The Trouble With Shadowstats

Often, when I talk about inflation being low, people who disagree tend to cite John Williams’ Shadowstats as evidence that price inflation is not low at all.

Now, I don’t disagree with the idea that some people have experienced a higher level of price inflation than the CPI. Everyone experiences a different rate of inflation based on their purchasing habits, so by definition everyone’s individual rate will diverge from the official rate to some degree; some will be higher, and some will be lower. And I don’t disagree that rising food and fuel prices have been a problem for welfare recipients and seniors on a fixed income, etc, who spend a higher proportion of their income on food and fuel than, say, young professionals with a lot of disposable income.

What I do disagree with is bad statistical methodology. Shadowstats is built on the belief that the Bureau of Labor Statistics changed their methodology in the 1980s and 1990s, and that if we were using their original methodology the level of inflation would be much higher. Shadowstats presents what they claim to be the original methodology. But Shadowstats is not calculating inflation any differently.They are not using the 1980s or 1990s methodology that they believe would be higher.  All Shadowstats is doing is taking the CPI data and adding on an arbitrary constant to make it look like inflation is higher!

This should be obvious from their data, which has the exact same curve as the CPI data at a higher level:

alt-cpi-home2 (1)

In fact, according to James Hamilton of Econbrowser, John Williams admitted in 2008 that his numbers are just inflated CPI data:

Last month I called attention to an analysis by BLS researchers John Greenlees and Robert McClelland of some of the claims by John Williams of Shadowstats about the consequences for reported inflation of assorted technical decisions made by the BLS. Williams asked me to update with a link to his response to the BLS study. I am happy to do so, along with offering some further observations of my own.

You can follow the link to Shadowstats’ response to Greenlees and McClelland and judge for yourself, but my impression is that the response is more philosophical than quantitative. In a separate phone conversation, Williams further clarified the Shadowstats methodology. Here’s what John said to me: “I’m not going back and recalculating the CPI. All I’m doing is going back to the government’s estimates of what the effect would be and using that as an ad factor to the reported statistics.”

Price changes and inflation are important topics, and constructing alternate measures of inflation is a worthwhile activity. Researchers at MIT have tried to do this with their Billion Prices Project, which measures price trends across a much, much larger range of products and locations than CPI:


What the Billion Prices Project implies for Shadowstats is that the CPI is roughly correct, and there is no vast divergence between real-world price trends and the CPI number. Of course, maybe the 1980s and 1990s methodology would be different from the current numbers. It would be very interesting to compare the current CPI methodology with the older CPI methodologies and with the BPP data! But assessing this empirically would require someone to mine through the raw CPI data since the 1980s and recalculate the outputs with the real earlier methodology — a far longer, more difficult and sophisticated process than taking the CPI outputs and adding an arbitrary constant!

201 thoughts on “The Trouble With Shadowstats

  1. Many libertarian talking heads, like Peter Schiff, like to cite these data. Now there’s a post to link to every single time someone cites Shadowstats. Thank you for writing this article.

    • Funny how the author assails Williams for his shorthanded approach but then says doing it properly would require mining through decades of raw data and obviously arduous task. It is easy to drink this authors cool aid but I can tell you my pay check is not going as far and that is all I need to know irrespective of what John Williams or the government says.

      • There is no inflation w/o the wage-price spiral. Rising prices ‘per se’ is not inflation. There are a host of reasons for prices to rise including shortages of key inputs.

        Aziz’ point is that Williams’ statistics don’t conform to observable reality. Williams and others … have a simplistic view of central banking.

        Consumer prices are increasing due to the rising real price of petroleum: 600% since 1999. Burn more fuel => ongoing shortage => increasing real price => increased nominal prices of fuel-embedded goods => system bankruptcy.

      • “Funny how the author assails Williams for his shorthanded approach but then says doing it properly would require mining through decades of raw data and obviously arduous task. ”

        The point is that Williams isn’t even trying to do that; he’s just claiming that the CPI is too low, adding an arbitrary number to it, and claiming truth.

      • I can see that the sun goes around the Earth, and that is all I need to know, irrespective of what the impertinent Galileo’s telescope says.

    • “young professionals with a lot of disposable income”??? So, he has no idea? Even the government data shows the demise of this endangered species. The rest is just total dribble to support that thesis.
      Melvin seems totally convinced and willing to use any excuse to support the elite. The elite who are reaping the benefits of printing record peace-time debt and ignoring the human suffering. It reminds me of a religion where some want to believe this elite represent honesty above any others.
      The prejudice and absolutism used indicate a closed minded obedience. Look at the terms of that statement and substitute families on food-stamps, families on Social Security, and many other fixed income groups that are concerned about inflation.
      These are real suffering humans on fixed incomes. Even Wal Mart has begun to complain. There are a lot of people on fixed incomes (or no incomes) who complain about the pinch of inflation. Then there are those who choose denial of those who are suffering. Exactly how fast has that “young professionals with a lot of disposable income” been growing the last 10 years?

      • 83% of May 2014 graduating class have been unable to find jobs in their chosen profession. My son graduating LNU a year ago and the best he could find was a rental clerk at Avis. When you factor in student loans he barely makes enough to support himself. Forget about a home, family, new car, furniture etc. He’s lucky he can pay his rent

        • Which is why the Federal government should be stimulating the economy until we are back to full employment. It is Republican-led austerity that is holding the economy back, and bogus claims that inflation is rising are one of the excuses they use for blocking any fiscal stimulus. If your kid can’t afford to live and pay off his loans, blame the Republicans throttling the recovery, not inflation.

    • Yea, thanks so much for concluding with telling us the proper way to actually figure this out, and then telling us that it is too much work for you or your colleagues to do! Anyone can look at your data. Beef is up 25% in one year, same with dairy in general, along with vegetables(could be a drought issue). Thanks for telling me my stuff doesn’t cost more, now please explain that to my grocery store!

      • Beef is up, because of the Global Global Warming Drought, where were you when Texas ranchers got burned out last year from drought, and sold all their cattle, now a cattle shortage leads to higher beef prices.

        This is a Republican Created Problem, the continuing Ignorance of the scientific data, and the Do Nothing Republican Congress.

        Five Years and Running US Drought.
        Vote Republican and Vote to Destroy America.

    • It’s the Republican Bubble of TOTAL Incompetence.
      – Global Climate Change Denial.
      – Hyperinflation fears, when real inflation hasn’t broken out to 5%.
      – According to them the best wage rate is ZERO.

      Fox News is there to Fool Republicans.

    • If one wished to correct for hedonic adjustment of the cpi then one would determine using bls statistics by what percent the cpi had been lowered (bls determines a correction for each of 15 or so categories) and then add that percent back. If the bls correction percentage didnt vary much from month to month then neither would the correction to the adjustmentt, since except for sign thay are identical. such a corrected cpi is obviously valid, useful and not the mere adding of a constant to bls cpi. Surely correcting for hedonic adjustment by recompiling all the bls data and then not subtracting the hedonic adjustment percentage would be incredibly more moronic than just adding the hedonic adjustment percentage back in, n’est *pas ?

      • You are absolutely correct.

        But it is much easier for those like cmaxracer above so simply shout “see republicans and teabaggers are stupid” because such responses make small people feel big.

        My only take away from this article is stadowstats is essentially correct, the mechanism he used was a shorthand method to get to an approximately correct number, so it’s not exact but close enough to make a valid point. Which is yes we are in a high inflation environment due to increasing the money supply by 500% in less than a decade and yes the real economy is shrinking.

        • Actually it doesn’t mean the money supply increase has caused inflation – because rates were higher BEFORE QE. ShadowStats has shown a higher level of inflation prior to 2008 – you have to compare the rate change both before and after 2008 to make any meaningful conclusion.

          Since ‘increasing the money supply 500%’ did not cause inflation to uptick either via BillionPrices, CPI, or ShadowStats, your conclusion is obviously incorrect.

  2. The best Shadowstats smackdown is always going to be Krugman:

    “A correspondent alerted me to an interesting alternative measure of inflation beyond the Billion Price Index. Those who claim that inflation is vastly understated often appeal to the authority of Shadowstats, a site that purports to provide true measures of many economic variables.

