CPI Lie.
With all the talk of rising Oil prices and soaring Inflation is it any surprise that the average American is terrified? But how bad is it really? As I cut through all the double talk and run around put out there by regulatory agencies and take a look at exactly what it is that makes up our most widely used Inflationary Indicator; the Consumer Price Index (CPI). Keep in mind this is the measuring stick used to measure changes in price of consumer goods also known as the (cost of living index) it measures price over time in a fixed basket of goods and services purchased by consumers. A fairly simple and easy to follow concept, if you have the prices of the measured items in a fixed basket of goods and these items are measured against the same basket of goods and services on a month over month basis this would show any increases or decreases in that basket of goods, equaling the inflationary pressures felt by consumers.
Inflation and the CPI go back to the late 1800s but it was not officially tracked until 1921; even then the numbers were not put to any real use until after WWII when the government first implemented the comparison, to show inflationary pressures in order to negotiate union contracts for inflation. The CPI was later used to adjust Social Security. Now keep in mind the U.S. government never full anticipated paying long-term Social Security benefits, when the Social Security Administration implemented Social Security it was another form of a tax. The government intended to collect on Social Security during a workers lifetime and then pay back the benefits after the age of 65… however the average life expectancy at the time Social Security was initiated wasn’t much over 65 so the government never fully intended to pay you back your Social Security benefits or at least not for a lengthy period of time. Introduce modern medicine; and this is where things all went wrong. The life expectancy of the average American has increased dramatically in recent history and Social Security is paying more then ever.
The relationship between Social Security and the CPI report is a delicate one; the CPI is used to calculate inflation and make adjustments to Social Security payment on those inflationary pressures. From January 1960 to January 1972 the CPI went from 29.3 to 41.1 that is in increase of around 2.6% per year, right in line with government expectations. Now lets move ahead to the inflationary cycle from January 1972 to January 1982 the CPI is now at 101.9 a 149.3% increase in inflationary pressure giving us an annual average increase of around %15. Well we can imagine the downward spiral our economy would suffer if double-digit inflation were the norm in any ageing population dependent upon Social Security adjusted for annual inflation.
So what can the government do to lower inflation? One of the key tools in the war chest of the Federal Reserve Bank (the agency responsible for controlling inflation) is to raise or lower the overnight lending rate, causing an increase in spending or help cool a hot economy. But what can the FED do during a time of rampant inflation and an already slowing economy. An increase in rates to curb inflation would further damage the labor market and send many Americans into a downward spiral. So what can be done? First thing to do would be look at the way the number is calculated and see if any changes can be made. Makes sense, well during the Reagan years several changes in the way CPI were calculated and implemented to prevent any repeat of double digit inflation that was felt during the previous inflationary cycle from 1972 to 1982.
First off; the CPI number is now a moving target… the CPI is only measured back for the past 11 years, so we never see the true affects of long term inflation, this was the first change made but not quit drastic enough to have an immediate impact on the rampant inflation. So the next change was to alter how the numbers are calculated. If our “fixed” basket of goods were to take in consideration the deflationary prospects of electronics items this would greatly reduce the outlook on inflation. But how? The concept was simple, take the electronic item and subtracts the price paid by the increases in technological advancement during that time period and report the difference. If you bought a TV 3 years ago with a Cathode Ray Tube 720p resolution (the big heavy T.V. sets) for $3,000 and you are in the market for a new T.V. your most likely leaning to a purchase a larger flat panel plasma, LCD or DLP with true 1080i high def capabilities for the same price you paid for your old tube T.V. giving the new T.V. lets say 10x the value of your old T.V. but for the same price. This would constitute an increase in value or product deflation so the CPI figures this number that you are only truly paying $300 for your new T.V. because of the increase in value due to technological advancements.
It has also been regular practice to change out items from the CPI if the price increase too much, but how can they substitute one product for another in a “fixed basket of goods” simple, they use comparable products… if the price of steak increases from one dollar a pound to ten dollars per pound and prices consumers out of the market for that product, you simply substitute that product for the product consumers are switching to; for instant hamburger. This is now the standard operating procedure for regulating CPI, during the Clinton administration as products increased in price or became to expensive we simply changed the weight they were measured in the “fixed basket of goods”. If your steak that increase from one dollar per pound to ten dollars per pound was measured at 2% of the basket during the Clinton years it was simple lowered to 1% of the basket to decrease its inflationary affect on the CPI. Speculation is that this kind change has had an impact between 2-3 percent annually on the CPI.
Lets take a look at the mitigating factor in our CPI, the one that is included but removed; that’s right, taxes. If the government adds a tax to an item they subtract that amount out of the final CPI number before it is published. Example 30% of a gallon of gas is made up of taxes, so it is only fair that this amount be subtracted from the final CPI number. Even though you are paying it the tax is not accounted for in the CPI.
Now lets stop and think about where our Inflation really stands; one thing we have seen sky rocket in the past couple of years is the price of our most widely used commodity (oil) this one product affects about every faucet of the American consumers life, it is used in the fuels we consume in our automobiles, it is in the products we purchase and touches about everything attached to our economy. According to the CPI published in 1982 our Consumer Price Index was about 100, currently our Consumer Price Index stands around 210; this would mean that at current levels, prices would have only doubled sense 1982 (all things being equal) we as consumers know this is not the case with oil alone up nearly %150 in the past 5 years we can see the inflation when we fill up at the pump and in the groceries we perches at the store.
