Devonshire: True Inflation Is Three Times Higher Than Officially Reported

Tyler Durden's picture

A fascinating, recent report by the Devonshire Research Group, whose recent work on Tesla was featured here one year ago, has moved beyond the micro and tackled on of the most controversial macroeconomic topic possible: what is the true rate of inflation. What it finds is that, like others before it most notably Shadowstats and Chapwood, the accepted definition of inflation, or CPI, is dramatically understated for various reasons, both political and economic.

For those unfamiliar with the "alternative" explanations of inflation measurement, and the implications if CPI is indeed drastically underestimating true inflation, the report is a real eye opener.

Devonshire sets the scene by noting that a wide variety of Price Indices are used to adjust for the effects of Inflation on the economy. These adjustments are widely applied to derive a number of common measures and underlie many critical economic and asset management concepts

  • Price Indices: the Consumer Price Index (CPI), the Producer Price Index, the GDP Deflator
  • Economic concepts: the Standard of Living, Real Income and Output, Real Economic Growth
  • Asset Management concepts: Real Interest Rates, the Risk-Free Rate of Return, the Cost of Capital

These indices and concepts are intimately commingled which is leading to a wide ranging divergence between
published government statistics and the assumptions used for investment decisions.

So how did the US economy end up with the current version of CPI, and specifically why is the widely accepted measurement methodology so wrong? A rising tide of Contrarians and their measurement methodologies is arguing that Inflation is understated by the Price Indices chosen by U.S. government agencies in
numerous ways for complex reasons

  • The CPI fails to measure a simple basket of goods that consumers typically purchase “out-of-pocket”
  • The weights in the official baskets shift over time in ways that mute the impact of higher priced products
  • Price increases attributed to quality improvements (hedonic adjustments) are subjective and overstated
  • U.S. government agencies have incentives to downplay CPI increases to lower cost-of-living payments, reduce borrowing costs, and increase apparent real economic growth

The Consensus of Contrarians is growing, shared across several independent critics and supported by concerns among many that official statistics paint on overly optimistic picture of the U.S. economy.

Needless to say, if and to the extent that the Contrarians are correct, the implications for the U.S. economy and for investors are profound

  • The Standard of Living may be far more difficult for many Americans to maintain than published statistics suggest
  • Real Economic Growth may be flatter or actually negative, suggesting a prolonged 21st century recession, not recovery
  • Real Interest Rates, already seen at historic lows, may be strongly negative making Fixed Income returns unattractive
  • The Cost of Capital most commonly used to measure investment returns may be far too low

The Consensus of Contrarians suggests that many investors are using incorrect assumptions in their asset allocation models and investment decisions. Capital preservation is compromised, portfolio allocations are distorted and return performance is overstated. Devonshire's preliminary conclusion: the broader effect on capital markets is likely profound and complicated.

Follow some of the key charts and supporting materials to demonstrate just how off CPI is from its measurement of reality, but first a bit of history: the CPI was originally designed as a tool to adjust wage increases:

The Consumer Price Index was initiated during World War I (which the U.S. joined in 1917) and was later estimated back to 1913. Due to the war, prices were rising rapidly as the government was pouring money into shipbuilding centers, this made it essential to have an index for calculating cost-of-living adjustments for wages.

A brief history of the Consumer Prive Index, and its several relatives:

Eventually, as the US Government developed a stronger interest in inflation, its incentives rose to steer CPI outcomes downward

As noted above, the reason why inflation measurement and reporting has become so controversial is that it is "less a measure of purchasing power (and therefore a financial tool), and increasingly a process of affecting macro-economic policies (and therefore a policy lever)." Just see Venezuela which recently stopped reporting inflation altogether to avoid rising social disorder and anger.

The report goes on to note that while in recent decades, transportation/energy components of prices have seen dramatic fluctuations as a result of oil crises, and subsidy programs, if one treats “transportation” and “other” as exceptional assets, and follow only US gov’t stats, the modern investment age has the feel of stability. In fact, viewed from a longer perspective, the rate of inflation, once volatile from year to year, “flattened” out to the “accepted” 3% / year

Alternatively, Contrarian views of CPI return to its fundamentals: what is the Consumer Price Index:

While the chart above lays out the theoretical divergences, the next chart shows just how vast the differences in CPI are in practical measurement terms between the official CPI calculation, and several alternatives.