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

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

  3. This is a big subject — and I have a little box to type in. A few points:

    a- CPI is NOT a measurement it is CONSTRUCT. It is a model of person X living in time/space Y and and consuming Z. As Z is not fixed — there is no “measuring” taking place.

    b- In order to me more objective and more relevant to average US/UK citizens — we should try to be use a methodology that is more like a measurement and has a FIXED “basket” of things. You could have some different flavors of “basket” — perhaps one geared to the essentials of life and another that included luxuries and leisure.

    c- There are other things that move our material standard of living around — and these are worth considering also. It would cost you millions to build a small stone cottage in the US (anywhere) and many material good people worked and saved for were hand made and hardly disposable. Likewise if your new printer weighs 2lbs and is a bunch of plastic crap — and your last printer had real machinery — the substitution of the newer one does not represent falling prices.

    d- In 1970 a can of Cambells soup was 10 cents. It is now over 2 dollars. If you wish to focus on essentials — then the cost of living in the US has gone up far, FAR higher than any official source will admit to. If you are more affluent — then you spend your money differently — and your experience may be quite different.

    e- SGS only attempts to show CPI ex-manipulation — it is not a new, from scratch measurement. The BPP is relevant to people who spend 100% of their income on — but otherwise, I think falls short of the mark.

    f- The standard of living of the average American has declined dramatically — especially considering 2-income households — and an inflation number of around 8% would probably accurate and meaningful to the non-affluent. I guess that’s about 4x.

    See also:

    (by me)


    • a- CPI is NOT a measurement it is CONSTRUCT. It is a model of person X living in time/space Y and and consuming Z. As Z is not fixed — there is no “measuring” taking place.

      What is measured empirically are the parameters of the framework, e.g. prices of items in the basket.

      b- In order to me more objective and more relevant to average US/UK citizens — we should try to be use a methodology that is more like a measurement and has a FIXED “basket” of things.

      I am all for more empirical measures of living costs! But I do think that some flexibility is important, because obviously consumption habits change for the vast majority of people based on their preferences…

      e- SGS only attempts to show CPI ex-manipulation — it is not a new, from scratch measurement. The BPP is relevant to people who spend 100% of their income on — but otherwise, I think falls short of the mark.

      Shadowstats is manipulation of the CPI! It is just adding on a constant, not using the old hedonics (which would be quite interesting…)

      BPP doesn’t just use prices from Amazon! It tracks a very wide range of goods from a wide range of retailers, across a vast variety of sectors food, real estate, etc.

      f- The standard of living of the average American has declined dramatically — especially considering 2-income households — and an inflation number of around 8% would probably accurate and meaningful to the non-affluent. I guess that’s about 4x.

      8%? Did you pluck that numbers out of thin air?

      • OK

        Point 1 – if the basket and other parameters change enough — I am saying that then it becomes a “construct” — and is not useful as a “measurement”.

        Point 2 – Many consumption habits change and maybe the price of hay is not so important these days — but is the MOTIVE of all the basket adjusting to accurately track habits — or obscure increasing prices? As SGS points out — if people buy hamburger instead of steak, this could be legit adjustment by BLS/CPI rules — but is clearly not giving a useful answer.

        Point 3 – My relating BPP to was sort of sarcastic. BPP collects prices from ONLINE RETAILERS and not medical offices, farm stands, or gas stations — therefore it is biased away from essentials — which should be the FOCUS of any legitimate “headline” number.

        Point ~4 – NO numbers from thin air; (me) generates its own prop metrics (see also my ‘flation essay). We have one that is called UNCORE (like the inverse of core inflation) that takes (mostly) BLS data from categories that relate to ESSENTIAL items humans need to live — and we studiously ignore the great deals available on snowboards in the springtime.

        Point n – Kids DO TRY THIS AT HOME: Look at the prices YOU were paying far various ESSENTIALS in 2000 vs today. If I look at my personal expenditures for:

        Fuel oil
        RE tax
        Medical insure
        Uncovered medical and dental
        Casual labor
        Organic beef, poultry, eggs

        I am looking at 2x from 2000> 2012. (in the Republic of Vermont, U$D).

        In my view, a discussion of price inflation should focus on the cost of *essentials* — because problems there have the highest real human cost AND we all have to spend something in this area….


        • It is true that prices for essentials have risen faster than those for nonessentials in recent years. But there’s no guarantee this trend will continue. Technological improvements may deflate food costs, energy costs in coming years in much they way as they did for most of last century!

          There are price indices like EPI that do the job you’re talking about. Unfortunately, these don’t do a great job of measuring the real cost of living, because people don’t just buy “essentials”. The EPI was falling 85% year on year in 2008, as Josh Barro points out here. That’s not a reliable measure of living costs.

        • One could argue that a measure of price inflation should _only_ examine the cost of essentials. In an economic downturn, many non-essentials come under extreme price pressure. Not necessarily all, of course. Prices at the Rolex / Rolls-Royce / Belgravia apartment end of the market are currently outpacing anyone’s inflation measure…
          For the top 0.001 or so percent, it’s been a really good global financial crisis.

        • The price of hay has gone up considerably because the price of fuel has gone up considerably and those of use who farm have to pass that cost on. My corn and alfalfa costs have risen too.

    • Agreed, especially point B. Living/minimum wage increases, and indexation are there to ensure standard of living does not fall, so basic clothing, food and shelter, should be a separate construct.

      However it can be argued that the basket of goods must be expanded, for if one can not participate in the culture one lives in, then that alienates them (So other “luxury items” are included).

      Substitution is ridiculous as it does not take into account diet intolerances, ethnic or religious requirements.

      But don’t forget that because your iPhone has so many “superfluous advantages” The cost of phones goes down according to the Statistics Bureau. That is my favourite.

      All these measures hide the fact that our Central Banks dilute the monetary supply, and only the rich and connected snap up real resources, before the minimum wage worker gets an indexation.

      • The fraud perpetrated by substitution issue is the most salient part of the argument. I can live without a flat screen TV but having me substitute hamburger for steak or corn chips for real vegetables is ridiculous.

  4. Great post! Here’s another graph comparing Shadowstats inflation and the CPI

    The graph looks like Shadowstats said “Since the early 1980s inflation has been X% higher than the CPI says it is” … and then they just started factoring in that extra X%. X being the “arbitrary constant” to which you refer.

    That graph is from Steak, Hamburger and Dog Food: How the Government Lies About the Real Inflation Rate by David Zeiler.

    If what you report is true, I’m disappointed in Shadowstats. I do think inflation is higher than reported (but that’s based on impressions, not measurements). And I do think changes to the way inflation is calculated have kept the numbers falsely low. If we’re eating beans instead of steak because the price of steak went up, and then they take steak out of the CPI and put beans in instead, there’s something very dishonest going on.

    • The graph looks like Shadowstats said “Since the early 1980s inflation has been X% higher than the CPI says it is” … and then they just started factoring in that extra X%. X being the “arbitrary constant” to which you refer.

      In the 80s series, they seem to be using a series of increasing constants. That graph blows my mind, though. They were saying inflation was 5% in 2009 when prices were falling hugely, especially food and energy!

      I do think inflation is higher than reported (but that’s based on impressions, not measurements). And I do think changes to the way inflation is calculated have kept the numbers falsely low. If we’re eating beans instead of steak because the price of steak went up, and then they take steak out of the CPI and put beans in instead, there’s something very dishonest going on.

      I don’t think the hedonics are really as bad as people say they are. After all, they tally with what BPP is showing. If BPP and other comparable measures were showing a much higher number, I might take the idea that inflation is higher more seriously!

  5. Yes many household consumer goods prices are low but that’s because in the past we have the cheap Chinese labor and other cheap labors which is reason the developed world were able to enjoy cheap consumer goods. But be aware the good time won’t last very long. Chinese cheap labors are not that cheap anymore. natural recourses prices are trending up.

    You might say, “So what Chinese cheap labors are not cheap anymore but there are others will replace them such cheap labors in India, Pakistan etc etc. But understand this Cheap labors is only one of the factors for cheap goods. There many others factors such as the support system factor, such as infrastructure, political stability support, work ethic and skills of the workers. The replacements currently don’t have all that China used have that supply the world cheap goods. Therefore, the costs are higher then the past Cost of Made In China. Inflation and stagflation is the trend from now on. There is no going back.

    Last but not the least: Big chuck of one’s paycheck goes to ever higher and higher rent/mortgage (housing prices are up,) healthcare & insurance, utility, education and food. You have very little left to save for retirement. And after saving for retirement, too many literally have not much to consume at all. Still many are in debt too have to repay the debt.

    • p.s. in the past China exported deflation around the world. Now they are exporting back the inflation they are stuffed and suffering at home back to the developed world. They are bring their dollar to stir fry All assets around the world, such as Real Estate market. Wherever they go, housing prices are shooting up. They are also buying US stock market too. They are buying up foreign companies too.

      There will be inflation and by the time you finally realize it’s happening, it’ll be a bit too late.

      • Ricecake —

        You may be right, but there is another possibility — that prices will keep falling because of improving technology and automation.

