Do you really believe we have 3% annual inflation?

[TexasLawyer]

Rating the real cost of inflation

The fedaral government says that inflation is under control at 2% to 3% a year –
with prices up 15 percent since 2002 – but some key prices have risen much faster,
and critics charge that the government is undercounting the pace of inflation.

By Dean Calbreath
UNION-TRIBUNE STAFF WRITER

September 30, 2007

If you're like the average American, when you fill your car up at the gas pump, you're paying 84 percent more than you were in 2000, for an average price rise of 12 percent per year, according to the latest data from the U.S. Bureau of Labor Statistics.

<snip>

Rudolph-Riad Younes, a co-manager of the Julius Baer International Equity Fund, told Barron's magazine this month that if the government counted home prices and energy correctly, the real inflation rate would be between 7 percent and 10 percent.

John Williams, a Dartmouth-trained economist who works as a consultant for a number of Fortune 500 companies, says the only reason the inflation rate is so low is because the Reagan and Clinton administrations rewrote the way the CPI is calculated.

In his monthly online newsletter Shadow Government Statistics, Williams has painstakingly attempted to recreate the inflation rate using its older guidelines. Under his calculations, inflation is actually running at an annualized rate of 9.95 percent.

<snip>

http://www.signonsandiego.com/news/business/20070930-9999-1b30inflate.html
********************

Just one of the sneaky tricks used to create a lower CPI-- "hedonic pricing."

How the government manufactures low inflation

<snip>

Hedonics: 'miracle' tonic for an ailing economy

For those of you who don't know, hedonics is the way the government transforms price declines into quality improvements. To wit, you buy a PC with twice as much power, so the government concludes that you really paid only half as much money for it. Hedonics is also the government's way of taking quality improvements and converting them into price declines when calculating the CPI. Sure, that brand-new Chevy you just bought cost 40% more than it used to, but it's a 40%-better car for a variety of reasons. So, the government says, the price didn't really go up. (I have oversimplified these examples, but you get the point.)

The idea behind the first case at least makes some sense, though the government carries it too far by acting as though improvements can be precisely measured. The problem with the second case is that those quality improvements are not voluntary. Since you have to pay the new price, it's sheer silliness to say that the price really didn't go up.

There are other ramifications as well. It turns out that the computer-spending component has materially warped GDP calculations in many of the last eight quarters. To put the numbers into perspective, from the second quarter of 2000 through the fourth quarter of 2003, the government estimated that real tech spending rose from $446 billion to $557 billion, when nominal spending only increased to $488 billion. That extra $72 billion represents the value the government imagines the improvement in computer quality is worth.

<snip>

http://moneycentral.msn.com/content/P72746.asp

[dkofos]

1. Maybe, on the misadministrations select list of consumer products.

But overall it is more like 10 - 15%.

[focusfan]

8. I think they are using the new math

The governments figure don`t add up the same as everyone else.In my opinion fuel is up 200 percent in the past 7 years and my insurance has gone up 400 percent in the same time period,not to mention food and utilities.

[liberaldemocrat7]

39. The Republicans: Hooked on Hedonics

hehehe

Republicans: Hooked on Hedonics.

[Warren Stupidity]

2. No. My guess is 8-12% annual real inflation for consumer goods.

They cured inflation by cooking the books. If you can eat dvds you are doing just fine.

[baldguy]

3. Economic depressions don't usually have runaway inflation.

[skids]

13. I don't think what is to come will be anything "usual"...

...we live in interesting times, to quote a Chinese curse.

[MADem]

29. Well, remember.....STAGFLATION??? That was a bummer... nt

[Alcibiades]

38. Not the depressions, but the run up to depressions

Which is the phase we are in (and have been in for a long time).

We have seen inflation recently in the value of certain assets--equities in the Clinton years, real estate today. Inflationary bubbles burst. I don't agree with Hayek on much of anything, but his account of the Great Depression's origins seems spot on, and an awful lot like what we are seeing in the US today.

[Richard Steele]

4. Of course not. I don't know anyone whose expenses have risen only 3%.

Inflation at the grocery store seems to be running around 25-30%...
so they stopped including that in their "inflation figures", just
like fuel prices.

3%? It's a sad joke.

[allisonthegreat]

9. Yeah it is like gas and food..Government knows you need it n/t

[here_is_to_hope]

31. Thats what I come up with too...

I run a tight budget and when I go over, I can compare what I spent today to a month ago and even up to three years ago. Its at least 22 percent this year.

[PSPS]

5. Like everything else from this administration, it's a lie

All you have to do is listen to the MSM "reporters" breathlessly read monthly inflation reports. It's like those quickly-spoken "disclaimers" at the end of every ad.