Some of the alternative measurements include the Shadowstats Index, introduced in August 2006, the Chapwood Index, whose first publication used the 2012 price inflation, and the Now and Futures CPPI.

Why the emerging disparity? According to Devonshire, numerous arguments claim that the CPI has undergone intentional algorithmic, measurement changes. These are shown below:

The biggest difference in methodology: the  CPI no longer tracks Standard-of-Living, and Out-ofPocket Expenses, yet is still used to benchmark salary increases.


Follows the most important chart: the estimation of real annual inflation: according to Devonshire, that number is roughly 8%, nearly three times higher than the "accepted" rate of 3%.

* * *

So why does the government under-represent inflation by such a vast order of magnitude? Simple: if you claim a lower CPI than in practice, you don’t adjust wages upwards as appropriate, so you save money 24

"It is estimated that between 1996 and 2006, this reconfiguration of the CPI saved the US government over $680 billion." - Chapwood

So putting things in context, as a reminder, total cumulative inflation measuring a “fixed bag” of “standard quality of life” over time – this is the official BLS view.

Meanwhile, the contrarian views of Shadow Stats, CPPI and Chapwood of
total cumulative inflation since 1940 are far more bleak. The chart reveals two things

  • The discrepancy suggests a 4-5x less purchasing power today that the “official” view
  • And the contrarian views of total cumulative inflation suggest 5-20x less purchasing power now than in 1970

Implications for both the economy and investing are profound, here are just two of them, first, for real GDP: the contrarians suggests the US economy never recovered fully after the dot-com bubble and ’01 recession 30

Meanwhile, investors should ask themselves what is the true “risk-free” rate of return, if inflation adjusted treasuries lose 7-8% purchasing power annually?

Devonshire's summary conclusions:

  • US official CPI calculation is governed, and possibly distorted, by numerous and complex technical decisions
  • Inflation reporting is less a measure of purchasing power (and therefore a financial tool), and  increasingly a process of affecting macro-economic policies (and therefore a policy lever)
  • Real gross domestic product (GDP) measures, yield curves, and treasury issued inflation protected securities (e.g. TIPS), government and union / minimum wages all rely on official US inflation indices that are subject to these distortions
  • Most financial, wealth management models rely on a price stability assumption and default to 3% inflation input – what would happen to these models if the true value was closer to 7-11%?
  • If we re-compute a purchasing power CPI, de-sensationalize contrarian reporting, and remain disinterested with modern economic policies, we arrive at a 7-9% practical CPI rate over the past decade
  • This has profound implications on reported vs. actual standard of living, and might explain the rapid appreciation of American consumer debt, potential reduction in perceived vs. reported quality of life, not to mention unexpected political trends
  • Post-1990 inflation of 7-9%, not 3% would also suggest near “bubble-like” conditions exist across many consumer sectors;

Expect low-cost consumer non-durable, consumables, food, housing, clothing, retail to continue to exhibit strong cost
pressure and consolidation incentives – or a macro-recession causing a major “inflation adjustment black swan event”

* * *

Full presentation below:

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ejmoosa's picture

What?  You thought that the government would err in your favor?

Thanks for the Big Mac Index.  Hate to be in Argentina.

Oracle of Kypseli's picture

Best way to get back at .gov will be massive requests for property tax reductions s there is housing deflation (?) 

philipat's picture

 "Hate to be in Argentina".

Not if you have Dollars!!

roddy6667's picture

You would loooove Venezuela. The hookers down by the docks are now financial experts. They only accept foreign currency from the sailors. They resell it on the black market for huge markups.

Creepy_Azz_Crackaah's picture

"Best way to get back at .gov will be massive requests for property tax reductions s there is housing deflation (?)"

What my leftist/statist nut-job county government did was raise property taxes 20% when home values dropped with Lehman. Government can NEVER do with less. The producers who fund government can (according to the government) ALWAYS do with less.

roddy6667's picture

Taxes don't go down when house prices go down. Basing your tax on the value of your house is just a way to collect more money form people with big houses and less money from people with smaller houses. In the end, the government will always collect enough taxes to run the government.

Pairadimes's picture

From these charts, it looks like something important happened around 1971 that tossed the whole shootin' match into the shitter. Gee, wonder what that was.