        • Automation has it’s limit. First someone must invests lots of money on Automation and make robots work. The costs are not cheap and you still need highly skill people to maintain and make the automation work the way you want. Expect a wave of TECH Bubble, in this case is called Robotic Bubble hit us sooner and later. Lots of people will lose lots money first. It seems Amazon’s still not very profitable. How do they make their investment back if prices are low? They will eventually increase prices. They can learn from the Stock market. Just don’t massive produce and make fewer products but market up the prices. Why work for little unless if somebody want to be the slaver workers to work for penny?

          Falling price is not good for productivity. For example, when price of pork falling in China, the peasants don’t grow pigs anymore since it makes no money. So pork prices jacked up a lot after that. Then the peasants are starting to grow pigs again. Such vicious pork lead inflation cycle keep come back to hunt the Chinese government.

          Automation will be taxed at some point of time as corporations’ income tax which will used for social welfare for the unemployed masses.

          Looks like Real Estate Flipping lead by Hong Kong and China or South East Asia countries become the glob event and trend. In Hong and China major big cities now has problem of massive small businesses closing down because they can’t afford the ever higher and higher rents which also push up prices. Few can afford to do any businesses these day except the big business with powerful government connections and they are monopolizing the market place. Government political powers all want the inflation. They will get it for sure because they have all the power and the tools.

        • WHOA! What do we mean by “falling prices”? What if — in a stable monetary environment — technology could cut the cost of orange juice by 50% — but in our untethered world — we see orange juice prices go down 10% — how do we digest that sort of situation?

          You must pin down at least 2 corners of the tent to have a conversation where the words mean something.

          One can have a scenario where the material world is “watered down” — *meaning* everything you see, touch, buy and eat is nothing but CRAP. In this not-so-hypothetical “Crap World” — price metrics look awfully good.

          This sort of concept is understood better in places like The Republic of Vermont* — where I live. I buy a lot of organic food, handmade objects and pay for labor-intensive tasks. The climate is cold and things are mostly far away — ammo is getting dear also.

          I need to earn more and more to maintain a fixed standard of living. I am surrounded by people who are circling the drain — who were middle-class a while back — and were dumb enough to try and “retire”.

          (*Don’t believe those stories about how The Republic of Vermont {originally 1777-1791} is part of the United States — we quietly seceded a while back.)


        • Ultimately most prices are linked to the cost of energy. The cost of energy is linked to how easily we can get it. Last century we got almost 100 barrels of oil for every barrel of oil that we expended finding and refining it. Now, with tar sands, shale oil and fracking, we are only getting about four barrels for every barrel invested. We’ve had all of the cheap, easy stuff. Prices will continue to go up — whatever metric you use.

        • Be careful not to equate standard of living with inflation. One of the most irritating things to me is the argument that because of technological advancement one can accept a lower level of item now than they could 20 years ago. For example, A Lexus ES in 1995 was probably much worse of a drive and quality of vehicle compared to a Toyota Camry in 2015… and since a Toyota Camry in 2015 costs the same as a Lexus ES in 1995, one would say inflation is close to zero. That argument implies that standard of living is the measure not price.. .what it doesnt take into account is the person who could buy the Lexus in 1995 but can now only buy the Camry has dropped in terms of financial level relative to the population.

      • Mr. Ricecake, Your thinking is too logical for academic analysis.
        Thank you. One should read the story of early France and it’s hyperinflation.
        Germany is too recent. It can’t happen to us.

    • Right and the American manufacturing base has been gutted and along with the prospect for earning real living wage. Crony capitalism facilitated by regulation leading to 3 too big to fail auto manufactures have replaced the tens of smaller American car companies while offshore manufactures can grow up in an unregulated environment until they are big enough to compete here.

  6. Aziz – do you live on your own? Do you make your own meals? Do you do your own shopping? Do you have children to feed?

    Are you employed by the government? Things have not gone up by that much? Are you serious?

    • I do my own shopping, and my food shopping bill has been falling recently, even here in the UK where we have actually had higher headline inflation than the USA recently. Some items have been rising, but most have been stable or falling in the last year. Before that there was a period of higher food price rises from 2009, and before that my food shopping bill went way down during 2008 after several years of price rises.

      That’s my general impression based on my own anecdotal evidence. I don’t work for the government. I have never worked for the government and I probably never will. I cannot stand bureaucracy…

      When I say inflation hasn’t gone up by much, I am just referring to the data as per the BPP, CPI, PCEI, etc.

      • Australians chose foreign produced food, because it was cheaper (Imported House Brands). As a result local food manufacturers, canneries closed down.

        The major Australian food retailers Coles and Woolworth have adopted the UK system and installed UK Managers. The shelves are literally stocked with “House” brands, most imported.

        Now the Aussies Dollar has dived. Consumers lack of patriotism will bite them on the arse now. No competition to fight the higher imports. It takes time to set up and operate a factory, grow food etc.

      • Faling food prices in the UK! Are you serious? Please tell me where you’re shopping! We have five children and I can confirm food prices are vastly higher and continuing to rise. We have had to reduce in quality and quantity to keep costs bearable. I always had a VERY rough guide to food costs – it used to equate to £5 of shopping per bag, some years ago, then £10, now it’s around £20 per bag. Inflation in the UK is not 4% or anywhere near, try 10% at least. And much more on food. You can spend £100, £150 or £200 and wonder what you spent it on! It ‘s very noticeable in many foods that they have reduced the actual size and increased the cost of the items.
        And we haven’t even started on austerity. This will get much worse.

        • I’m talking short term. Obviously food prices have risen since 2000 or since the 1990s. What was costing me £200 6 months ago is now costing me £180. But that’s just my personal experience.

  7. I’m too lazy to do the math again, but elsewhere on the internet I’ve argued with Shadowstats supporters by pointing out the implications of believing inflation is overstated by seven percentage points per year, as they used to. (Although I guess they’ve moderated a bit, the arbitrary constant is now around four it seems, based on the graph there.) Basically, you end up getting such self-evidently absurd conclusions that no sane person could possibly take any of it seriously. IIRC, the implication ends up being that living standards have gone down by something like 2/3 since 1983.

    • Well I have been alive since 1960 and I can tell you it has not go up. And my pay check went much further in 1983 than it does today. I still buy basically the same things food fuel, heat, housing and the prices of these have skyrocketed since 1983.

  8. To be fair, I don’t think most (sane) people look at shadowstats for the CPI data. The money supply data (ie his measure of M3) is the only datapoint that might be of interest.

  9. Agreed. ShadowStats is basically nonsense.

    I have done a few recalculations of CPI myself. What you find is a whole bunch of grey areas including hedonic adjustments, the treatment of owner-occupied housing, and the weighting scheme.

    Here are my thoughts on the process of updating the CPI methodology (why not continue the new and old methodology for a while to gauge the impact of methodological changes?).

    Some thoughts on the treatment of land

    Finally some details about hedonic adjustments, limitations, advantages etc.

    • Excellent links. And I agree, if CPI reflected the increasing price of housing, higher interest rates would have kept the housing bubble at bay.

      From Your link “How the CPI hid the housing bubble”:
      “To me you need to choose one treatment or the other. Either add the full cost of home ownership as a lump sum, either in the form of house prices, or add the cost as a periodic payment by the home-owning household to itself in the form of imputed rents. The RBA canvasses this approach in its submission but noted that this may cause a ‘disproportionately large’ weight to the housing basket.”

      Housing is a massive cost. Just ask any renter!

  10. The CPI [or any other measurement of inflation] is a perfect example of how you can not apply group-think [in this case,measurement] to individual experience.

    The only measurement of inflation should be an increase in money supply [and credit] over and above the amount of goods and services produced in the economy.

    Price inflation is a completely individual experienced based upon what that individual [family] consumes. In the U.S., housing, higher education, taxes of all sorts, and health care have seen massive increases in prices over the past several decades because of government support via credit. Of course, you can add in the financialization of every damn thing as a phantom surcharge, as well.

    Many other commodities have seen decreases due to deflationary forces [cheap foreign labor, primarily, but also, cheap and plentiful credit, not to mention, huge productivity gains via technology, e.g., electronics].

    So, and like almost all things, apply the group-think thing to prices and you end up with a metric designed only to support the status quo [like everything else].

      • Thirty years ago.

        The reasons that all the -isms don’t work is because they attempt to morph individual pseudo-ethics into social mores. Can’t work.

        This is why I say that all group activity is simply an attempt to steal from individuals, be it intellectually, financially, or otherwise. After all, who among us can not see the forest for the trees at this point in time?

        A perfect example of this behavior are housing bubbles, where groups [all involved in the FIRE economy] use self-interest [people’s home values] as a weapon to destroy people’s financial [long-term] well being, but their children’s, and theirs.

