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Inflation Not as High as You Think?

Written by Nickel - 54 Comments

Inflation Not as High as You Think?

Inflation isn’t as bad as you think. Or at least that’s the premise of a recent article on NPR’s Planet Money.

According to economists, consumers consistently overestimate inflation. And not just here in the United States, either. Rather, this misperception appears to be a common occurrence in many countries. Why? Good question.

More than likely, people tend to overestimate inflation because they mostly associate it with things that they buy most frequently, such as gas or groceries, as opposed to bigger ticket items that may make up a larger part of their budget.

It’s also been well documented that the media tends to provide much more coverage of price spikes vs. instances in which prices are declining. And, of course, there’s a tendency for people to dwell on the negative rather than celebrating the positive.

As an example… Remember last spring when everyone was predicting gas at $5/gallon before the end of the summer? That never happened. Instead, gas prices tumbled through the summer. And yet you never really heard about that. People (the media in particular) just stopped talking about it.

More recently, when prices once again began to tick upward, gas prices were in the news again even though the summer’s predicted price spike never materialized.

What do you think? Do people tend to overestimate inflation? Or do official inflation estimates underestimate the true inflation rate?

Published on October 22nd, 2012
Modified on October 27th, 2012 - 54 Comments
Filed under: Consumer, Economy

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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54 Responses to “Inflation Not as High as You Think?”

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  1. 1
    Jonathan Says:

    Shadowstats.com would say otherwise.

  2. 2
    jim Says:

    I absolutely agree. People do overestimate the inflation. They notice the prices that go up and don’t notice the ones that are flat or drop.

    Theres a lot of major costs that have been flat or dropping in recent years.

  3. 3
    RampantRedsFan Says:

    Inflation can be seen from 2 perspectives: micro and macro.

    On a micro level your personal inflation rate is based on the things (or categories) that you buy most. If half your budget goes to gas, and gas goes up 20% while the rest of your budget stays the same then your personal inflation rate was 10%.

    On a macro level I am no expert, but I always feel like the inflation rate is underestimated. Two things give me this feeling: Fuel and a number of other items are excluded in the newer calc. This is supposedly because it is baked in with other items, but I don’t buy that explanation completely. The inflation rate is lower than the increase in the price of real currencies (IE precious metals) in the long term, therefore the purchase price of the dollar compared to a finite resource has gone down faster then we are are being told.

  4. 4
    Jonathan Says:

    @jim

    What we are witnessing is debt destruction and the resulting price drops due to decreases in demand due to consumers having less access to credit.

    Prices would fall even further if the FED didn’t step in attempting to prop up toxic asset prices. Eventually, the flood of money they are creating has to flow somewhere, and when it does, prices for everything will skyrocket.

    Unfortunately, inflation itself is really a symptom of central bank malfeasance, a point that is never really discussed in mainstream media or by the government itself.

    Creating dollars out of thin air is a hidden tax that gives the government unlimited spending powers, to the detriment of savers and those who were more prudent with their own money.

  5. 5
    BG Says:

    Gonna take Nickles side on this, sorry Jonathon. If shadowstats is correct then why can I get a mortgage for under 3-4% right now? Banks aren’t that dumb! The free market says inflation is nowhere near shadowstats numbers.

    Had a friend recently complaining about the cost of beef brisket (blaming it on “Obama’s printing presses”). Ask a waiter at any steak house and they will correctly point out the recent droughts in Texas and the mid-west, as well as the increasing demand for beef from Asian nations contributing to that particular increase.

    Supply and demand caused price increases are always blamed ob the inflation bogeyman.

  6. 6
    Steve Says:

    Some of the hijinks they play do seem a little wacky. Take for instance how they calculate inflation on cars. Yes, the price goes up, but they consider that antilock brakes, air bags, and electronic stability control are now standard on that car. Yet, If a consumer buys a car one year and then 5 years later, what they will compare is the price they actually pay, not the feature-adjusted price, nor their salary or food or gas costs vs. 5 years previous.

  7. 7
    Derek - Freeat33 Says:

    I don’t think economists could agree on if we were in a recession or not ( Opinion only ). How can they measure inflation!

    Even seemingly respectable websites seem to have different answers on growth. How can the average Joe really guess it accurately.

  8. 8
    Daniel Says:

    I don’t know about for you, but my four largest expenses are, in decreasing order: taxes, food, housing, and auto fuel. Everything else pales in comparison, so I’ve always thought it silly that common inflation indicators exclude food, housing, and fuel. You know — the three things everyone needs that are the most expensive things people buy!

  9. 9
    Jonathan Says:

    Actually, BG, rates are so low because that was the only way for the FED to bail the banks out. If rates were to rise, and banks had to mark level 3 derivatives to market, they would all go bankrupt overnight.

    Residential mortgage delinquencies are trending upward, and commercial, consumer and industrial loans are trending negative.

    The FED has to purchase $40BB (billion) of toxic mortgage assets, per month, just to prop up the failing markets and asset prices. All of these monetary shenanigans will eventually manifest as dramatic price inflation.

    Central banks create supply/demand distortions by pumping money into the markets to fix the bubbles they created.

    From one bubble to the next, first real estate in the 80s. That bubble was papered over and the money flowed into tech stocks, that bubble papered over and flowed into sub-prime mortgages and derivatives.

    Inflation is not a “boogey man” it is a symptom of central banking. Everyone addresses the symptom of inflation, yet never looks at the disease.