TeethVillage88s's picture

You know in the USA, they could increase the price when they do a Tax Inversion and move McDonald's HQ Off-Shore.

I was in South America, the Cheeze on Big Mac Sucked big dicks and left an after taste. Go no cheese whatever you do.

In South American where I was International Food is s Specialty Food, so seems hard to find good prices all the time. And Imported Brands are considered luxury goods. Asia is like that too. Listerine Mouth Wash is also high priced. A Tequila Index would be another good one to look at. Cuervo Gold Index.

I saw a Taxi Index Last month, but didn't think the data was accurate.

GUS100CORRINA's picture

Devonshire: True Inflation Is Three Times Higher Than Officially Reported


Devonshire will probably be excecuted for telling the TRUTH. TRUTH is TREASON in an EMPIRE of LIES.

roddy6667's picture

I don't eat fast food, but I went into a McDonald's in China to use the restroom. It was packed. As I walked through and back I looked at what people were eating. I didn't see anything that resembles a US McDonald's

Fast food might not be a reliable indicator across international lines.

Hal n back's picture

near the end of a 3 week trip to china, I stopped at A McD to buy a diet coke with ice.

It was only a couple of bucks and I was surprised. The hotels were 8 bucks a glass.


My wife surprised me Yesterday at teh deli counter buying some turkey cold cuts-she walked away. The price had been $5 a pound and new price was $7.50


We have been watching prices and the stuff we use is going up fast.


roddy6667's picture

In Qingdao where I live, I can take a taxi to the other side of this city of 6 million people for less than $6 US. That's a 35 minute ride during rush hours. The bus costs 15 cents US, 13 cents with the caard.  You can ride it all day if you transfer in less than one hour. It also runs to villages in the mountains outside the city, all for 13 cents one way.

The taxis and buses are clean, modern and are driven by people in uniforms that are real people, not subhumans.

I don't know how a Taxi Index would deal with this.

bowie28's picture

Anyone with common sense and basic math skills knows true inflation and unemployment numbers are far worse than what the gov states.  Sadly that appears to be a small minority.

E.F. Mutton's picture

Most people are trained to be focused on how to FEEEEEL about things.



Creepy_Azz_Crackaah's picture

As long as the EBT card can keep bringing in the Ripple and Moon Pies many be feel'n GOOOOooood!

larz's picture

NO f'n SHIT was this written by captain obvious

bowie28's picture

Actually this is considered the "contrarian" viewpoint. 

What do you get when you merge Orwell's 1984 with Idiocracy?  USA! USA! USA!


Pure Evil's picture

You get California.

D.C. is in its own bizarro world in an alternate dimension in a galaxy far far away.

youarelost's picture

Yea we knew this


All that hedonics crap from Boskin Comission.


Tell us something we don't know

larz's picture

Next they'll tell us unemployment is higher than officially reported

Sonny Brakes's picture

Has this story been sanctioned by Commissioner Gordon? Like the regularly reported government inflation numbers, he too is a fictional figure.

RSDallas's picture

For me, this is the root of many evils, but we continue to bend over and say thank you.  Unbelievable!  

. . . _ _ _ . . .'s picture

"Where's the beef?" commercial aired in 1984.

All this is common knowledge since then. How much did this report cost, and who got paid to write it? That's like the interest on inflation.

order66's picture

Truth is not a policy tool so the Fed doesn't use it.

E.F. Mutton's picture

Hey, at least a Pound of Bacon costs the same

Oh..what...12 ounces?  When did that happen...?

wisehiney's picture

Inflation will turn on a dime.

Commodities index is far below five years ago.

Deflation it is.

At first.

Then they go zimbabwe.

Get your precious when the big drop comes.

TeethVillage88s's picture

Thanks Zerohedge. Chuck full of good stuff.

Cordeezy's picture

Most people knew this was a fraud number much like the jobs report that comes out full of thousands and thousands of jobs that dont exist.



mary mary's picture

I am always amazed at how many people believe government reports and figures.  The list is endless:  CPI, Unemployment, 911, Lee Harvey Oswald, Saddam Hussein's WMDs, Russian "election hacking".... 

People WANT to avoid confronting a bully, so they WANT to believe the government, so they talk themselves into believing the government.