        The Elite have finally figured out how to serious manipulate people, through giving them EVERYTHING they desire [in the short term], no matter the long term consequences.

        Perhaps this imperative is even more important than is keeping the debt money thing alive? Time will tell.

    • Since global production efficiency via automation and better management practices has increased supply, monetary policy has become more “accommodating” to keep up and avoid a deflation trap. Without helicopter handout to the masses, demand will stall. Job insecurity and retirement insecurity (even with higher stock prices) is keeping wallets and purses shut tight.

  11. To be fair, it seems like it would be worthwhile to read Williams’s response. It sounds to me like adjustments to the metrics *were* made according to government reports at the time, as well as news sources like The New York Times.
    “My basic approach to looking at CPI inflation is from the standpoint of common experience and the traditional expectation that the CPI measures the cost of *maintaining a constant standard of living* which reflects costs out of pocket to get a products or services.

    The reason is that inflation measures commonly are used as an indication of how much income has to increase in order for living standards *to be maintained*, or of how much return is needed on an investment in order to stay ahead of inflation. Changing BLS methodologies have caused CPI inflation reporting to stray sharply from those needs.

    I contend that most people view inflation as being much higher than currently reported by the BLS, due largely to those methodological changes over the decades that have moved CPI inflation away from basic, traditional reporting. Changes tied particularly to quality, weighting and definitional issues have moved reported inflation ever further from broad, common experience, with resulting reporting biases in the CPI that usually are to the downside.”

    He also doesn’t fault the BLS but believes the process has been “politically mauled” and was widely reflected in official arguments and the press at the time, in the mid-1990s.

    From the New York Times,”Panel Sees a Corrected Price Index as Deficit-Cutter,” September 15, 1995, by Robert D. Hershey, Jr.:

    “Speaker Newt Gingrich, Republican of Georgia, suggested this week that fixing the [CPI] index, with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket adjustments], would provide maneuvering room for budget negotiators…”

    “Alan Greenspan, chairman of the Federal Reserve, is among the other Government officials who have spoken optimistically about financial benefits of a more accurate [CPI] index…”

    “Economists believe one of the most important CPI upside biases is when consumers shift their buying patterns in response to changing prices, substituting one product for another. The [CPI] index is based on a fixed market basket of goods and services. But, for example, if the price on an item like steak gets too expensive, consumers may switch to hamburger.”

    He’s also got quotes from the Boskin Report, the San Francisco Chronicle, and the 1999 Economic Report of the President, that show how the CPI can be shoehorned lower with substitutions like hamburger for steak. Substitution-based indices may work for budget negotiators and bankers, but one can hardly say that a standard of living is being *maintained* when hamburger is substituted for steak.

    So it would make sense that his charted lines are the same shape and follow the same path. He still uses, and respects. the BLS numbers, he’s just countering the political manipulations, adding steak back in and removing hamburger, in order for people to be able to look at the true *maintenance* of a standard of living from the pre-Gingrich/Greenspan time. The ups and downs are all the same, just steak is more expensive.

    • And of course if you’re a Gingrich or Greenspan fan, you would not at all want to consider what Williams is trying to do. Much easier to just call it “nonsense.” From my perspective, so what if his figures are perhaps off. No statistics are perfect, they are all biased in some way, cooked by assessments of probability, and far removed from people’s real experience of their lives. I appreciate his perspective, and the amount of work he’s put into his site. It’s certainly more than what the government or its apologists are doing, trying to save their own butts while the people are living a completely different experience from the one they cook up in their models.

      • They’re not his figures, though. They’re the BLS CPI figures — the exact same curve — with the addition of an arbitrary constant to make it look higher.

        • You keep calling his constant arbitrary – but then you quote him as saying he got it from official government commentary on what it would be.
          That’s a measured constant (even if imprecise), hence not arbitrary.

    • “fixing the [CPI] index, with its implications for lower spending [Social Security, etc.] and higher revenue [tax bracket adjustments], would provide maneuvering room for budget negotiators”

      Bingo. In Australia, the unemployment benefits have not been indexed to true cost of living , but to the new methods which has seen real welfare payments lagging behind essentials like food, utilities and rent.

      If higher our Budget deficit would balloon.

  12. If you really think inflation is only 1% and John Williams is wrong at 8%, congrats! Ignorance is bliss and you must be as blissful as can be. I recommend you put your magical fiat cash [that you think is as good as gold] in a safe and enjoy this period of non-inflation joy.

    BUT WHAT YOU ARE EXPERIENCING IS NOT LOW INFLATION……its the DEFLATIONARY COLLAPSE THAT LEADS TO HYPERINFLATION. Input costs and materials are not going down…..profit margins are being redcued and companies are going out of business. BIG difference between low inflation and collapsing economies.

    When foreign countires realized that the United States is not paying our bills [this happened 2 years ago with China] they stopped funding our debt. So now the counterfeiting FED is funding their OWN debt with fresh digitial debt. This leads to wholesale dumping of treasuries and loss of trust in currencies. This started last week….check the 10 year. Takes awhile in a fiat world but the United States is $247 TRILLION in the hole. Eventually people will see that IOU as what it is WORTHLESS. Sure the economic collapse makes things drop in price temporarily [reduced margins, not reduced input]…M2 Money Velocity is COLLAPSING. However it doesn’t end in a strong dollar….it ends in a COLLAPSE of the dollar. The dollar is debt and its value is based on repayment of the debt. IOU’s that are not being repaid have not value. Re-read the last 2 lines until you get it. Your life depends on it.

    • I disagree. Governments NEVER intend on repaying debt. They either create new money or steal it from individuals [taxes] and roll-over the debt in perpetuity. This time it will be no different.

      The government of GB still hasn’t paid off their original loan from from the BOE in 1694!!

      Banks [especially Central Banks] NEVER want loans paid off, and that’s what government debt is.

      The key to parasitism is in embedding yourself so deeply in the viscera of the host, that you are mistaken for a vital organ instead of the pathological varmint that defines your very essense.

    • I recommend you put your magical fiat cash [that you think is as good as gold] in a safe and enjoy this period of non-inflation joy.

      No thanks, I’m not into hoarding.

      This leads to wholesale dumping of treasuries and loss of trust in currencies. This started last week….check the 10 year. Takes awhile in a fiat world but the United States is $247 TRILLION in the hole.

      Notice how Japan has been in a pretty similar position to the USA (a liquidity trap) for the last 20 years without the soaring interest rates that deficit fetishists keep saying will destroy us tomorrow!

      One day we may see US rates rise significantly (especially if it loses its status as the global reserve currency) but not any time soon. With such huge levels of desired savings, anything with yield is very expensive right now. Yield is hard to come by. What we’ve seen in the last 5 years isn’t a collapse in desire for dollar-denomimated yield, but soaring demand for it. See here —

      The $247 trillion figure is a nominal future cashflow issue. In a worst case scenario inflation can substantially reduce this figure next to tax revenues. Of course, with a strong recovery and 4% growth, and a recovery in tax revenues no inflation would be necessary, but even if this is not the case the necessary level of inflation to stabilise these future cashflow expectations is nothing like hyperinflation, but more like 4% per annum (something which hasn’t happened in Japan, which is why their national debt load is so high relative to GDP and revenues).

      However it doesn’t end in a strong dollar….it ends in a COLLAPSE of the dollar. The dollar is debt and its value is based on repayment of the debt. IOU’s that are not being repaid have not value.

      I’m not sure you really understand how the monetary system works. Not all dollars in the system are debt-based. There are exogenous dollars (the monetary base put into the system by the Federal Reserve), and there are endogenous dollars created by lending, including shadow credit. I recommend you read my article on this —

      What we have seen in the last 5 years is a collapse in the supply of credit-based dollars, which the Fed has been replacing with base dollars through QE. The overwhelming trend has been deflationary, not just in terms of prices but in terms of the credit-based money supply.

      Hyperinflation of the currency is something that historically only really happens in the context of physical shocks — loss of a war, trade breakdown, natural disasters, etc. In the long run, these kinds of events happen. In the short run, they are tail-risks. I don’t rule them out, but I am much more worried about real-world problems like mass unemployment.

  13. I measure inflation by the amount of new money that is electronically entered into the system(real definition). Debating prices is pointless IMO. Too many supply/demand & central bank & government manipulation factors to even guess what is accurate for pricing. All we know is it is harder to make ends meet because cost of living is increasing everywhere

    • Price indices are important because they tell us about price trends.

      The size of the money supply, again is a debatable issue because it depends whether we include just base money, traditional credit, and shadow credit.

      I think your definition is useful, but I think price indices are useful too.

