2% Inflation and Other Official Lies


According to official government statistics, the Consumer Price Index (CPI) - the mostly widely used measure of inflation - is running a very low 2.2% a year.

But if inflation is so low, why is the price of everything you buy going up so fast?

How do you reconcile 2% inflation with 10% to 20% annual increases in housing prices . . . 25% to 40% increases in heating bills during the past winter . . .and double-digit increases in the price of nearly everything you consume, from gasoline, to food, to movie tickets?

The simple answer is that the official inflation rate is virtually pure fiction, and has been for decades.

Thirty years ago, when I took my first college economics class at the University of Maryland, my professor explained why he quit his job at the Commerce Department.

He was hired to write economic forecasts based on the best available information. Yet time and again, when he sent in his report, his bosses sent them back to him to be re-written with more "positive" figures. After this happened repeatedly, it became clear to him that there was no way he could honestly do his job. http://jahtruth.net/truth.htm

For a very long time, the accuracy of government economic figures has been going straight downhill.

As John Williams, head of Shadow Government Statistics, explains:

- "During the Kennedy administration, unemployment was redefined with the concept of 'discouraged workers' to reduce the unemployment rate.

-"If Lyndon Johnson didn't like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce got it right.

 -"The Carter administration was caught deliberately understating inflation.

- "The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation.

 -"The current Bush administration has expanded upon the Clinton era ... setting the stage for the adoption of a new and lower-inflation CPI."

Why Government Wants to Keep the CPI Low

Williams estimates the current real consumer inflation rate is closer to 6% than 2%. Other research services, like free market Agora Research, now put the real inflation rate at 7%-8%.

There are many reasons why it is in the government's interest to make the inflation seem lower than it actually is: First and foremost, it saves them billions of dollars.

For instance, cost of living adjustments in Social Security, welfare payments, Medicare and other entitlements are based on changes in the CPI.

Similarly, keeping the official CPI rate low, keeps salary and pension adjustments for government employees and retirees much lower than they would otherwise be.

A low official CPI also helps keep down interest payments on the national debt (which now consumes over 20% of all government expenditures). It also keeps down the cost of government borrowing, which is now over $1 trillion a year - a lot of money even for the federal government.

How the official inflation rate is manipulated

There are in fact many ways in which the government manipulates economic information to keep the CPI artificially low:

1. Geometric Weighing: Elimination of good and services that are going up rapidly from the CPI. Goods and services that are increasing most rapidly - such as housing and energy costs - are given a lower weight in calculating the CPI, or even eliminated from it entirely!

The public rationale for this blatant sleigh-of-hand is that such goods and services are "too volatile" to be included or that increases are "temporary" and atypical. However, with such manipulation, the CPI ceases to have any connection to reality.

Depending upon how "volatile" goods are geometrically manipulated, the official inflation rate can become any figure the government wants it to be, with little connection to reality.

2. Hedonic Adjustment: Explaining away price increases as quality improvements. For instance, if the price of a computer goes up by $100 this price increase will not be included in the CPI if (as is usually the case) there is also some improvement in the capabilities of the computer.

Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold a Model T for $300.

3. Ignoring quality decreases. If we need to adjust the inflation rate for quality increases, don't we also need to adjust it for quality decreases?

The post office provides a good example. Sixty years ago, first-class postage was just three cents. But back then, the post office made four deliveries each day, two regular and two special.

Also, sixty years ago, gas stations had attendants who pumped your gas for you, checked your oil, and cleaned your car windshield at no additional charge. And movie theaters had ushers who took you to your seats. I won't even comment on what has happened to service at U.S. airports since 9/11.

Not factoring in such quality decreases - which can be dramatic even in a short period of time - also greatly understates inflation.

4. Assuming consumers will simply turn to less-expensive alternatives. Thus if the price of a steak dinner at a restaurant goes from $19.95 to $24.95, the Department of Commerce simply assumes diners will go to a less expensive restaurant, keeping their meal costs the same.

Like other CPI adjustments, this assumption has little to do with reality and is in the end simply an excuse for manipulating official inflation figures.

5. Exclusion of goods and services whose price is reduced by government subsidies. For instance, the actual cost of a subway ride in New York City is anywhere from $3.50 to $6.00, but riders only pay $1.25. The rest is subsidized by taxes.

But since only the price of a subway ride (and not its actual cost) appears in official price reports, the CPI again appears much lower than it actually is.

Thousands of goods and services in the U.S. are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system, and much of what you eat.

Considering the above list, 7% may be much too low an estimate for the present, real U.S. inflation rate.

Economic consequences of manipulating the CPI

The blatantly false official consumer price index has many harmful consequences for both individuals and our economy as a whole.

First and foremost it causes everyone from individuals to corporations to government to overspend, thanks to artificially low (and unsustainable) interest rates and easy credit.

You can see this everywhere in our society today, from home buyers "qualifying" for loans they can't really afford, thanks to artificially low interest rates . . . to home owners who use their artificially-inflated home equity as an ATM . . . to the federal government's current binge of deficit financing.

As the great free market economist Ludwig Von Mises explained in his masterwork Human Action, manipulation of the money supply creates the destructive boom/bust trade cycle, of overexpansion (boom) followed by unavoidable contraction (recession).

With foreign central banks buying less and less U.S. debt, and complaining about low interest payments, the bust is now not far off and could begin by the end of this year - potentially devastating stocks, bonds, businesses, and jobs.

The Party is About to End

Fed Chairman Alan Greenspan has announced a few months ago that he would be increasing the prime federal funds rate by more this year than he did last year (2.25%). That will mean the end of the days of easy mortgages for all and unrestrained spending.

It could even push the real inflation rate from 7% to 10%+. Such high inflation rates could cause other countries to abandon the dollar and U.S. debt like a hot potato, and in turn trigger a major U.S. recession.

However, not to worry. No matter how high interest rates go and no matter how many people lose their jobs, the "official government inflation rate" will still probably be well under 3%.