Consuelo's picture



That is a great point you make.   Obvious as the sun in the sky, but never to be brought up in polite company...

It also explains quite nicely, those who yammer on about the 'Constitutionality' and 'Founding Fathers' of all things political, yet that same Constitution and Founding Fathers admonitions get tossed out the window when it comes to all things war related.   When it comes to war & the MIC, the 'government' magically becomes honest & true.. 

Xena fobe's picture

Cognitive dissonance.  They can't handle the truth.

Last of the Middle Class's picture

NO way dude, I believe everything the government/industrial complex/fed tells me. Especially as it relates to the economy. They don't piss on us and call it rain anymore, they just piss on us.

rosiescenario's picture

So our government is defrauding all the recipients of social about some ambulance chaser organizing a class action suit....better yet Rico might be really more to the point.

Consuelo's picture



For shits & giggles, I'd like to see a retort to this piece by Doug Short (Adviser Perspectives), who has fairly high regard amongst his peers, but does not have charitable things to say about Williams' Shadowstats - the premise nor the methodology.    Everyone seems to have a way of twisting this data, but my anecdotal evidence tells me personally, that there is way more inflation out there than is officially stated.    

And that would be true not only in the 'after-effects' which we all refer to as 'inflation', but also the specific definition, which is an increase in the supply of money & credit, as well.

quasi_verbatim's picture

Not another fucking expected Black Swan. What about delayed, diverted and hijacked Black Swans? Can you be dragged off a Black Swan?

Sorry, but we've known all this for oh, thirty years.

roddy6667's picture

In China I often see black swans in the parks. I stopped worrying.

holdbuysell's picture

The contention was that the CPI overstated inflation (it did not allow substitution of less- expensive hamburger for more-expensive steak). Both sides of the aisle and the financial media touted the benefits of a “more-accurate” CPI, one that would allow the substitution of goods and services. - Shadowstats

Substitution is a slippery slope. When does the hamburger get substituted for dog food?

roddy6667's picture

When dog food is swapped out for Soylent Green will the sheeple still believe the government?

Kurpak's picture

Nixon closing the gold window in 71 gave inflation a 40 year boner.  Thanks Dick


See a doctor for boners lasting more than four hours.

holdbuysell's picture

So slide 30 shows that GDP on a contrarian basis was higher than the official measurement from <1950 - ~2010?

Doom Porn Star's picture

Econ 101: Inflation is the rate of change in the money supply.

The US is on a Fiat/Debt standard; and indeed credit emissions are running well over 7%.



man of Wool's picture

CPI is a fake inflation figure as it ommits property and housing costs in the UK. The cpi rate is therefore lower than the inflation rate.

This is very handy if you want to keep interest rates low.

silverer's picture

Aside from John Williams site,

You've also got:

Why would the government ever want to admit it sucks and its information is nothing but lies? It's just easier to bullshit everyone.

Pareto's picture

Inflation will be what they tell us it to be.  To know this you need to look no further than Venezuela to see that no matter how bad it actually is, the government will still say "chill - its all good."

There is no truth anymore.  Fucking nowhere official anyhow.

In other words, real inflation will be what you experience it to be.  I hope ZH'ers experience nothing but bargains.

progolfdoctor's picture

Real GDP = Nominal GDP - Inflation

The lower the Government can keep Infltion then the higher GDP will be.

So a True Inflation Rate of 8% would give us a Negative GDP and that would not look good to the peasants.

FedFunnyMoney's picture

Move the decimal point to the left one spot and you pretty much have prices from 1964, when we left the silver standard.

FinsterF's picture

How did the Consumer Price Index morph into an inflation index in the first place? US domestic consumer prices are just one subset of all the prices that could be used to measure inflation, which just reflects depreciation of the dollar.

And as this article points out, it doesn't even do a very good job of measuring the price changes most consumers experience.

jialins's picture

exactly my point as i mentioned in a previous comment. CPI is a total HOAX, by far the most important and deliberate lie in our time with profound implications.

Yet, few appreciates the value of this report. CPI manipulation comes to rescue the "fiat" and create FX advantages and inflate "economic growth", saving a few bucks for borrowers along the way. Probably a research piece worth of Nobel prize buried because it is not "politically correct".

Again, salute to most important truth of our time. (Well i think everyone knows this fact deep down because it is damn obvious)