      For what it’s worth, the total money supply appears to have decreased in size in the last 5 years, even after all the QE —

      Most people find this very surprising. They think the Fed has been printing money like mad, but the money printing doesn’t even cover the shadow credit depletion!

      • I include all money & credit. Your answer about shadow credit is why I find prices analysis pointless. Too many unknown variables that effect prices…who the hell really knows whats going on.

        • To the contrary, the point about shadow credit is why prices are the most accurate depiction. Counting all money and credit is impossible, because literally anything can be collateralised into exchange.

        • What is your definition of prices? When I see a price for a good or service, I know I’m the back of my mind, this doesn’t represent anything free-market. They are prices based on central planning economic control. I know it’s not a true price.

          Do you believe you have access to 100% knowledge?

        • Prices are the outcomes of decisions by preference-satisfying agents in a market.

          Central planning is an externality. If the Fed (or, before the Fed, gold miners or private banks) is producing a lot of money (or on the other hand not producing enough money to satisfy market demand) people take that into account.

          Prices stop being prices when you have actual price controls, but even then agents have a choice to not buy, and there is still the black market.

        • Yes i agree and ironically, that is my whole argument. We already have price controls(central bank interest rates), thus incorrect prices, thus pointless data based on incorrect prices, it’s a disaster and at the end of the day nobody has perfect knowledge, so who gives a crap about how people measure prices and/or inflation. Just know that prices will rise in terms of fiat and understand how to hedge and even benefit long term

          Just my opinion, which is of course subjective 😉

        • I disagree, I think you can have incorrect prices. I don’t think for one second our prices represent real supply / demand or time preference. Until interest rates are localized by banks, there is nothing that can convince me a central bank has the perfect knowledge for the masses. There is too much economic information for a central bank. The price of money is not the same in New York as it is in Los Angeles, it is impossible to have a national interest rate.

          I guess we just disagree on this

        • I disagree, I think you can have incorrect prices.

          This is where many Austrians, I think, take a genuinely un-Austrian position. In a truly subjective theory of value, there can be no such thing as a “correct” price.

          Until interest rates are localized by banks, there is nothing that can convince me a central bank has the perfect knowledge for the masses.

          I don’t think central banks have perfect knowledge. What’s more lending to the masses is intermediated by local banks and at variable interest rates. The Fed doesn’t set interest rates for ordinary lenders, it sets the Federal Funds Rate for banks. That’s not to say that I think that this is a good transmission mechanism, but there is considerably more flexibility than you imply.

        • Again I disagree, I think because of the subjective theory of value is the reason why interests rates need to be localized. It is the most accurate way to ballpark such a large amount of economic activity. Also, and most importantly, any misallocation is localized and not spread throughout a nation. Disasters can be contained.

          Until interest rates are localized, I don’t put any serious weight into economic data as anything real.

        • Again I disagree, I think because of the subjective theory of value is the reason why interests rates need to be localized.

          Interest rates to borrowers are already localised, and further stratified by credit scores, income, etc.

          I think you need to seriously think about what a subjective theory of value means. If value is subjective, any notions of correct or incorrect as regards pricing are also subjective.

        • Interest rates are controlled by a central bank. I don’t know how to answer the 2nd part of your reply, it doesn’t really make sense to me. Prices are subjective? Do you own a business by any chance? Because I do, and prices are not really subjective. To a consumer, calculating utility from product or service is subjective. All I am saying is free-market interest rates is the best system to price money, we currently don’t have that.

        • Interest rates are controlled by a central bank.

          No, interest rates are not set by the central bank. The Federal Funds Rate is set by the Central Bank. This is the discount rate that banks lend at. They can lend to the various segments of the market at any interest rate they choose.

          Prices are subjective? Do you own a business by any chance? Because I do, and prices are not really subjective.

          Whether a price — in this case, the price of credit — is too high, too low or just right is a totally subjective question. To deny this contradicts the subjective theory of value.

  14. Perhaps this is a good time to discuss money [once again], because money is something very different to individuals than it is to institutions, two in particular, governments and banks.

    Since money is simply the abstraction of labor-value, to individuals, it represents a storehouse of labor-value [earned or transferred [stolen]. But to governments, and with their blessings, to banks, money represents a method to not only create labor-value [without creating any labor-value what-so-ever], but even more diabolical, it facilitates a multitude of methods whereby labor-value can easily be transferred from your pocket into theirs.

    On top of this, these lowlife, sleazy, mutant slug-fukkers have the balls to charge interest for this wonderful service they provide to mankind!!

    Understand money and you will understand why it is only governments and banks who control its creation and use it as a means for the implementation of modern serfdom.

  15. Pingback: Links 6/2/13 | Mike the Mad Biologist

  16. Here is what the real inflation looks like in Greece in a time span of 2001 – 2012. (2001 right before introduction of Euro)

    metro ticket 100%
    coffee 105%
    cigerettes 75%
    1kg potatoes 85%
    1lit milk 2%
    1lit oil 60%
    basic salary 28%

    For me the statistics and variables used are bull%&$&! It is just a nother tool that governments and super wealthy use to rape us while we sleep this day dream.

  17. Why not trust Williams’ ShadowStats? Here’s what the BLS and Williams said happened to the price level in the US between 1990 and 2010:

    BLS: +73%
    Williams: +378.9%

    Can you think of ANYTHING that costs five times more today than it did in 1990? Examples:

    Did a gallon of milk cost $0.80?
    Did a 12-pack of Coke cost a dollar?
    Did a case of Budweiser cost $5?
    Could you get your shirts washed for 35¢?
    Did Levi’s cost less than $10?
    Was a Big Mac, fries, and a drink on the dollar menu – combined?
    Did decent running shoes cost $20?
    Did an entry-level Lexus cost less than $10,000?

    Not even gas, housing, college tuition, or health care comes close. Seriously – why does anybody even talk about ShadowStats?

  18. In all this talk of inflation is any account of governmet tax increases taken? governments often claim to reduce taxes but the overall tax rate does not appear to come down (well for those of us paying taxes not the offshore elites) for example UK VAT is now 20% was 17.5% (and yes I know in the dim distant past it was higher for some goods). But in the longer term taxes have risen enormously, is that not a type of inflation too?
    Just wondering.

  19. John, Seriously?!? You and your followers are trying to smackdown John Williams for using an estimated constant (based on government’s former calculated figures) as a means for establishing a consistent baseline for calculating inflation?!? Hmmm. I see you left yourself lots of wiggle room so that no one can really attack you for your comment. But I think it’s disingenuous to attack someone for trying to give us a baseline which can be used to try and compare apples with apples.

    In fact, if you and your readers were not drinking the cool-aid, you would realise that classically, inflation was just an increase in the money supply. As no-one can tell how it will flow through the economy, it was really the only way to make a proper calculation. Does anyone seriously think the trillions of dollars and other currencies created worldwide, has not had an impact on prices, pensions, etc worldwide??? Get serious!

    • I can play this game. Let’s use the classical-Misesian definition of inflation and see how much inflation we have had in recent years in the money supply:

      By this definition Shadowstats is even wronger than by adding arbitrary constants onto the CPI number, because the money supply is even less than when the QE started!

      In terms of a price index, the BPP suffices very well mainly in that it actually measures the price levels across a broad spectrum! In terms of the money supply, we should look at the Divisia M4 data. These are all relevant. Shadowstats is a pathetic Unskewed Polls-style attempt to rig the inflation data to show a preconceived assumption to be correct. Nothing more.

      • The Federal Reserve now claims that they have no proxy for money supply. One Fed governor said (and I am paraphrasing) that money supply had evolved beyond their ability to understand it. Maybe that’s what a $17 trillion debt in a fractional reserve banking system will do?

        • The total level of debt in the economy is far higher than that. But I can say Divisia M4 is a pretty good measure of the total money supply.

      • Of course the argument is that 0% inflation is desirable, that is the central bank prints as much extra cash as the extra productivity to keep the purchasing power the same (which isn’t even true). The problem of course is that I don’t think the government and banks have a right to claim this extra gain in productivity as “theirs” by devaluing the dollar even to hold its present purchasing power. By what right is it for them to claim the extra purchasing power as their own? What right does some central planning authority get to decide where to spend all those newly minted dollars and competing with me as a consumer? Inflation to me (not the officially defined) is the stealing of wealth from the productive, to the unproductive (counterfeiters and bank multplying counterfeit reservers) even if the dollar bill had exactly the same purchasing power its a theft of my consumer purchase as well as producer creation.

