We’ve been talking a lot about the specter of inflation. Despite the Fed’s assurances not to worry because any price increases we’re seeing are transitory, some people are indeed worried. A former JP Morgan managing director warned about inflation and echoed Peter Schiff’s view that the central bank is powerless to fight it.
And we’re seeing rising prices all over the place, from the grocery store to the gas station. Even the government numbers flash warning signs. But as Peter Schiff explains in this clip from an interview with Jay Martin, it’s probably even worse than we realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it’s up 0.6% in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn’t think it does.
The government always makes changes to their methods of measuring things, whether it’s GDP, or inflation, or unemployment. And they always tweak the numbers to produce a better result as a report card.”
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they want to find ways to make those numbers little and the good numbers big.”
The CPI is calculated by analyzing the price of a “basket of goods.” The makeup of that basket has a big impact on the final CPI number. According to WolfStreet, 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number.
Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were “sweeping.”
According to the BLS, periodic changes to the CPI calculation are necessary because “consumers change their preferences or new products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it.”
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the “Advisory Commission to Study the Consumer Price Index,” its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation — by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this “issue.”
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants.
I think this period of ‘Oh wow! We have low inflation!’ It’s not a coincidence that it followed this major revision into how we calculate it.”
Peter said there is a bit of irony in government officials and central bankers constantly complaining about “not enough inflation.”
They’re the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they’re really trying to do is get the go-ahead to produce more inflation, which is printing money.”
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I’m sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished.”
The bottom line is we can’t trust CPI to tell us the truth about inflation.