    We are at the Keynesian endpoint, rates are going to stay are zero for a looooong time.

    And, banks really are, that dumb. Why? Moral hazard.

  10. 10
    BG Says:

    Jonathon) If you sincerely believe shadowstats inflation numbers — then mortgage your house up to the hilt (at todays 3.43% 30-year fixed rate) and pocket the difference by investing in your “inflation-protected” asset of choice. That is if you can find a risk-free asset paying anywhere near shadowstats’ inflation numbers…

    That is the point I’m making: the “free-market” doesn’t agree with shadowstats. If shadowstats were accurate, then banks would not be lending at today’s rate levels (why lend to you at 3.43%, when banks could make better money elsewhere?).

    BTW: gas prices are falling currently, despite your reasons why that isn’t possible (4% drop in the past 30 days).

  11. 11
    Tommy Z Says:

    Inflation is an increase in the money supply whereas increasing prices are only a symptom of that. In fact, there can be lots of inflation with DECREASING prices if technology and efficiency are improving even faster as is the case with many high tech items today. Without inflation, the prices on tech gadgets would fall even faster.

    @BG:

    Jonathan is right. I want to address some of your comments…

    “why can I get a mortgage for under 3-4% right now? Banks aren’t that dumb!”

    Do you honestly think that banks hold the mortgages they make? The only reason banks are making mortgages is because they can turn around and sell those mortgages to quasi-government entities like Freddie and Fannie which btw…have failed and required taxpayer bailouts.

    “Ask a waiter at any steak house and they will correctly point out the recent droughts in Texas and the mid-west, as well as the increasing demand for beef from Asian nations contributing to that particular increase.”

    There are droughts every year in various places throughout the world. This is nothing new. What IS new is when those droughts take place closer to home in certain years like we have had in 2012. So, even if prices rise due to a drought, prices in other commodities have to fall assuming there is no inflation. However, we are witnessing commodity prices increase across the board. Meaning? Inflation is real.

    “If you sincerely believe shadowstats inflation numbers — then mortgage your house up to the hilt (at todays 3.43% 30-year fixed rate) and pocket the difference by investing in your “inflation-protected” asset of choice.”

    I am in fact doing this. You should too.

    @Steve:

    “Take for instance how they calculate inflation on cars. Yes, the price goes up, but they consider that antilock brakes, air bags, and electronic stability control are now standard on that car.”

    As technology improves, quality and features get better while prices should get cheaper. This is how our standard of living goes up. However, the money printing is robbing us of our increases in standard of living because it adjusts “inflation” for quality improvements. For example, a $1,000 computer today may be twice as fast as a $1,000 computer 5 years ago. Although the price is the same, the government calculates it as a 50% price drop. Yet, when airline tickets stay the same, but airlines eliminate meals, in-flight entertainment, and charge for bags, the government calculations inflation at 0% because the ticket price has not changed. See the hypocrisy?

  12. 12
    Jonathan Says:

    @BG

    You speak of mortgage rates as if the “free markets” set interest rates in general. That is the FURTHEST thing from the truth.

    Money is simply a commodity, and money’s price is the rate of interest. Money is not exempt from the laws of supply and demand.

    Absent the central banks, and their idiotic policy of zero interest rates, mortgage securitisation would have NEVER happened! Why did it happen? Again, moral hazard!

    Give someone who can’t afford a home, hey it is a “right” to own a home after all, and package the mortgages up as AAA bonds to sell to pension funds, individuals and governments.

    Of course, the free market reacts to prices, and the price of money is NO exception. If the price of money is artificially lower, thanks Bernank et Greenspan, a surplus ensues.

    Where does this surplus money go? Who knows, but one thing is for certain, this surplus money, created out of thin air, chases real assets. To the point where it artificially drives the prices of those assets to speculative levels.

    Curious, are you familiar with any competing schools of economic thought? Keynesianism is destroying the accumulated wealth and real capital that was created by the generations before us. Read up on austrian business cycle theory.

    If the market for the price of money was really “free”, as you purport it to be (which it most definitely is not as I explained above), rates for everything would be much higher than libor +x%.

    To answer your loaded question, why would I put myself in debt to protect myself from destructive central banking policies? There are easier ways to hedge yourself, and I do, in fact, believe the shadowstats numbers, which is why I invest in precious metals.

    Gold & silver, and before you detract from them, they have both dramatically outperformed Berkshire Hathaway over the past decade, and no, the fundamentals and techincals of gold and silver indicate they are the furthest thing from a speculative bubble.

    BTW, I appreciate the debate and lack of ad hominems =)

  13. 13
    jim Says:

    Daniel said: “I’ve always thought it silly that common inflation indicators exclude food, housing, and fuel”

    The inflation index DOES exclude food and fuel. People keep saying it doesn’t but it does. THe government reports the normal CPI and a ‘core’ inflation which excludes fuel / food. They use the normal CPI (with food & fuel) for inflation adjustments like social security increases

    CPI also DOES include a housing component. Though its not straight up house costs since theres an investment component, they look more at the value of rents.

    ref:
    http://www.bls.gov/cpi/cpiqa.htm

    Tommy Z said :
    “For example, a $1,000 computer today may be twice as fast as a $1,000 computer 5 years ago. Although the price is the same, the government calculates it as a 50% price drop.”

    That is not how it works.