        It doesn’t take a genius to figure out that they don’t even keep the dollar bills stable at 0% purchasing power, no they plan for 3-4% theft yearly. Thats called eating not just he profits but the substance of the capital on top of it. Its suprising to me that the economy has lasted as long as it has with all the parasites, hiding behind abstract theories of M1, M2, M3, and M2001. As far as shadowstats I see no reason to worry whether its 3% price increace or 5% the difference is how fast they drive the car over the cliff, not whether they should brake or better yet give back the car to the original owners.

        Let me add to the theft picture that the bank loans out the same $10 to multiple debtors. That is they may pay 2% to the saver of that $10, but loan it out to 5 people for 5% each that amounts to 5*5%-2%=23% return. Who wins with an economy of savers getting taxed at 23% going to scumbag bankers? And is it any wonder why the scumbag bankers making their 23% are game to have a 4% planned inflation or 19% total return. The poor depositor savers of such money lose 2%-4%=-2% of their money. The people just holding the money and not depositing in a interest lose -4% of their purchasing power. The banks gain 19% return despite the inflation. The mortgage debtors put down a deposit of 10% down on a house but if the house appreciates by inflation 4% they can get 40% return on their original deposit. Though a house doesn’t make money once built (consumable) people have the nerve to think because it doesn’t depreciate as fast as the money and with clever corrupt money and banking system they are actually “investing” in a house. And oh yeah the third leg of the theivery being government who gets all their IOU’s bought with money printed from a central bank to keep the 4% yearly inflation scam going. Three legs on this table of theft. The bankers, the debtor, and the government. The loser is the productive and savers, the scheme is a massive theft of production to 3 losers legged table. Yeah we could saw off one parasitical leg of the table (the debtor) if inflation were 0% and cost of interest were higher than 0%.

        Aziz you are so blind to the evil, you actually believe that this scheme is benefiting the REAL producers? And that prices aren’t being manipulated, that real wealth isn’t being transfered from the sweat of labor, investment of capital, and brains of engineers? I see the trees in this forest very clearly, and I could care less if shadow stats overstates inflation by 4% or 7% as its the thought of the real theft and central planned theft that bothers me most.

        • Joke it is but not in the way you envision. Anyone with a case of sense will understand exactly what I mean about leverage, loans, fractional reserve and returns and loses for the participants. Who gains in conterfeiting and who loses. What I wrote wasn’t about giving away how the system works in a parable or to the finest detail, its about brevity in a case example to explain why the unproductive win at the productive expense and how. Anyone that can draw off some of the typical numbers I threw at them will also understand what I’m getting at in substance. Anyone that isn’t delusional or rebrobate will understand exactly why what I said was the truth and how to prepare if they haven’t already for the great unraveling. Coming very soon to a nation near you. Its what happens when people feather their nests with lies, cheats and manipulations.

  20. Inflation and CPI have nothing to do with consumer purchasing behavior. They both have to do with price changes of a basket of goods and services over time. Inflation is the upward pricing ability (a rational economic aspect (we all want to be paid the most we can) of producers of goods and services allowed by the money supply. If CPI had anything to do with consumer purchasing power there would never be a “core CPI” since the idea of consumer price measurement without regard to food and energy is absurd.

    • The point of core CPI is to discern broader price trends not related to volatile commodities. If increases in food and fuel prices leak from commodities into prices more broadly, core CPI rises too. Core CPI exhibits a very similar curve to CPI during the late 70s inflationary episode, for example.

      And right now for what it’s worth, core CPI is the lowest it’s ever been. Lower even than 2009.

      • If you look at the CPIs or inflation of the past 10 years and then at prices of the last 10 years, the CPI/inflation is not even close. The Fed’s inflation numbers are as bogus as the triple A rated mortgages Greenspan was allowing to be loaded into the financial system. Those mortgages were a hoax that came home to roost. At some point, people will realize the glaring evidence of phony inflation numbers (and the failure to manage money supply) which is two stock market crashes, hockey stick growth in stock indexes, unprecedented bubbles, a Depression (the Great Greenspan depression), and Federal Reserve utilizing experimental chemotherapy to control something it cannot control.

        The denial associated with greed is as powerful as anything I have seen.

      • Obviously, if food and energy prices are high, that creates a deflationary effect on the things that are measured in “core CPI”. That’s why the Fed loves high food and energy prices because it allows them to exclaim low core inflation. I understand the short term (months) of food and energy but medium and long term its all about upward pricing ability re: money supply regardless of the good or service.

        I can agree with you that core CPI, as phony as it is, is the lowest it has ever been.

        One other corollary: If after 6,000 years of money, commerce, and inflation, Greenspan found a cure for inflation, wouldn’t he be entitled to some grand award? He’s not even a real popular guy.

  21. Pingback: Today's Economist: Inflationphobia, Part III | New-York News

  22. Stumbled onto this from a link from Bruce Bartlett. Very good piece. The most interesting thing, though, is how a competent blogger like Aziz finds his comment section overrun by every clueless wingnut on the internet.

  23. Re: the Greenlees and McClelland article: “the improvements to the CPI are consistent with international standards and guidelines for the construction of prices”. Name the methodological fallacy there!

  24. Aziz:

    Williams, in his April 2013 ‘Public Comments..’ shows how he comes to at least a 5% understatement of inflation (see the chart on page 8).

    He compares the usual CPI-U and an internal measure – CPI-U-RS – calculated as if all the methodological changes since 1980 were in place in 1980. He derives the year-by-year in the rates, sums the rate difference, and voila a 5.1% understatement of inflation for the CPU-I

    I think column 1 is with Dec 1967 = 100, but it doesn’t make any difference for this purpose.

    This summing of year by year rate differences is very suspect. This what the real calculation looks like.

    CPI-U-RS price level 2011 330.3
    CPI-U-RS price level 1980 127.1

    Change in price level 2.5987 (ratio of the two price levels)
    average yearly inflation 3.129% (the 31st root of 2.5987 converted to %)

    CPI-U price level 2011 224.9
    CPI-U price level 1980 82.4

    Change in price level 2.7294
    yearly inflation 3.292%

    difference in average inflation .163%

    The difference in average inflation between the two methods is .163%, not his 5.1% . He’s wrong by a factor of 31.

    So his most important assertion is the result of a simple error in sophomore high school algebra. Doesn’t look good for the rest of his comments, but more on that later.

    • I will offer the following that I posted to the Bubble discussion:

      Between Jan 2003 and Jan 2013 (except where noted) below is the official BLS CPI followed by Official BLS price (percent) increases during that same period. Draw your own conclusions.

      CPI: 27.1%

      Eggs: 64.5%
      Fuel Oil: 175.1%
      Gasoline: 118.8%
      White Bread: 36.5%
      Ground Beef: 59.8%
      whole chicken: 49.1%
      milk 31.3%
      red del. apples: 38.2%
      naval oranges: 39.0%
      bananas: 15.8% (virtually 100% produced overseas)
      tomatoes: -9.7% (most grown backyard veg.?)
      orange juice: 35.9%
      coffee: 96.8%
      electricity: 44.9%
      util gas: 13.1% (the fracking phenomena?)
      higher education: 91.1% (Dec 2001 and Dec 2011)

  25. Check the data. All of the above figures are incorrect, according to the January 2003 ( and January 2013 ( BLS releases. The total weight of the items listed here using actual BLS data cited above is 12.14%, and their weighted average 10-year price rise was 87.6% (gasoline and fuel oil accounting for 46% of the items’ CPI-U weighting).

    Next, always say “so what?” If just under 1/8th of CPI-U components had 10-year inflation of 87.6%, does that mean that the total index couldn’t be 26.7% (the actual 1/2003-1/2013 figure)? Of course not. The other 87.86% of the index would simply have to have had a 19.3% average price increase.

    Is that possible? Here are a few more line items with their 10-year price changes:

    New and used motor vehicles: +1.8% (5.51% index weight)
    Apparel: +5.6% (3.56% index weight)
    Communication: -10% (3.5% of index weight)

    These three items make up more of the CPI-U than the grocery and energy list above, and have a combined 10-year price change of -0.135%. Add these to the list and you get just under a quarter of the index with a weighted average 10-year price change of 42.8%. Quite a lot closer to the total CPI-U figure of 26.7%.

    Now add all services less medical care, which is 25.37% of CPI-U with 10-year inflation of +19%. Now you’ve got just over half of the index with a weighted average 10-year price increase of 26.3% – a touch less than the headline CPI-U figure.

    NOW draw your own conclusions.

    • “I checked your numbers for eggs, fuel oil, and gasoline average prices.

      They are correct, so it looks like you are doing these average prices correctly.”

      Verbatim e-mail from a BLS economist.

      We have problematic inflation. The average consumer has been priced out of healthcare and higher education almost completely much of it hidden by taxes and the debt and as future liabilities.

