Official inflation numbers appear to show little or no inflation in the developed world, yet we all seem to feel a greater impact on our wallets. Whether it’s at the petrol pump, train fares, food prices or even school fees, they all seem to be rising in price at a greater pace than the reported CPI numbers suggest.
Why is this?
Shadowstats, an electronic newsletter service that exposes and analyzes flaws in current U.S. government economic data and reporting, produces the chart below. It shows in red the official CPI-U year on year change in US CPI-U as reported by the Bureau of Labor Statistics and in blue the pre-1980 official methodology for computing the CPI-U, as reported by Shadowstats.
While numbers looked identical up to the early 80s they soon began to deviate substantially.
Today the latest US CPI-U number is 1.7% while the Shadowstats pre-1980 methodology shows a change in annual inflation closer to 10%!
Interested readers should read Shadowstat’s excellent report on the changes in the methodolgy since 1980. As stated in the report, the Consumer Price Index has been reconfigured to understate inflation versus common experience:
- CPI no longer measures the cost of maintaining a constant standard of living.
- CPI no longer measures full inflation for out-of-pocket expenditure.
- With the misused cover of academic theory, politicians forced significant under-reporting of official inflation, so as to cut annual cost-of-living adjustments to Social Security, etc.
- Use of the CPI to adjust retirement benefits, private income or to set investment goals impairs the ability of retirees, income earners and investors to stay ahead of inflation.
- Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported GDP.
It is no surprise the cost of living experienced by most of us has risen significantly above that reported by the CPI. For heavily indebted governments aiming to inflate away their debt this might appear to be a way of solving, in part, this issue. Take from savers and redistribute to borrowers. However, as consumers are unable to generate incomes that keep up with true levels of inflation their purchasing power falls consequently leading to a greater economic slowdown.
If real GDP numbers were to reflect this higher inflation number it would show that the US economy has been in recession for some time now, perhaps explaining why the unemployment number has struggled to fall for so long. That assumes the unemployment methodology hasn’t changed, which of course it has. Shadowstats estimates true unemployment in the US (pre 1994 methodology) at about 22%! More on that another day..