    For a simple laptop the government looks at a class of computer. Say high end, middle or entry level. They do NOT take price divided by speed to figure the inflation index. So paying $1000 for a 3GHzz computer today is not considered a 50% drop compared to paying $1000 for a 1.5GHz computer 5 years ago. It isn’t. Its considered no change in the index since these computers are in the same class. In fact you’d pay $500 today for the 3GHz mid level laptop and $1000 5 years ago for the 1.5GHz so the index shows a 50% drop in prices even though performance also doubled they don’t figure that performance change in the index.

    From 1993 to 2005 the clock speeds went from 60MHz to 3800Mhz (3.8GHz). Thats a 60 fold increase in performance by that measure. Its 40% annual increase. Yet the BLS computer index drops more like 10-12% a year based on prices for a given ‘class’ of device.

    ref:
    http://www.bls.gov/cpi/cpifaccomp.htm

  14. 14
    jim Says:

    My last comment (currently waiting for moderation) I said : “The inflation index DOES exclude food and fuel.”

    I meant the opposite. I edited poorly.

    Inflation DOES include food, fuel and housing.

  15. 15
    Tommy Z Says:

    Warren Buffett said that going into debt by taking on a home mortgage is a “great way to short the dollar.”

    http://www.cnbc.com/id/4654386.....ffett_Rule

  16. 16
    RampantRedsFan Says:

    @jim, CPI-U DOES include food & fuel, Core CPI does not. http://usatoday30.usatoday.com.....usat_N.htm

  17. 17
    jim Says:

    RampantRedsFan, BLS generally reports CPI-U. Thats the main inflation measure generally reported. BLS also reports CPI “less food and energy”. So yes, the CPI “less food and energy” does not include fuel and energy as clearly labeled.

    Daniel had said: “I’ve always thought it silly that common inflation indicators exclude food, housing, and fuel” The “common inflation indicators” would be CPI-U or CPI-U “less food and energy”. So I don’t think that Daniels perception is accurate.

    When the government announces the CPI they lead with CPI-U which includes food & fuel.

  18. 18
    BG Says:

    “So, even if prices rise due to a drought, prices in other commodities have to fall assuming there is no inflation.”

    I already gave the example that gas prices have fallen 4% in the past 30 days.

    “I am in fact doing this. You should too.”

    No thanks, I don’t believe shadowstats.

    “There are easier ways to hedge yourself, and I do, in fact, believe the shadowstats numbers, which is why I invest in precious metals.”

    No, if you truly believed in shadowstats numbers, you would mortgage your house to the hilt and use that “cheap” debt and purchase your precious metals (as Tommy Z is purportedly doing). To capture the difference between the “dumb” market, and shadowstats figures…

    Note: I dont advocate anyone to do that.

  19. 19
    Jonathan Says:

    @BG

    You still haven’t given a substantial rebuttal to any of the points I’ve made…

    Your example of declining gas prices is a cherry picked, false cause fallacy, at best.

    I do believe the shadowstat numbers, and my precious metal hedge reflects that.

    Implying that I do not, simply because I don’t leverage myself, does not mean that my conviction is any less so. Black or white fallacy much?

    Can you rebuke my arguments, on a conceptual basis?

  20. 20
    BG Says:

    “Your example of declining gas prices is a cherry picked, false cause fallacy, at best.”

    How many examples do you want then? Tommy Z said: “we are witnessing commodity prices increase across the board.”, so all I need is a single example to prove his statement false — and I provided the example, hence Tommy Z’s statement is false. This is logic 101.

    “You still haven’t given a substantial rebuttal to any of the points I’ve made…”

    Really? I thought my points were pretty clear. Do I believe there is inflation: YES, I haven’t doubted that. Do I think it is as bad as shadowstats makes it out to be: NO.

    The reason is simple: if inflation were as high as shadowstats claims (between 6% and 10% looking at the graphs on the website), then it would be absolutely impossible for me to find a lender to give me money at a lower rate! I say “impossible”, because any money they lend to me at the lower rate means they are losing money on day #1 — and no lender stays in business long with that kind of business plan.

    I already gave you examples using mortgage rates, but you didn’t like that, so how about: Bank of America, right now on their website, is offering new auto-loans at 2.99% for 6 years. Why would BofA offer 2.99% auto-loans if inflation were truly at 6%-10% per shadowstats? The answer is BofA wouldn’t. That is what I mean by “the free-market doesn’t agree with shadowstats”.

    If shadowstats inflation numbers were accurate, then I would suspect BofA (at a MINIMUM) would have auto-loan rates at shadowstats 6%-10% plus another percent or two premium (hence at 7%-12%).

    Since BofA’s auto-loan rates aren’t anywhere near shadowstats inflation numbers: then shadowstats numbers are crap <– rebut THAT!

    Please don't come back with some kind of conspiracy theory involving the fed-gov and BofA auto-loans — L0L — it will just make you appear crazy.

  21. 21
    Jonathan Says:

    @BG,

    Who said anything about conspiracy theories?

    BG: “Since BofA’s auto-loan rates aren’t anywhere near shadowstats inflation numbers: then shadowstats numbers are crap <– rebut THAT!"

    BG: "Gonna take Nickles side on this, sorry Jonathon. If shadowstats is correct then why can I get a mortgage for under 3-4% right now? Banks aren’t that dumb! The free market says inflation is nowhere near shadowstats numbers."
    ________

    Jonathan: Of course, the free market reacts to prices, and the price of money is NO exception. If the price of money is artificially lower, thanks Bernank et Greenspan, a surplus ensues.