      • I meant, nice reply, DC, and the point of having to apply category weightings to the the % change is well demonstrated. Too bad it was ignored.

    • Verbatim from the same BLS economist:
      “For the overall CPI, I get 26.7% for the CPI-U All items (not 27.1%).”

      I don’t think a .4% over a 10 year period (amounting to .04% per year) is significant do you?

      And btw draw on this mf.

  26. If the Federal Reserve’s Greenspan and Bernanke have solved inflation, the bane of many an economy over the 6,000 years (and many over the last 100 years) of money, commerce, and inflation, wouldn’t they get and deserve the Nobel prize for Economics (say well before someone like Long Term Capital Mgmt)? I don’t see anybody rushing to make that award.

    Leave the numbers aside for a minute and step back and ask what’s wrong with this picture?

    • OK, so what IS wrong with this picture? Looks like a big, and not very logical, jump, from ‘Greenspan and Bernanke haven’t found a complete solution to avoiding inflation’ to ‘Therefore Shadowstats is (at least largely) correct’. Maybe I’m misinterpreting what you’re saying, but then what ARE you saying?

      Aren’t we talking about whether CPI-U as calculated by BLS is a reasonably accurate measure of inflation? Let’s stick to that.

      • No we are not talking about CPI vs. inflation. We are using the two interchangeably actually.

        No if you read the article we are talking about the accuracy of shadowstats with regard to inflation (and not really about Williams’ methodology. That is a side issue.)

        My point is that if shadowstats is incorrect and inflation reporting is accurate then the following (my comment above) is a logical derivative.

        I don’t get lost in numbers because frankly I don’t believe most of the data and most of all I don’t believe the U.S. government data. I do believe that the BLS data I used is inaccurate to the low side of actual inflation which makes my point even more.

        And I sure don’t like people who are mad at the world and use their keyboard and individuals to vent that madness. So you and your butt boy DC should find other work.

        • R.T.

          Of course we’re talking about whether CPI-U or Shadowstats is a better method of inflation, but let’s drop that, it’s not getting anywhere.

          Williams’ methodology has to be important, because that’s the basis on which he makes his claims. If it’s as seriously flawed as I think (see my post above), then his claims are likely wrong. And there are many other reasons why his claims are wrong.

          As I said, you’re making too big a logical leap. I realize the purpose was sarcasm, but here are some other possible conclusions.

          Shadowstats numbers are wrong, but it’s likely that inflation, at least for the lower quintiles, is understated by CPI-U
          Shadowstats is wrong, but it raises good points about substitution, weightings, and hedonic adjustment.
          Shadowstats numbers are incorrect right now, but all the quantitative easing means higher inflation is still very likely.
          Shadowstats numbers are incorrect right now, but the huge amount of government borrowing is certain to lead to higher inflation as they monetize the debt.

          Maybe we could pick up a discussion from one of these.

          As far as ‘getting lost in numbers’, that’s what the whole discussion is about. BLS throws out numbers, Shadowstats throws out numbers, DC does, you do, I do. How do you avoid that?

          Your last paragraph wasn’t worthy of you, and doesn’t and belong here, so I won’t answer it.

  27. John Williams’ keeps on selling subscriptions to Shadowstats, and is cited frequently in the blogosphere. But his methods are so bizarre and his results so absurd that I should take at least one more stab at him.
    Here are links to some materials.
    • William’s public comment #515 April 2013 is here
    • In 2008 the BLS published a paper which refuted every point that Williams would still be making 5 years later, that’s here
    • You can read William’s somewhat incoherent response to the BLS paper here.
    • And finally, a paper describing the methodological changes made by the BLS, and when they made them, here.
    Williams makes a 7-step argument. Up until the early 1980s the BLS CPI-U index was an accurate representation of inflation, that is, it correctly showed what a consumer would need to maintain a ‘constant standard of living as measured by a fixed-basket of goods’.
    1. In the early 1980s the BLS, under political pressure to lower the reported rate of inflation, started making methodological changes to its calculation of CPI-U. These changes distorted the inflation statistics which up until that time were accurate
    2. The changes were made in various pieces through 1999, and have been used since then.
    3. As each new change was made the reported rate of inflation was lowered further away from the ‘true’ pre-1980 rate.
    4. Watch this next one, it’s important. Each methodological change generated a rate change that was consistent year on year, so that the effect of each rate change could be ‘stacked’ on top of previous rate changes to arrive at the total distortion.
    5. After 1999 the distortions from the ‘true’ rate remained constant (see ‘stacking’ in #4). From then on a constant added to the reported inflation rate would give a ‘true’ inflation rate. This is the ‘arbitrary constant’ Aziz sees added to the CPI.
    6. As a result, inflation is understated, ‘real’ GDP is overstated, and the consumer sees a much different picture of inflation than the government reports.
    7. But (probably unwittingly), the government came to John’s rescue. In 1999 it published an experimental index which recomputed the CPI-U index for prior years as if all the methodological changes had been made in the prior years, carrying the comparison back to 1978. With that gleaming sword in hand, we can take on the dragon of government disinformation.
    Where do we start?
    On page 9 of the Public Comments William’s gives a table showing the difference between the reported CPI-U and the refigured CPI-U-RS. The CPU-I-RS should be lower than the CPU-I for that year, and that’s mostly true. By the end of the 90s the sum of the year-on-year rate differences is 5.1%. There are also some changes the BLS made but could not estimate accurately, and so did not include in the CPI-U-RS. William’s figures these to be 1.9% so the total difference is about 7%, which you can see in the 1980 based alternate table pg. 12.
    But wait, the BLS calculated CPI-U-RS back to 1978. Why not start there? OK, if we do that the three years 1978, 1979, and 1980 add a full 5.37% to ‘stack on’ to the 1980 figure. So the total rate difference is now 10.5%. The government inflation figures are understated by a full 10.5% + 1.9% = 12.4%. We’re nearly in hyperinflation and don’t even know it.
    Something’s wrong here. Oh yes, the first problem is that NONE of the methodological changes were made before 1983, so they could not have affected the CPI-U before 1983, so there’s no reason to ‘stack on ‘ the changes for 1981 and 1982. OOOOPS!!! That cuts down the overstatement he wants to use to 4.2% instead of 5.1%. Too bad he didn’t see that.
    Hey, wait again. If none of the changes were made before 1983, and the rate differences are ‘stackable’ as he insists, then the rate difference should be the same year-by-year between 1978 and 1982. The rate differences for those five years were 1.2%, 1.77%, 2.4%, .8% and .3%. Hmm. So ‘stacking’ the differences couldn’t possibly work.
    A simple trial of his most critical assumption fails completely. This doesn’t look good.
    And another thing. The 1983 change replaced the old calculation of housing cost with imputed rental costs. This should made the CPI-U-RS (the restated rate) significantly lower, but in that year the RS figure was more than a percent higher than the CPI-U number.
    An interesting footnote. On page 12 of Public Comment he has two tables. One shows ‘true’ inflation if you started calculating it from 1980 (why again did he choose 1980 instead of 1983 when the methodological changes started?). The other if you started calculating it in 1990 (why 1990 if the changes started in 1983?). In the first the 2008 ‘true’ rate is 13%. In the second it’s 8.9%. So depending on an arbitrary start date, you get ‘true’ inflation rates that differ by 46%. Do these tables actually mean anything?

    Now let’s look at some of the consequences we get from his assumptions. This table shows the ‘real’ GDP figures between 2000 and 2011. First, the BLS figures. Then, using his inflation figures if you start in 1980. Next, if you start in 1990. Next, if you start in 1983 (when the methodological changes actually began)
    Real GDP using different alternate SGS inflation rates. Billions of 2007 dollars

    BLS 1980 1990 1983
    GDP 2000 12,378 11,803 12,017 11,905
    GDP 2005 13,900 10,389 11,576 10,973
    GDP 2011 14,973 8,356 10,380 9,265
    Change in GDP 21% (29%) (14%) (22%)

    Using Williams’ calculations, only 1 year in the 2000s had even a small positive real growth rate. At this rate in another 30 years we won’t produce anything at all. What happened to all that labor (building houses and such?). What happened to all that capital? What about the increased productivity? What in hell were people doing since 2000?
    Apparently Williams agrees, because here’s his chart of real GDP growth.

    And as the BLS paper reports (page 16) using his 7% differential from 1998 to 2008 implies a 40% drop in real disposable income. In comparison, income declined by 26% during the Great Depression.

    So by using an extremely dubious assumption (‘stacking’ the inflation reductions), which doesn’t stand up to even a simple test, Williams produces unimaginable inflation rates. He then goes on to generate absurd economic consequences. You’d think he’d stop there. But no, he embraces the consequences. And apparently a lot of gullible readers not only embrace them, but are willing to pay for them.

