Inaccurate Statistics And The Threat To Bonds

Tyler Durden's picture

Submitted by Alasdair Macleod via,

Statistics have become very misleading: in particular we are being badly misled into believing that the US is teetering on the edge of price deflation, because the US official rate of inflation is barely positive, a level that US bonds and therefore all other financial markets have priced in without accepting it is actually significantly higher.

There are two possible approaches to assessing the true rate of price inflation. You can either reverse all the tweaks government statisticians have implemented over the decades to reduce the apparent rate, or you can collect a statistically significant sample of price data independently and turn that into an index. John Williams of is well known for his work on the former approach, but until recently I was unaware that anyone was attempting the latter. That is until Simon Hunt of Simon Hunt Strategic Services drew my attention to the Chapwood Index, which deserves wider publicity.

This is from the website: "The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation." It is, therefore, statistically significant, and it consistently shows price inflation to be much higher than that indicated by the Consumer Price Index (CPI).

The table below shows this difference since 2011, and how it affects real GDP.

The Chapwood number in the table is the simple arithmetic average of the 50 cities. The year-in, year-out 10% inflation rate is notable. Furthermore, Chapwood shows cumulative inflation rate as shown by the CPI for the four years to be understated by 39.9%, and using Chapwood numbers in place of the GDP deflator, real GDP has slumped a cumulative total of 21.4% over the four years.

No wonder the poor in America are suffering: when their wages and benefit increases have been aligned to the CPI, they have fallen nearly 40% in real terms over the last four years. The resulting decline in business on Main Street revealed by these figures explains why Wal-Mart are laying people off and closing stores, and why trade associations continually issue disappointing trading assessments.

Understated price inflation fundamentally distorts everything that is macroeconomic, from monetary policy to economic commentary. It misleads central bankers into thinking they are missing their inflation targets when they are in fact exceeding them by a dangerously wide margin. It misleads analysts into thinking we are on the brink of a deflationary slump with prices maybe about to collapse. And most worryingly of all, bond markets have become more mispriced than even hardened bears realise, something that's very likely to be corrected through a financial shock.

Just think of all those bonds that the banks have acquired as zero risk investments under Basel III rules. If bond markets discounted, as the Chapwood Index suggests they should, a US inflation rate consistently around 10%, the 10-year US Treasury bond should yield at least that, possibly more. The price would halve to meet those redemption yields, and lesser credit-worthy bonds would fall even more, a development for which all financial markets are wholly unprepared, not to mention the knock-on effects on stocks, derivatives and of course, mortgage rates.

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duo's picture

And my property taxes are going up 10% a year to top it off.

B2u's picture

Then do what I did....sell your house and move to the tropics....

Bumpo's picture

If and when there is an enevitable Stock Market and Bond Market Crash, uhm, sorry .. you would have to consider that DEFLATIONARY. Meanwhile, with wages stagnant and jobs in short supply, good luck ramping the price of gas and the price of meat. People will just stop driving and switch to Top Ramen when their pocketbook is empty.

JustObserving's picture

Alternate inflation charts from Shadowstats shows inflation 3% to 7% higher than official statistics:

If you adjusted US GDP for real inflation for only last couple of decades, US GDP would only be around $6 trillion.  Given a debt to GDP ratio of 300% and unfunded liabilities to GDP ratio of 2500%, what should US bonds be yielding?

If you adjusted US inflation by the average Chapwood Index for the 4 years shown above for just the last decade, US GDP is about $6 trillion

Arrowflinger's picture

My Leseur index was at 0.62 six years ago and now stands at 1.68 at Wal-Mart.

Bobbo's picture

Speechless.  As though I did not already know.

Upshot:  this word, "inflation," does not actually refer to prices--instead it refers to complacency.

Never underestimate the power of denial.

BoPeople's picture
BoPeople (not verified) May 29, 2015 12:51 PM

I cannot imagine that there is anyone who actually believes the government inflation data... at least anyone who has to purchase anything.

The most likely reason the government lies about inflation is so that they save money on social security. They want to use that money to pay inflated government salaries and finance wars.

We have the rampant inflation of the early 80s without the wage indexing because the government lies.

froze25's picture

The people that understand it don't care that much because thier wages are keeping pace with it.  The people that don't understand it don't care because they still can afford their newest toys that keep them distracted with entertainment news, sports or porn.  The people that do care scream and shout only to have the people that don't understand it look at them like they are crazy and the people that do understand it and don't care simple say why do you care you understand it and are doing just fine.  This will continue until the people that don't understand it can no longer get thier toys or eat, then the shit will hit the fan.

Urban Redneck's picture

"The greatest shortcoming of the human race is our inability to understand the exponential function." -Albert Barlett

buzzsaw99's picture

the author is implying some fundamental connection between consumer price inflation and treasury rates? how funny. t bonds are mispriced alright, they are priced too low.

The Rent is Too Damn High [/Jimmy McMillan]

Stoploss's picture


Using old school math in the new abbynormal, could be dangerous to one's job and health.

Obama LaForge's picture

You think all the bonds are going to be paid back? How?

BlowsAgainsttheEmpire's picture

"AIER’s Everyday Price Index (EPI) measures the changing prices of frequently purchased items like food and utilities. We do this by selecting the prices of goods and services from the thousands collected monthly by the Bureau of Labor Statistics in computing its Consumer Price Index. The EPI basket contains only prices of goods and services that Americans typically buy at least once a month, excluding contractually fixed purchases such as mortgages. Our staff economists weight each EPI category in proportion to its share of Americans’ average monthly expenditures. In order to better reflect the out-of-pocket prices that consumers experience on a daily basis, the EPI does not seasonally adjust prices."

Bell's 2 hearted's picture

what a moron


recession/deflation at hand 


see everyone at 10yr yield 1%

BlowsAgainsttheEmpire's picture

10-Year Treasury Inflation-Indexed Security, Constant Maturity, Percent, Not Seasonally Adjusted (DFII10)

Consumer Price Index for All Urban Consumers: All Items, Index 1982-84=100, Seasonally Adjusted (CPIAUCSL)

BlowsAgainsttheEmpire's picture

PriceStats measures inflation in 22 economies on a daily basis using online prices.

The objective of our series is to anticipate major shifts in inflation trends. We can achieve this because we observe prices in real-time and online prices tend to react to shocks faster than offline prices."

taketheredpill's picture




Mr. McGuire: I just want to say one word to you. Just one word.

Ben Bernanke: Yes, sir.

Mr. McGuire: Are you listening?

Ben Bernanke: Yes, I am.

Mr. McGuire: Hedonics.


Ben Bernanke: Exactly how do you mean?

madbraz's picture

piss poor article.  then again, what would you expect from a fellow named "Alasdair"

Consuelo's picture

- Why is the article 'piss poor'...?

- Why the need to attack a man's name for sake of your argument - or do you have a cogent one to offer in the first place...?



smacker's picture

The Chapwood Index confirms everything I've been saying along with others for a l.o.n.g time: inflation is far higher than reported and GDP is far lower. I suggest this anomaly doesn't only go back 4-5 years but for a generation. Given that wages are widely correlated to official inflation, the shortful in spending power has been filled up with credit/debt. Until 2008.