    Jonathan: Where does this surplus money go? Who knows, but one thing is for certain, this surplus money, created out of thin air, chases real assets. To the point where it artificially drives the prices of those assets to speculative levels.

    If the market for the price of money was really “free”, as you purport it to be (which it most definitely is not as I explained above), rates for everything would be much higher than libor +x%.
    _________

    Your focus on the interest rates banks offer is misplaced.

    Are the rates low because banks are voluntarily keeping them low, or because of the FED? I fail to see a conspiracy in the line of questioning.

    Can we agree that the rate of interest is not as "free" as you claim it is to be?

  22. 22
    Jonathan Says:

    @BG

    As an aside, BG, continually reverting back to your interest rate argument, despite the points I’ve made above, illustrates your ignorance, and utter lack of understanding, of Basel II, Tier I capital, reserve requirements, and how these standards interact with interest rates.

    Do you realize that rates are near zero due to the fact that any increase in interest rates would cause nearly every bank to default on those standards? “<- Rebut THAT"

  23. 23
    BG Says:

    Banks don’t “keep rates low”. Banks want loan rates to be as high as possible, that is how they make money: borrowing from A, and lending to B at a higher rate and pocketing the difference.

    Your entire argument is just illogical.

    You think people are stupid by loaning banks money (in the form of CDs and savings accounts), paying less than inflation. So those savers are throwing away “real” money (adjusting for inflation they are realizing losses). BIG losses if inflation were at 6%-10% as shadowstats claims.

    And you are claiming that banks are in turn making the same mistake and losing “real” money by creating loans for mortgages and cars with rates lower than the supposed inflation rate.

    So everyone is wrong (dumb), and shadowstats is right? Or, everyone else is right and shadowstats is wrong. Take your pick.

  24. 24
    Jonathan Says:

    I’m illogical? Did I attack anyone or call them stupid?

    You really have no understanding of banks and capital requirements do you?

    You keep thinking in terms of black and white, is this due to a limited understanding of finance, economics, and banking in general?

    Quit straw manning my points and conceptually refute my point, which isn’t an opinion, BTW. It is a fact! The banks are technically insolvent.
    _______
    As an aside, BG, continually reverting back to your interest rate argument, despite the points I’ve made above, illustrates your ignorance, and utter lack of understanding, of Basel II, Tier I capital, reserve requirements, and how these standards interact with interest rates.

    Do you realize that rates are near zero due to the fact that any increase in interest rates would cause nearly every bank to default on those standards? “<- Rebut THAT"

  25. 25
    BG Says:

    If you are right, and everyone else is wrong, then capitalize on your beliefs by putting your money where your mouth is by leveraging your house to the hilt and take advantage of the (supposedly insolvent) banks.

  26. 26
    Jonathan Says:

    Wow, dude…I already told you that I own gold and silver.

    Appeal to authority much? I’m not going to mortgage myself just because Warren Buffet said to do it.

    Bill Gross, Kyle Bass, Peter Schiff, Nassim Taleb, and many others prominent in the field of finance, who manage extremely large sums of money, share similar views to mine, so you should do what I’m doing.

    See, I can play that game too. That doesn’t mean I’m not going to verify their claims, rationale and reasoning. However, their points of view do edify my own.

    Stating that I should leverage myself alludes to your ignorance of economic, financial, and banking concepts, and shows that you have no understanding of leverage either.

    Although, I do own options on mining equities, which are a form of leverage, but that’s beside the point.

    I gave you detailed, conceptual explanation, of my point of view. Explanations that you have not been able to refute with any economic principles.

    Yet, you straw man my arguments, propose a binary solution to a non-binary problem (in order to solidify my personal beliefs regarding the matter, which I already demonstrated, with my mouth and my money), and have left every question I’ve asked you unanswered despite the fact that I have answered your loaded questions.

    If you can, I’d like an answer my “unloaded” questions:

    1. are interest rates as “free” as you claim them to be?

    2. what would happen to banks if rates began to rise give the current Basel III requirements?

    3. where does the excess money, created by artificially suppressed interest rates, flow and what is its affect on the economy?

    You label me as the illogical one, when your economic arguments are riddled with common fallacies that are easily shot down.

    Try harder next time, or are you simply trying to get the final word in?

    If that’s the case, then I’ll remain silent regarding the matter if that’s what will make you happy.

  27. 27
    BG Says:

    1. are interest rates as “free” as you claim them to be?

    No, I believe the Socialist president from Kenya is personally controlling every bank and credit union in the country and is setting interest rates daily at his whim. Likewise, he controls the masses and forces them to give money to banks, while making them think they are “saving”.

    2. what would happen to banks if rates began to rise give the current Basel III requirements?

    Obviously nothing as I believe the banking cartel controls the government, hence the president, so nothing bad can happen to the banks (example: they continue to exist even though they are insolvent).

    3. where does the excess money, created by artificially suppressed interest rates, flow and what is its affect on the economy?

    Money what money? The only “real” money is gold and silver.