Over the past year we have seen CPI go from around 202 up to about 215 giving us just over a 6% inflation rate. (Government statistics can be found on CPI data at www.bls.gov/cpi/cpid0805.pdf) but is this the true inflation that consumers are feeling? If you factor in new money being put into circulation (M3) or money supply we are seeing inflation somewhere in the neighborhood of 15% so the next time you hear about where inflating is at keep in mind that what you see is not always what you get.
Inflation and the CPI go back to the late 1800s but it was not officially tracked until 1921; even then the numbers were not put to any real use until after WWII when the government first implemented the comparison, to show inflationary pressures in order to negotiate union contracts for inflation. The CPI was later used to adjust Social Security. Now keep in mind the U.S. government never full anticipated paying long-term Social Security benefits, when the Social Security Administration implemented Social Security it was another form of a tax. The government intended to collect on Social Security during a workers lifetime and then pay back the benefits after the age of 65… however the average life expectancy at the time Social Security was initiated wasn’t much over 65 so the government never fully intended to pay you back your Social Security benefits or at least not for a lengthy period of time. Introduce modern medicine; and this is where things all went wrong. The life expectancy of the average American has increased dramatically in recent history and Social Security is paying more then ever.
The relationship between Social Security and the CPI report is a delicate one; the CPI is used to calculate inflation and make adjustments to Social Security payment on those inflationary pressures. From January 1960 to January 1972 the CPI went from 29.3 to 41.1 that is in increase of around 2.6% per year, right in line with government expectations. Now lets move ahead to the inflationary cycle from January 1972 to January 1982 the CPI is now at 101.9 a 149.3% increase in inflationary pressure giving us an annual average increase of around %15. Well we can imagine the downward spiral our economy would suffer if double-digit inflation were the norm in any ageing population dependent upon Social Security adjusted for annual inflation.
So what can the government do to lower inflation? One of the key tools in the war chest of the Federal Reserve Bank (the agency responsible for controlling inflation) is to raise or lower the overnight lending rate, causing an increase in spending or help cool a hot economy. But what can the FED do during a time of rampant inflation and an already slowing economy. An increase in rates to curb inflation would further damage the labor market and send many Americans into a downward spiral. So what can be done? First thing to do would be look at the way the number is calculated and see if any changes can be made. Makes sense, well during the Reagan years several changes in the way CPI were calculated and implemented to prevent any repeat of double digit inflation that was felt during the previous inflationary cycle from 1972 to 1982.
First off; the CPI number is now a moving target… the CPI is only measured back for the past 11 years, so we never see the true affects of long term inflation, this was the first change made but not quit drastic enough to have an immediate impact on the rampant inflation. So the next change was to alter how the numbers are calculated. If our “fixed” basket of goods were to take in consideration the deflationary prospects of electronics items this would greatly reduce the outlook on inflation. But how? The concept was simple, take the electronic item and subtracts the price paid by the increases in technological advancement during that time period and report the difference. If you bought a TV 3 years ago with a Cathode Ray Tube 720p resolution (the big heavy T.V. sets) for $3,000 and you are in the market for a new T.V. your most likely leaning to a purchase a larger flat panel plasma, LCD or DLP with true 1080i high def capabilities for the same price you paid for your old tube T.V. giving the new T.V. lets say 10x the value of your old T.V. but for the same price. This would constitute an increase in value or product deflation so the CPI figures this number that you are only truly paying $300 for your new T.V. because of the increase in value due to technological advancements.
It has also been regular practice to change out items from the CPI if the price increase too much, but how can they substitute one product for another in a “fixed basket of goods” simple, they use comparable products… if the price of steak increases from one dollar a pound to ten dollars per pound and prices consumers out of the market for that product, you simply substitute that product for the product consumers are switching to; for instant hamburger. This is now the standard operating procedure for regulating CPI, during the Clinton administration as products increased in price or became to expensive we simply changed the weight they were measured in the “fixed basket of goods”. If your steak that increase from one dollar per pound to ten dollars per pound was measured at 2% of the basket during the Clinton years it was simple lowered to 1% of the basket to decrease its inflationary affect on the CPI. Speculation is that this kind change has had an impact between 2-3 percent annually on the CPI.
Lets take a look at the mitigating factor in our CPI, the one that is included but removed; that’s right, taxes. If the government adds a tax to an item they subtract that amount out of the final CPI number before it is published. Example 30% of a gallon of gas is made up of taxes, so it is only fair that this amount be subtracted from the final CPI number. Even though you are paying it the tax is not accounted for in the CPI.
Now lets stop and think about where our Inflation really stands; one thing we have seen sky rocket in the past couple of years is the price of our most widely used commodity (oil) this one product affects about every faucet of the American consumers life, it is used in the fuels we consume in our automobiles, it is in the products we purchase and touches about everything attached to our economy. According to the CPI published in 1982 our Consumer Price Index was about 100, currently our Consumer Price Index stands around 210; this would mean that at current levels, prices would have only doubled sense 1982 (all things being equal) we as consumers know this is not the case with oil alone up nearly %150 in the past 5 years we can see the inflation when we fill up at the pump and in the groceries we perches at the store.
Over the past year we have seen CPI go from around 202 up to about 215 giving us just over a 6% inflation rate. (Government statistics can be found on CPI data at www.bls.gov/cpi/cpid0805.pdf) but is this the true inflation that consumers are feeling? If you factor in new money being put into circulation (M3) or money supply we are seeing inflation somewhere in the neighborhood of 15% so the next time you hear about where inflating is at keep in mind that what you see is not always what you get.
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