It goes something like this:

"The government reported good news on the inflation front today! (begin fast uninteligible speech) While the overall inflation rate was 15% last month, after removing the volatile energy and food components (end fast uninteligible speech) the core inflation rate was only 2% !!!11!!1!!"

In other words, inflation is "low" if you ignore everything that has gone up in price.

[annabanana]

6. Well. . There's the math they're selling to us.. .

and then there's the math. I wonder how far up the food chain you have to be to have access to the math?

[ikojo]

7. Aren't a lot of things not included when

calculating the annual inflation rate?

[charlie]

10. As long as they're allowed "in kind" substitutes

in that representative consumer basket, inflation will hold steady while we're spending entire paychecks before they lose value the following Monday. It'll probably be stuffed with corn husks and toenail clippings before someone blows the whistle on their horseshit.

[skids]

11. You are attempting to make me laugh, right? n/t

[Ready4Change]

12. If you include home prices, for the last couple months, maybe?

Otherwise, I'd have to say 3% is an underestimation.

[Greyhound]

14. Government inflation, unemployment, really all of their economic numbers,

have been so skewed, for so long as to be utterly meaningless.

When they removed the baseline for calculating inflation, for example, I posted the prediction that we will never again hear the government admit to a rate over 4% again. It is basic arithmetic, which is why so many have such a hard time understanding it.

[aquart]

15. Only ten percent???

They don't do the grocery shopping, do they? What do you call a fifty-cent increase on a formerly two dollar item?

[BelgianMadCow]

16. I argued we had higher real inflation against my dad

and he said I was right. This means it is right or he wouldn't concede that.

[gateley]

17. No. nt

[renie408]

18. Maybe after you eliminate all the stuff people buy, we do. n/t

[shaniqua6392]

19. I don't trust any of their figures!!

I think they are full of crap when it comes to the unemployment figures and jobs creation also.

[spanone]

20. the 'numbers' are so spun and manipulated they mean nothing

[napi21]

21. Inflation is calculated differently now than it used to be.

They don't include food & gasoline, which is the two BIGGEST items that affect everyone and have both radically increased in price! I actually don't know if they include housing prices in their calculations or not. Something tells me they don't because even though they're falling now, they sure increased FAST over the last 5-6 years!

The current calculations of inflation & unemployment are very distorted from what I can see.

I wonder if anyone is calculating the figures under the old system? Somehow I have to believe some group IS! I just have no idea where to begin looking.

[vssmith]

28. What about health care and college expenses?

[nadinbrzezinski]

22. For correctness some of these numbers have not

been counted since the Carter administration

It has just gotten far worst in the last seven years

But 3% the joke's on you America

I'd argue we are close to 20%

[Hydra]

23. This is just the usual admin policy

"If we don't like what the report says, we give a doctored one, or we discontinue the report entirely."

[BlooInBloo]

24. I think it's 38%. You guys are all SOOOOO naive.

[Warren Stupidity]

32. That was the actual one month increase in commodity prices

last month. Rather a staggering data point. It is not the inflation rate (yet.)

[mediaman007]

25. So in reality, Jimmy Carter did a good job!

Everyone just changed the rules after Carter was done.

[Trillo]

26. Both are the MONEY party ...

both democrats and republicans seem to be on the same page with Social Security and COLA based upon an understated CPI.

The marvelous thing about hyperinflation is that all past debts are deflated. The sad thing is the minimum wage doesn't appear indexed to any inflation figure, it has to be voted upon by Congress. So, all our past debts are deflated (government is biggest debtor), the masses wages won't rise, and most won't be able to buy anything new, at some point, even food itself will likely become too costly.

The social contract is dead, but sophisticated liars using advanced mathematics, economics, and politics try to keep it alive in our perceptual minds.

[bigbrother05]

27. They do it to keep down military pay

Each year Bush has tried to give the military about a 2% bump and Congress comes in and moves it to 3-3.5% to keep up with "inflation". Then the WH does their patented kabuki dance about how Dems are busting the budget, etc. all the while laughing at how little they have to pay the troops. After that, the pay of the rest of the gov't workers is adjusted to match the military raises, the WH then complains about that and privatizes/politicizes more of those jobs and the no-bid contractors pop the champaign corks. It is so tiring trying to keep up with the depths these suckers would sink to.