    *end sarcasm*

    Here are some reads for you:

    http://bpp.mit.edu/usa/

    Practically identical to the BLS numbers, just updated daily instead of monthly.

    http://blog.jparsons.net/2011/.....art-i.html

    “Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you’re delusional.”

    http://blog.jparsons.net/2011/.....rt-ii.html

    “Ignorant people are easily scammed.”

    http://traderscrucible.com/201.....ery-wrong/

    “Yes, according to John Williams (of shadowstats), the government earns massive returns by borrowing!”

    http://traderscrucible.com/201.....ery-wrong/

    “So using grade school math, investors in 6 month T-Bills are losing 8.99% per year due to inflation!”

    http://www.bogleheads.org/foru.....hp?t=73073

    “We obviously gave him (John Williams of shadowstats) too much credit as he was not attempting this challenging task at all. He just grabbed some old estimates on the impact to calculation changes and has assumed them from then to infinity. No wonder his conclusions are so completely wrong; he’s not even trying to do it right!”

    http://voxrationalis.wordpress.....estimates/

    “Williams’ incentive to continue generating a bogus data set is clear: he sells his data to a self-selecting audience who might not pay if reality were reflected accurately.”

  28. 28
    BG Says:

    Using my County’s Appraisal District website, I pulled up the property-tax history for my house (county appraises my house every year for tax purposes). They have tax appraisal histories going back to 1999. I put my home’s historic 1999 value into the shadowstats “inflation” calculator at:

    http://www.shadowstats.com/inflation_calculator

    to find out how much my home “should” be worth in January 2012 — to compare with my current tax appraisal.

    Guess what? L0L.

    The shadowstats calculator handily provides the official BLS computation and that official number is within 1.8% of my current appraisal value – after 13 years of time! In fact, the official BLS number is 1.8% higher than my current appraisal (not lower), suggesting that the BLS inflation number is a little high in this case.

    Whilst the shadowstats “alternative inflation” figure shows a bar graph implying that shadowsstats inflation-figure would put my house at least 2.5 times its current value (of course with an asterisk linking to a page that I can provide a credit-card number to pay $175 to find that value exactly).

    So, once again: who should I believe? shadowstats, or the property appraisals for my own house?

  29. 29
    Jonathan Says:

    You continue to display your ignorance when it comes to money and true purchasing power, let alone economics, finance and banking.

    Are you going to answer any of my questions or continue to ignore them.

    Did you even bother to click the link, on the page you linked, which explains concisely why they believe the government statistics aren’t a true measure of inflation. Here, I’ll link it for you since you were too lazy to do it yourself. Even though it’s on the same page.

    http://www.shadowstats.com/art.....easurement

    Your point is anecdotal at best, which is essentially a fallacy, yet you label me as illogical. Go figure.

    “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” -Murray Rothbard

    You sir, are in a irresponsible state of ignorance. Answer my questions, refute them if you can, and prove me wrong. Personally, I don’t think you can.

  30. 30
    BG Says:

    “Your point is anecdotal at best”

    My home, which is my largest expense, is anecdotal in a conversation about inflation? L0L!

    You actually believe home values have increased 2.5 times since 1999 (per shadowstats bogus “inflation” numbers) and wow, my house (MY HOUSE) is the lone outlier not fitting the trend. Hah!

  31. 31
    Jonathan Says:

    Wow, there you go again, putting words in my mouth that I didn’t say and skirting my questions.

    Did I say I believe housing prices went up 2.5 times since 1999? No.

    Although, this time around you demonstrated your complete lack of ignorance regarding statistical measurements and methods.

    Shadowstats is simply using the method of calculating CPI prior to the change in the calculation during Clinton’s administration, did you even read the link a posted for you?

    Currently, CPI is calculated using a weighted average of various consumer goods and services. Say at one moment in time CPI is composed of 25% fuel, 35% food, 30% household expenditures, etc.

    Gas prices has risen ~12% per year since 1999. That sucks, so we’ll decrease the weighted average of fuel from 25% to 5%.

    Housing expenditures seem to have fallen lately, so we’ll increase household expenditures from 30% to 50%.

    Food prices are going up rapidly, lets decrease food from 35% to 30%.

    Do you even know how a weighted average works? Let alone how you can manipulate CPI if you can change the weightings as you please?

    Why did the BLS make changes to the CPI index? Because social security payments are indexed to the CPI, using the old method of calculating CPI would result in social security payments that should be double what they are now!

    Do you even understand how the hedonistic component of CPI artificially reduces the CPI index?

    Even though a refrigerator costs more today than it did last year, the BLS offsets the inflation in price for the increase in the technology offered by refrigerator manufacturers.

    Since new fridges have fancy electronic buttons and digital displays, the price inflation is offset by the hedonistic component of the CPI calculation.

    In other words, price increases do not matter as much if the device you purchased is more pleasurable to use due to increases in technology.

    Sounds like BS to me? The price of a fridge, is the price of a fridge, no matter how much statisticians tell me that the price isn’t the price simply because this years version has more buttons than last years.

    Are there any other subjects you’d like to show the interwebz you have a complete ignorance of?

  32. 32
    Tommy Z Says:

    @BG:

    I want to address 3 things: Shadowstats, Bank of America interest rates, and commodity prices

    1. Shadowstats attempts to measure “inflation” in a more honest way which also happens to be how “inflation” has been historically measured. I say “inflation” in quotes because most people do not understand that inflation means an increase in the money supply – not an increase in prices. However, people today tend to think of inflation as an increase in prices…and if prices do not increase, or decrease but slower than they otherwise would, they assume inflation does not exist…which is obviously false.

