tax brackets and numerous tax-related levels (exemptions, for example)
- Basic CPI indices feed into the PCE price index which is the preferred measure of inflation by the FOMC
Overall, CPI’s are used to index payments on over $10 trillion in liabilities. Any underestimation of CPI benefits the federal government at the expense of the taxpayer and amounts to a backdoor default on its financial obligations. Please understand this could be deliberate or the result of dubious econometric methods. Using a bad model is like using a random number generator as a compass.
To get an idea of the sums of money involved, for every 1% of CPI underestimation the federal government saves $8.4 billion on social security payments alone. The lack of transparency regarding quality adjustments (and their perceived complexity) provides a perfect smoke-screen for covert debt management through CPI under-reporting.
There is no reason for this to be the case. Hedonic Quality Adjustments are computed via linear regressions, one of the least complicated models in statistics. Any statistician provided with the data could verify the BLS’s regressions using an off-the-shelf statistical computing package like R. Release the data, plain and simple; any other response smacks of corruption in the name of regression or an attempt to justify one’s existence.
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I think that ShadowStats would show a much larger gap.
An American, not US subject.
Shadowstats says it understates by at least 3% and as much as 8%
http://www.shadowstats.com/alternate_data/inflation-charts
8% understatement about right. Current inflation rate is 10%
http://www.shadowstats.com/alternate_data/inflation-charts
It's probably higher than that.
It's a shame the MIT billion price project went offline. THE most accurate way to calculate this stuff. Simply measure and report EVERY change in price. No statistics required.
How much does it understate inflation?
So much that on my "time off" I have to post these stupid fuckin' links to perhaps be able to feed myself atleast one meal this week.
https://www.youtube.com/watch?v=i_F4ldgdPVk
"this could be deliberate or the result of dubious econometric methods."
LOL.
CPI = Cunt Punt Index.
Wake up dismal EBT couch coin treasure searchers.
Interesting that the mere 4% inflation peak in 3Q 2011 coincides with gold's peak, no?
Imagine what would happen if they ever tell the truth.
I have come to the conclusion that while inflation appears tame and government claims it is low it is growing. The seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future.
Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/06/inflation-lurks-beneath-and-hidden.html
No one ever would have come up with the concept of an hedonic adjustment unless they were trying to dissimulate the plain reality that your inflation-adjusted wages were buying less of the items you really want.
Dear Mr. Moron,
You are correct that, in effect, it obscures the true rate of inflation. The theory, however, was legitimately conceived by members of the "dismal science" of economics to explain rational behavior in markets which is based on individual preferences, all of which are based on marginal utility/marginal cost choices by individual consumers. That is, every individual (except the top 0.1% that benefit most greatly from this corruption based malinvestment and misallocation that causes inflation), has limited means but unlimited wants and must weigh each choice in evaluating the basket of goods that the individual can purchase with these limited means that will produce the greatest benefit (marginal utility) to the individual. Assuming you believe that average people are rational, at some point they will substitute hamburger for steak, for instance, as prices rise. The price of steak always rises faster (since the total price per pound of steak is mathematically higher than the absolute rise in the cost of hamburger, all other things equal) than hamburger but the Hedonic Adjustment theory allows some bureaucrat to assume an "adjustment" of the rational consumer to consume more hamburger than steak. The bureaucrat's inherent bias will be towards these adjustments occurring sooner rather than later because the bureaucrat's self interest in preserving his/her job lies in understating inflation, otherwise political forces may cause a risk to the bureaucrats job security (who then will have a smaller means to buy the basket of goods necessary to buy food, medicine and ammunition for the rational bureacrats' family, assuming a rational bureaucrat--another economic fools' assumption!)
Hope that fixes it for ya'--now get some coffee and wake up from my post to go purchase more goods, as a good consumer drone must do so that the bureacrats can survive to build more bombs and produce more EBT to keep this cam going for a while longer.
Fixed it for me. Gave ya a thumbs up. Going shopping tomorrow.
Thank you, Gooshtepper!
Happy Shopping!
Sincerely,
Hamburger Eating Recovering Former Economist
PS the magic of all this really will make your day because Americans cannot afford healthier foods as inflation rises--they buy more processed garbage full of high fructose and GMO grains, hormone laced cheap hamburgers, hence our obesity and diabetes epidemic that will keep the corporate farmers and corporate pharma reaping their means to acquire large baskets of goods as the government (and consumers--us) pick up the exploding medical tabs for our own unhealthy demise and the demise of our children! It's wonderful how economics works when the corruption starts at the top in NYC Banks and trickles down to the masses this way!