[Wiley50]

37. I works the same way with Social Security, SSDI and SSI

They owe us three times a month what we get now for all of the years we've been screwn

[napi21]

30. You really need to read This ARTICLE!

http://www.financialsense.com/stormwatch/2005/0624.html

Here's an excerpt:
Hedonics
The manipulation didn’t stop there. The bureau also began to adjust prices for quality. This practice became known as hedonics. Hedonics adjusts the prices of goods as a result of the increased pleasure a consumer derives from a product. A few examples will illustrate how removed the index has moved away from reality. Tim LaFleur is a commodity specialist for televisions at the BLS. In December last year he adjusted the price of a 27-inch television set for quality improvements. The 27-inch television set had a retail cost of $329.99. However, he decided the new model, which still sold for $329.99, had a better screen. After putting this improvement through the governments complex hedonic adjustment model he determined the improvement in the picture was worth at least $135! Taking in this improvement he adjusted the price of the TV by $135, concluding that the price of the TV had actually fallen by 29%! <1> The price reflected in the CPI was not the actual retail store cost of $329.99, but $194.99. The only problem for we consumers is that if we went to Best Buy or Circuit City to buy that TV, we would still pay $329.99.

Another example of hedonics at work is the way the BLS treats rising automobile prices. Mr. Reese, a specialist for autos, took a 2005 model car, which went from $17,890 in 2004 to $18,490 in 2005. After adjusting for quality items and making antilock disc brakes standard, the bureau adjusted the actual $600 price increase down by $225. The problem for we consumers is that the price of the car in dealer showrooms was still $18,490.

The Substitution Effect
Substitution also plays a role in reducing the CPI. From 2001-2003 the CPI index fell by 1.6% reaching a low of 1.1%. Wall Street and the Fed were talking about the risk of deflation. Deflation was predicted everywhere in the press. The financial world became fixated over the risk of deflation even though the monetary presses were working overtime, credit was mushrooming, and asset bubbles were inflating in the mortgage, bond, and real estate markets. The reason for the decline was the substitution effect. Instead of using new car prices, which were going up each year, the BLS substituted used car prices, which were falling. In place of exploding real estate prices, the Bureau gave more weight to the price of rents, which were falling as more households bought homes. Rents were given more weight even though 69% of households own a home versus the 31% that rent.


Yes it started in the 90's but it has gotten MUCH worse in the last 6 years! This is f-ing mindboggeling!

[TexasLawyer]

33. That is a good article

I thought that this was interesting.

Many homeowners may not be aware that as a homeowner they receive a fictional income referred to as Owner’s Equivalent Rent (OER). Essentially the BLS samples the price of rents in residential housing to come up with what a homeowner would receive hypothetically if they were to rent their own home. That sounds idiotic to me, since most homeowners would agree the family castle is in many cases a money pit and not a source of income. Unless the home is owned free and clear, most homeowners have cash outgo each month due to mortgage payments, property taxes, utilities, and repairs. As absurd as this concept appears, OER gets the largest weighting in the CPI index of 23% versus actual rent, which gets only a 6% weighting. OER is purely fictional, yet it carries the greatest weight within the CPI index.

Hedonics helps the BLS keep rising prices for goods in the CPI from ever showing up as rising prices. Even though the cost of housing, energy, food, medical bills, prescription drugs, tuition, and entertainment have soared, the government keeps reporting moderate inflation. Hedonics is partially responsible. It has become a convenient and subjective way of removing prices increases from the CPI.

The combination of substitution, changing the weight of goods rising in price, hedonics and seasonal adjustments is one reason why the CPI and reported inflation has remained as subdued as it is reported each month. The problem is that these numbers are all fictional and bare no resemblance to what households face each month with their actual budgets.

[napi21]

36. WAY too many things in that article are insane! I was an

accountant for a lot of years, and if I had ever done any dishonest calculations like that, I'd still be in prison! I KNEW the numbers we've been hearing about inflation and unemployment were BS, but that's the first article I found that actually detailed at least some of the BS logic they've been scamming us with!

[necso]

34. More raygunomics at work:

taxation, "debt relief", through price-inflation/dollar-devaluation.

Of course, the elite can find ways (although increasingly risky ways that threaten to undermine the system) to get returns that beat inflation, and need spend proportionately less of their income on badly-inflating basics, so it's the average citizen that pays disproportionately. (The increasing percentage of wealth/income going to the elite is no coincidence -- it's part/parcel of the approach.)

But then, the social darwinism behind this "thinking" holds that if you haven't found some way to "acquire" piles of money, then you're beneath contempt -- unfit.

[kineneb]

35. he-yell no!

ShadowStats is much closer... just watch the milk prices, if you want to see inflation.

[Yupster]

40. Even lower when you

eliminate from the calculation everything with an inflation rate of over 3 %.

[Hoof Hearted]

41. Not at my house. n/t