    So when you think of inflation as a word to describe price levels instead of monetary supply, ShadowStats tends to estimate the price level changes similar to how it was tracked in the 1970’s. Surely you don’t think inflation was low in the 70’s, do you?

    2. Bank of America and lend money cheaply only because they can borrow it cheaply. We do not have a free market in interest rates – we have centrally planned interest rates. If Bank of America can borrow from the Fed at next to 0% and make a car loan for 4-6%, then of course they are going to do it. However, look out when interest rates start to rise – banks will fail left and right. The FDIC has nowhere near enough money to reimburse depositors.

    3. Just because you say fuel prices are down 4% doesn’t mean my point was refuted. Commodity prices do not go up and down in a straight line. There are fluctuations overtime and the long-term trend in fuel prices is up…which is true of all commodities when you look at them all as a broad basket (some go up, some down, but overall – everything is up).

  33. 33
    Jonathan Says:

    @Tommy

    Lol, you’re trying to explain the subtle differences between cost push inflation vs purchasing power deflation as a result of the increase in the money supply, to an individual who has no understanding of economic, financial or statistical subjects.

    Of course, purchasing power erosion requires an increase in the money supply along with an increase in money demand and the velocity of money.

    All of this would require an understanding of economics, statistics, finance, banking, money velocity, and the cantillon effect, which BG sorely lacks.

    I’m sorry, I know you get it, unfortunately, BG will come up with some cockamaney reason as to why it is okay to change the weightings and components of CPI on an ad hoc basis.

    “Gas has been going up tremendously in price, so let us remove gas entirely as a component of CPI”

    “Hamburger inflation is less than steak inflation, so let’s remove steak and use hamburgers”

    “Hotdogs are cheaper than salmon, take salmon out and use hotdogs”

    He’ll come up with some wild eyed reason as to why the above statements are true and why a fixed basket that doesn’t change (the old method) is bogus.

    BTW, he’ll avoid the core of your reasoning, straw man your argument, call you illogical and create a red herring of sort to detract from your main points, while throwing in some ad hominems lite.

    When he is finally pinned to a wall, he’ll present you with a black or white binary solution to a real world non-binary problem. In short, either everyone else is dumb and you are the sole individual who thinks this way, or you’re dumb and everyone else is right. Pick one and mortgage yourself to oblivion, if you won’t then you are lacking in your convictions.

    In the words of BG “L0L”

  34. 34
    BG Says:

    “He’ll come up with some wild eyed reason as to why the above statements are true and why a fixed basket that doesn’t change (the old method) is bogus.”

    No, I’ll come up with a wild a$$ reason why all your assumptions about how the BLS actually calculates is completely wrong. Perhaps you shouldn’t take your “facts” from a government conspiracy website that specializes in making money off those conspiracies.

    http://www.bls.gov/cpi/cpiqa.htm

  35. 35
    Tommy Z Says:

    @BG:

    The very government that reports their own inflation numbers is the same government that profits/benefits off those numbers. It is the fox guarding the hen house!

    Fast forward to 1:37 here:

    http://www.youtube.com/watch?v=FQWzRK3Bwtg

  36. 36
    BG Says:

    You guys realize that John Williams of Shadowstats doesn’t actually “calculate” an alternative inflation rate at all, right? He is just blindly adding 7% to the official BLS numbers.

    http://www.shadowstats.com/article/special-comment

    “I do not recalculate the CPI, only adjust for the reported, aggregate biases, generally using the BLS numbers. Since 1980, the aggregate change in annual CPI inflation reporting due to methodological shifts has been a reduction of roughly 700 basis points (7%).”

    Why don’t you turn your skeptisism on the government conspiracy website? What would you do if you thought maybe, just maybe, shadowstats is wrong. Perhaps you’d look for some third-party to validate either the BLS or shadowstats. If you bothered to look, you would find The Billion Prices Project at MIT:

    http://bpp.mit.edu/usa/

    Showing numbers very close to the official BLS (and nowhere near shadowstats figures).

    “The project monitors over 5 million prices in 70 countries, including the United States. One the project’s early successes was demonstrating that the government of Argentina was consistently understating that country’s inflation rate. “They actually fired people from the statistical office and they forced them to recompute a new inflation rate,” says Roberto Rigobon, an MIT management professor and cofounder of the BPP.”

    Is MIT in-bed with the fed-gov too?

    Or, if the US government were shafting the elderly (Social Security recipients), perhaps their lobby group (AARP) would have something to say about that — where is their outrage? Shouldn’t be hard for you to find some evidence where they claim the BLS numbers are bogus and shadowstats is correct.

  37. 37
    Jonathan Says:

    @BG

    Dude, BG, the shadowstats site uses the old method, the BLS’s old method, of calculating CPI with a fixed basket.

    Did you even read what I wrote, do you ever read what I write?

    You okay with removing gas, even though its gone up 12% per year since 1999?

    You okay with substituting hamburgers for steak since hamburger inflation is lower?

    You okay with using hotdogs instead of salmon?

    These statements aren’t conspiracy, they actually reflect the changes the BLS makes to the weightings of the CPI calculation.

    _____
    BG Writes:

    No, I’ll come up with a wild a$$ reason why all your assumptions about how the BLS actually calculates is completely wrong. Perhaps you shouldn’t take your “facts” from a government conspiracy website that specializes in making money off those conspiracies.

    _____

    Is your reading comprehension lacking or something? I’m no conspiracy theorist.