I look at the published numbers and shake my head. Frankly, the disconnect represents a Red Flag to me that the "system" is in jeopardy. Not much of an "end of the world" guy, but this is sounding alarms that something could bust soon. Really believe that most Americans are too stupid how all this works. But those same stupid people are the most likely to revolt when they, all at once, believe they have been deceived. We'll see. The deception can't continue with a few "published numbers". It eventually becomes clear to even the idiot on the street.
If we have so much shadow inflation, can someone explain why the CRB Commodity index (an index of 19 core agricultural, mining and oil-related commodities) has fallen for the past four years in a row, by an average of 5% per year? And shouldn't this hidden inflation at least be reflected in the price of gold?
They actively manipulate the indexes. I'd say it was reflected in gold though the end os 2011, and then, as Volker said in the 80s, gold "looked bad." So they fixed that.
Looking at the change in annual % is decieving, its better if you took say a plot of prices of a good every 3 years as a function of the % change over 3 years.
So you can get a better "feel" for how much inflation the public feels for a given item.
Like if you looked at the price of bacon charted over 3 years it would probably shock you and make you worry, but if you look at a chart made up of just the % changes in price for each year broken down year after year, it would make the chart feel very flat.... like nothing is happening.
Because say 3% inflation after 3 years is really 9% inflation.
So something that costs 1$ would cost 1.09 cents in 3 years.
It gets worse the longer it goes on.
Say you had an item that costs 5$ an Lb (steak) and you had 3% inflation for 3 years.
In three years, your 5$ an LB steak will cost you 5.5$an LB say you buy a 2LB steak that costs you an extra dollar in 3 years, multiply that with a household (feeding 3 people) that costs 3$ more per meal per day (on avg).
So really if 3% kept up, in short order every years your families spending on food might go up 1000~3300$ depending what you eat.
How many families in America can afford to spend 1000~3300$ more a year on food, year after year?
Eventually in 10 years, you have to make 30k more$$$$ to feed your family the same stuff you ate 10 years ago.... and as for "quality" obviously the "quality" of food will GO DOWN to make CHEAPER FOOD becase people will no longer be able to afford the "good food".
So things get more expensive and worse because of the Federal Reserve.
I think Shadowstats has the best reflection fo inflation. John Williams compare today's CPI to how it was calculated in 1980 and 1990, etc. He indicates 5-8% real inflation as calculated inthe days of Reagan.
Agree! That sounds more realistic.
Whilst hedonic quality adjustments are made to downplay the official CPI figures, there are also items which are included in the base calculation which downplay CPI equally as much, if not more.
The actual inflation suffered by any indovidual varies from one person to another. In my experience measuring CPI for different age groups would produce a far more meaningful set of numbers. Age groups: (a) 25 and under, (b) 26-50 and (c) over 50 would be my choice. As people get older a geater proportion of their spending goes on items which are rising much faster than CPI (energy, food, domestic services etc) than items bought by the iPod generation. And of course fees, licences and taxes imposed by government are mostly excluded from CPI.
Government CPI measurement is a racket, actual inflation is far higher for most people. When GDP is adjusted for honesty too (nominsl GDP is lower than reported) and adjusted down by true inflation, you end up with zero or negative growth in the economy. This delta is filled up with more debt to maintain living standards. Welcome to the 2008 debt bubble.
I almost never eat fast food. I ate it a lot as a kid though.
But last weekend on a trip, I had only one choice on the highway and it was McDonalds.
Eating it once in a blue moon won't hurt. But I got a shock.
I ordered two cheeeseburgers. Simple ones, not double or anything.
They looked like white castle (or Krystal, for you in the south) burgers.
These burgers have shrunk like testicles soaking in an ice bath!!!
These inflation numbers are meaningless. Your dollar is dilluted on a daily basis. But what can you do? The populace is so dumb, they cannot connect the dots nor the obvious.
Strange that when the 'good times' were rolling, no one cared about the underestimation of inflation.
Now that we're in Tripledidipistan, everybody wants to lock the stable door after the horse is gone.
***When someone takes action too late, they do this. There is no reason to lock an empty stable.***
Jest sayin
When the credit is flowing like cocaince at an early 80's party, party on. Then wait for the hangover.
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Just saw chocolate milk in Toronto, now in 750 ml, NOT 1 L paper containers, on sale for 88¢, on sale (down from $1.98)
This is the beginning of the head fake. Soon, the 1 L containers will disappear.
Screwed again.
•?•
V-V
Online prices is but a very small subset of real purchases on $ value basis per month. Most money is spent on food and fuel for the average family. Add in entertainment costs (movies, pro games, etc) and I believe John Williams ~8% more than the CPI. Just to hook up to electriticty now cost some $40 before using any!