Laudato Si
The Consumer Price Index (CPI) is a method by which economists determine the effects of inflation (the increase in price of goods over time) on household spending. It has provided a somewhat reliable way to determine how money is losing value. The problem is, today’s CPI no longer reflects inflation, as it was gutted by a team of economists and politicians under Clinton, Reagan, and Nixon. Where formerly, CPI was calculated given the values of the price of today’s everyday household items minus the cost of those items in the year from which one is trying to gauge the rise in price, now, the CPI used to gauge inflation is called the Core CPI. Core calculation is woefully inefficient, and where everyday people notice that the prices of groceries are skyrocketing, the government denies inflation is increasing. They can, because the statistic now means almost nothing, thanks to three presidents.
First was Nixon. Nixon and his advisers, after removing the link between gold and the U.S. dollar (called the Bretton-Woods system), knew that the value of inflation would need to be re-toggled to ensure that the new system could adjust to any surprise inflation as a result of the decimation of Bretton-Woods. To do so, the Nixon Administration created the Core CPI. In the Core CPI calculation, the prices of energy and food were taken out, as they were judged to be volatile. Most consumers spend most of their money on food and energy such as gasoline. The fact that they were taken out warped the consumer price index substantially, as the main source of prices that were to be assessed as the CPI would now be technology, such as computers, phones, etc. As most anyone can tell you, as technology progresses (which it does in rapid pace), prices move downward. This deflationary pressure that is produced by innovation and advances moves much faster than food or energy prices. Therefore, Core CPI that is supposed to measure how inflation occurs is subject to unusual deflationary pressure. It therefore is not a very good assessment of the inflation of currency.
The next was Reagan. Ronny and his economists noted that housing was rising quickly as well. Accordingly, housing costs were taken out of that Core CPI calculation. Again, as most people can tell you, consumers spend a good deal of their money on housing. After Reagan, it was apparently no longer important that calculations concerning every household did not include food, energy, or housing, or that which takes up the highest percentage of household income…
The final evisceration of the CPI was at the hands of Clinton, and is now named after the adviser who devised the scheme. The Boskin Method of CPI calculation uses three means of dampening prices for everyday consumers. Bob Wenzel, in short:
- Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger. . .
- Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
- Hedonic adjustment: . . . product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.
And now you know why Consumer Price Index values by government estimates signal inflation of around 4% this year, while the everyday experience of most people and the old method of calculating CPI signal inflation over 11%…
Why does the government have an interest in hiding inflation? you might ask. The reason is two-fold. First, inflation is a tax. Inflation is a result of the Federal Reserve printing money that is put into the stream of commerce. Money follows the laws of supply and demand just as anything else. Therefore, if there is more of it in the system, the value of it goes down (this is what inflation is). The government being able to print money without people knowing is a benefit because it allows for covert taxation to finance spending programs. Most citizens don’t understand the reason for inflation, and it allows for deception of the public at large on the issue of taxation. The second reason the government might want to mask the true measure of inflation is consumer confidence. To keep the economy flourishing by values traditionally held to be indicative of an economy’s strength, like Gross Domestic Product (GDP), the government has to ensure that people believe first that inflation is under control, and second, that the economy is growing faster than inflation. If GDP is rising at a rate faster than inflation, or even slower than it has in years past, consumer confidence is undermined, people stop spending money, and the growth by measure of consumption spending slows even further. The value of inflation needs to be kept low in the public’s eyes such that the economy looks strong and people continue to invest money, as to prevent a deflationary spiral.
I speak often of ways in which the government signals present us with a false view of the economy. If you cannot see it here, you never will. Real household wages have not risen in total since 1985, even while more households today have two working people. Inflation is the reason for this fact. The truth is buried, and very few people know yet where to find it. But it doesn’t end with CPI…
For values of CPI calculated before the tinkering, go to ShadowStats.com. You can also find true unemployment values, as well as other indicators of economic stagnation that are indicated by calculations that better reflect the truth of what an economy is. Remember also that spending is not necessarily a good indication of an economy’s wealth. That’s all for today…