    However, you sir, are an individual irresponsibly ignorant of economics, who constantly appeals to authority without question.

    Red herring much, OMG people can’t make money off of information, question the government and it’s conspiracy. Way to detract from the issue yet again, illogically I might add, without adding anything to the conversation either factually or conceptually.

    According to you, myself, Bill Gross, Kyle Bass, Peter Schiff, Jim Rodgers, Nassim Taleb, and many other prominent financial professionals are simply conspiracy theorists. Since we don’t inherently believe the BLS statistics.

    “L0L” you mad much, it’s ok if you don’t know how to argue a point since you obviously lack the knowledge and intelligence needed to do so, I do get a kick out of you making an “a$$” out of yourself though.

    que BG and his last word post in…

    3

    2

    1

  38. 38
    Jonathan Says:

    Oh, and I suppose that our clients, who are managing directors, CEOs, CFOs, board members, vice presidents, and directors of large Fortune 500 companies and investment banks (who all agree with our premise regarding inflation) are conspiracy theorists as well?

    I’ll inform them that we should change the way we manage their eight figure portfolios because BG thinks the BLS doesn’t manipulate CPI and inflation is lower than we think it is.

    /sarc

    I’d like to think that they, myself included, know a little more about finance than you do, actually, a whole lot tons extra super mega duper more. Especially when it comes to managing large sums of money.

    How many people trust you to manage their life’s fortune? How about inter-generational fortunes? What was that? None?

    I rest my case.

  39. 39
    BG Says:

    I’m not sure why Nickel has a couple of my comments stuck in “moderation” — perhaps I’m linking to too many sites that debunk shadowstats.

    You do realize, Jonathon, that shadowstats doesn’t have an army of people out collecting pricing-data all over the country (like the BLS does) — he is one man, in his garage, and all he is doing is adding 7% to whatever the BLS publishes — and you are paying him for that. L0L.

  40. 40
    BG Says:

    Having to split my comments up do to “waiting on moderation”:

    You guys realize that John Williams of Shadowstats doesn’t actually “calculate” an alternative inflation rate at all, right? He is just blindly adding 7% to the official BLS numbers.

    http://www.shadowstats.com/article/special-comment

    “I do not recalculate the CPI, only adjust for the reported, aggregate biases, generally using the BLS numbers. Since 1980, the aggregate change in annual CPI inflation reporting due to methodological shifts has been a reduction of roughly 700 basis points (7%).”

  41. 41
    BG Says:

    Why don’t you turn your skeptisism on the government conspiracy website? What would you do if you thought maybe, just maybe, shadowstats is wrong. Perhaps you’d look for some third-party to validate either the BLS or shadowstats. If you bothered to look, you would find The Billion Prices Project at MIT:

    http://bpp.mit.edu/usa/

    Showing numbers very close to the official BLS (and nowhere near shadowstats figures).

    “The project monitors over 5 million prices in 70 countries, including the United States. One the project’s early successes was demonstrating that the government of Argentina was consistently understating that country’s inflation rate. “They actually fired people from the statistical office and they forced them to recompute a new inflation rate,” says Roberto Rigobon, an MIT management professor and cofounder of the BPP.”

    Is MIT in-bed with the fed-gov too?

    Or, if the US government were shafting the elderly (Social Security recipients), perhaps their lobby group (AARP) would have something to say about that — where is their outrage? Shouldn’t be hard for you to find some evidence where they claim the BLS numbers are bogus and shadowstats is correct.

  42. 42
    BG Says:

    “Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you’re delusional.”

    http://blog.jparsons.net/2011/.....art-i.html

  43. 43
    BG Says:

    “Yes, according to John Williams (of shadowstats), the government earns massive returns by borrowing!”

    http://traderscrucible.com/201.....ery-wrong/

  44. 44
    BG Says:

    “We obviously gave him (John Williams of shadowstats) too much credit as he was not attempting this challenging task at all. He just grabbed some old estimates on the impact to calculation changes and has assumed them from then to infinity. No wonder his conclusions are so completely wrong; he’s not even trying to do it right!”

    http://www.bogleheads.org/foru.....hp?t=73073

  45. 45
    BG Says:

    “Williams’ incentive to continue generating a bogus data set is clear: he sells his data to a self-selecting audience who might not pay if reality were reflected accurately.”

    http://voxrationalis.wordpress.....estimates/

  46. 46
    BG Says:

    “Shadowstats doesn’t come cheap: currently, an annual subscription costs $175.

    Six years ago, an annual subscription cost … $175.”

    http://krugman.blogs.nytimes.c.....n-measure/

  47. 47
    Jonathan Says:

    Awww, BG, you are quite the chef, how long did it take you to cook up that copy pasta?

    Here, I’ll reply to you, using my own brain (which is apparently so “illogical” my employer, and our clients trust, me enough to pay me for input and advice when it comes to managing large sums of money or developing investing strategies).

    You see, in your paradigm, when you think of inflation you are really thinking of cost push inflation, which is inflation due to price increases. In this alternate reality of Keynesian economics, you’d technically be correct. Yay BG, you’re so right, you are the copy pasta king!

    Unfortunately, people who have real wealth and are sophisticated enough understand alternative forms of economic thought and are smart enough to reject Keynesian dogma, view inflation as any increase in the money supply.

    M3 has grown at an annualized rate of around 17%, we don’t wait for inflation to manifest itself and the increase in consumer prices. Want to know why? Because you don’t know where the money, which is created out of nothingness, is going to flow!

    Papering over the bubbles with money only leads to bubbles which are subsequently more dramatic and volatile than the bubble the money was created to initially fix.

    I never said I didn’t believe in the housing bubble. The real estate crash in the 80s was papered over, paper which flowed into and caused the tech stock crash, which was papered over again creating the financial crisis and an eventual currency crisis. OMG, I said currency crisis, conspiracy, blasphemy!

    You probably don’t even realize that the biggest bubble of all right now is government bonds. A complex subject indeed, but I wouldn’t expect you to understand that. Yet I digress, go be “safe” and buy some t-notes.

    Understand, that to increase the supply of anything is to decrease its price. Money is simply a commodity and its price is either interest rates or purchasing power. Guess what, the purchasing power of money has fallen dramatically more than the CPI index otherwise indicates.

    Sure, some things have inflated more than others, some things are even flat in terms of prices. Yet, how many individuals have experienced a reduction in salaries? A cut in hours? Reduction in benefits? Find themselves on food stamps or unemployment? Underwater on their mortgage? Having to work extra hours? Surprise, suprise! Those are all forms of inflation!

    How much harder is it for Americans today, to purchase that same basket of goods compared to yesterday. Speak to a hundred, a thousand, a whole city full of people. Hardly anyone would say it has gotten easier.

    Try again BG, you are grasping at straws. Keep demonstrating your ignorance, and posting copy pasta BS. You haven’t presented a single argument that has came from the space between your two ears.

    Oh, and guess what, we have subscriptions to financial services that are 50 times more expensive than $175 a month. Apparently, those services are “expensive” since many of them trash CPI, I guess we should get our money back.

    Anyone who invests in PIMCO total return and has paid them any managment fees should ask for a refund, Bill Gross said CPI is a sham.

    Anyone who invested with Kyle Bass’s hedge fund and made 300% in a single year should get their money back, Kyle Bass has a similar investment premise to ours.

    Oh, wait a second, our firm is trashing the S&P over a ten year period with no negative years. All on the premises of absolute inflation adjusted returns in an inflationary f**king environment.

    So while we continue to manage money, under a premise that you think is trash, go google fu some talking points and pretend that you know what you are talking about. I’ll keep responding until you no longer amuse me.

    Look at that, I didn’t even have to google sh*t to reply to you.

    cue, BG google copy pasta in

    3
    2
    1

  48. 48
    Tommy Z Says:

    “Or, if the US government were shafting the elderly (Social Security recipients), perhaps their lobby group (AARP) would have something to say about that — where is their outrage? Shouldn’t be hard for you to find some evidence where they claim the BLS numbers are bogus and shadowstats is correct.”

    BG – When I ran for office, I had the opportunity to speak with many voters – especially senior citizens. They all agreed that their COLA increases were not keeping up with inflation and nobody was happy about it. They shared their stories with me about how its getting harder and harder for people living on a fixed income.

    A poll was just released where question #31 asks:

    “Which of the following is the biggest economic problem facing people like you?”

    The #1 problem Americans identified is rising prices (41%). Compare this to unemployment which was #2 at only 24%.

  49. 49
    Jonathan Says:

    Rising prices with rising unemployment are symptoms of the disease of monetary inflation.

    I know you get it Tommy Z; unfortunately, the concept keeps flying over BG’s head.

    He’s too focused on the symptom of cost push inflation to realize it.

    He’s like a doctor that keeps measuring the increases in a cancer patient’s in lung cancer cells on an annual basis but doesn’t realize that his patient reeks of cigarettes and will soon die a horrific death.

    In this case, central bank malfeasance is the smoking “butt”, yet BG chooses to focus on the symptom of price increases, when he should examine the disease of monetary inflation which is caused by the central banks.

    A disease which has caused the sovereign debt crisis in europe, a crisis coming soon to a country we live in.

    Next up, currency crisis and the central bank race to debase.

    I know BG, sometimes certain things are too difficult for some people understand, it’s ok. Although, it doesn’t mean that it isn’t true if you can’t understand it.

    Cue, BG conspiracy theory brush off…

  50. 50
    BG Says:

    Tommy) No doubt that price inflation (defined as increasing prices regardless of the cause) affects the elderly the most. The best insurance against inflation is people having a job, as wages typically increase in tandem with inflation (over the long term). Economists are pretty universal in agreement that a low (yet positive and non-zero) inflation rate is ideal.

    The elderly, however, are on fixed incomes so price inflation (ANY inflation) is felt by them the hardest — so rightfully: they will complain the loudest.

    Having said that, I have seen nothing from the AARP indicating that the BLS is UNDERSTATING the true inflation rate. Yes, the elderly complain to politicians about inflation — but the elderly (AARP) are NOT saying the BLS is “cooking the books”.

    Also, I noticed that neither of you have disputed the MIT-BPP, which is commercialized at PriceStats.com, that I mentioned.

    Jonathan said: “…M3 has grown at an annualized rate of around 17%, we don’t wait for inflation to manifest itself and the increase in consumer prices….”

    Thank you for FINALLY admitting that the BLS numbers are accurate. I’ll leave your predictions about M3’s affects on FUTURE inflation between you and your clients.

    As I said earlier:

    “Do I believe there is inflation: YES, I haven’t doubted that. Do I think it is as bad as shadowstats makes it out to be: NO”

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