    It seems that it’s easy to get a man to believe something, however stupid, if it matches his political views.

    • Then I am completely in favor of giving Alan Greenspan a Nobel price in Economics for controlling inflation, the bane of many an economy for the 6,000 years of commerce, money, and inflation, over a 20+ year period. For real.

      • Hmmm, I write a detailed explanation of why William’s reasoning is wrong. Your response is ‘Then that means you think Greenspan deserves a Noble prize ‘.. ZZZZZZZZZZZZZZZZZZ wake me up when what you have to say is sequitorial to say.

        • I have made several prior comments saying that CPI/inflation are not accurately reported. Your seeming definitive case to the contrary prompts my suggestion Greenspan is a genius and deserves the Nobel award. I await a groundswell of support.

        • R.T.

          You keep misreading what I say. I said that William’s logic and methodology are all wrong, provably false, and that even without that the consequences are absurd.

          I have to say, you’re committing an elementary logical fallacy which Aristotle noticed 2500 years ago. I believe it’s called the False Dilemma Fallacy. It’s hard to converse with someone who commits egregious logical fallacies and then doesn’t notice nor admit them.

          Just to get back on track, here are some other possibilities from the first exchange we had.

          1. Shadowstats numbers are wrong, but it’s likely that inflation, at least for the lower quintiles, is understated by CPI-U
          2. Shadowstats is wrong, but it raises good points about substitution, weightings, and hedonic adjustment.
          3. Shadowstats numbers are incorrect right now, but all the quantitative easing means higher inflation is still very likely.
          4. Shadowstats numbers are incorrect right now, but the huge amount of government borrowing is certain to lead to higher inflation as they monetize the debt.

          There are probably other. But want to try one of these?

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  29. I have to wonder what the government thinks they gain by under-reporting inflation? I suspect they hold a belief that they are prolonging the final date of our social entitlement accounts running dry, by slowly reducing the standard of living of those relying on these programs. Meanwhile, they are causing a very real reduction of income tax and consumption tax collection to fund their entitlement programs, by artificially suppressing the typical employee’s cost of living wage increases. If average cost-of-living increases were closer to “real” inflation now, wouldn’t taxes rise a corresponding amount to better fund entitlement payouts later on?

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  39. The only good thing about aziz’s blog is that he does not censor the negative comments so we can all see the excellent eviscerations people do on his nonsense.
    Inflation runs around 8 to 10% in the US and UK, any shopper knows this, so those who go with the government and bankster line are very suspect.

    • You mean like the average price of gasoline, which was $3.66 a year ago and was $3.53 today?

      Or maybe food, which has increased 2.2% a year since 2010?
      Or maybe housing, 1.7% a year since 2010
      Or clothing, 1.4% a year since 2010, and has actually decreased in the last 20 years?

      Is any category going up fast enough to support a claim of 8 – 10%? No. That number is just plucked out of thin air.

      Or in the case of John Williams, out of his bodily orifices.

        • Ah yes, cherry picking data is always a pleasant pastime. Especially when you compare the lowest point in a year to near the highest in another year. Even better when one year is completely out of line. And better still when you pick the most volatile commodity.

          From March 2008 to March 2009 the price of gasoline dropped by 39.7%. Just getting it back up to its 2008 level is a 65% increase.

          Between March 2008 and March 2014 the price increased 8.3%. That’s 1.3% per year. How close is that to 8%, let alone 10%?

          March 2012 to March 201 gas prices dropped 3.7%
          Match 2013 to March 2014 gas prices dropped 5.3%

          The price of gas is extremely volatile compared to almost anything else. There was a very sharp run-up in 2008 followed by a huge decline in 2009, then a recovery in 2010 and 2011. But prices in 2014 are only 8.3% higher than they were 6 years ago. But admittedly it’s very hard to measure overall inflation by this wildly volatile commodity.

          But since 1983, when Shadowstats says BLS started grossly underreporting inflation, the actual price of gasoline has increased 3.5% per year. Where’s the beef?

          I notice you didn’t address any of the other, more substantive statistics I mentioned? Howcome?

        • Me cherry picking? You picked a short term duration of one year, an almost meaningless time period for inflation analysis, and called it proof.

          2008 was a true anomaly, that is, the short-lived oil futures bubble (fueled, so to speak, by excess liquidity just prior to the Greater Depression which I believe we are still in).

          Between 2001 and 2011 gasoline was up well over 100%. The BLS web site has the exact percentage.

          I’ve been through this so many times, you are welcome to the last word.

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  44. Look up the Guild Basic Needs Index.

    Unpretentiously, they track the costs of
    1. Food
    2. Clothing
    3. Shelter
    4. Energy

    The chart shows, based on their basket, that the cost of basic needs in the United States has doubled since 2000, while other CPI components have risen by 40%.

    If you want more information on what goes into the basket, I’d recommend giving Guild Investment a call. The point I’m making is that for the average American, basic “living” has gotten much more expensive in the last 10-15 years.

    In my experience, whenever these sorts of conversations have come up, anyone with “anecdotal” evidence to the contrary is likely dismissed offhand. “Expensive food and gas is the new normal.” And the wealthy people that I know feel it too… they can cope much more easily of course, but they do feel it, and mention it out loud in conversation.

    • This is an interesting index, but there are several flaws which reduce its usefulness.
      First, looking at the change in CPI for each of these groups from 2000 to May 2014 and using their weightings, I can’t come anywhere near GBNI’S 100% increase. My calculations come to more like 57%. If they don’t want to use CPI changes for the categories they have to state where they got their numbers. I’d be glad to post my calculations if anyone wants to check them.
      Second, the weightings they use are wrong. Normalized to the total of the four groups, food is about 23% of expenditures, but they weight it at 30%. Energy is about 16% (normalized) but they weight it also at 30%. Shelter is 54% but they weight it at 30%. Food and Energy have much higher increases than Shelter, with the result that the overall increase is exaggerated.
      If I redo the calculations based on the actual weightings, I get an increase of 48% rather than GBNI’s 100%. This is certainly higher that the overall CPI, but not nearly as much as GBNI claims.
      During that time the median household income rose about 25% in nominal terms. The average household (actually, almost anyone below the 1%) is feeling more economic pressure than in 2000. But let’s at least keep the numbers accurate.

    • Another claim GBNI makes that raises a red flag is this:

      “Another point about the CPI is that the Bureau of Labor Statistics periodically alters its content, making adjustments to the weighting of the components, and smoothing seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost of living index”

      1. You have to make adjustments to the weightings. If Food, which used to be 20% of expenditures is now 13%, changes in food prices have a much lower impact on overall price changes. I’ll be willing to bet GBNI never even glanced at BLSs explanation of its weighting procedure.

      2. Same with seasonal adjustments. And besides, if you don’t like seasonal adjustments just look at the year-on-year figures.

      3. Saying this ‘usually results in an understatement of the inflation rate’ is meaningless. Since these factors belong in the CPI calculations, what is the ‘real’ inflation rate they’re understating?

      Any time I see a claim like this (e.g. in Shadowstats) I think the author is either ignorant of the BLS’s methods, or doesn’t care anyway because he has an ideological agenda.

      • Right about year over year in terms of seasonal adjustments. If you compare the unadjusted annual numbers say, of jobs or employed/unemployed people, vs. the seasonally adjusted annual numbers, they are almost identical. So in any month, the numbers may be off, but in the grand scheme of things it is meaningless.

        Right now, in seasonally adjusted number, we’ve added 2,635,000 jobs September to September; in unadjusted numbers, we’ve added 2,638,000 jobs September to September. No difference.

        I vote for “doesn’t care” but I’m a little more cynical about his motivations. Perhaps to keep the gullible coughing up their bucks to get behind his pay wall.

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  47. “Everyone experiences a different rate of inflation based on their purchasing habits…” Such as, some people worry about the cost of rent, utilities and food; while others, whose purchasing habits are mansions, yachts, sports cars and jets, don’t worry as much about the cost.

    “…Rising food and fuel prices have been a problem for welfare recipients and seniors on a fixed income, etc, who spend a higher proportion of their income on food and fuel than, say, young professionals with a lot of disposable income.”

    According to the latest data, 50% of all wage earners take home $27,519 a year or LESS, so rising food and fuel prices would be a big worry for them as well. Those “young professions” (earning between $50k to $100k a year) only make up 25% of the work force.

    So if half the country is concerned about inflation, I’d say that is a problem. Especially since nowadays it takes a dual or multiple household incomes to keep up with the cost of a decent living. But I’m sure that people who own beachfront property, gold, wine collections (and other capital property) would like more inflation (and less capital gains taxes).

    • One thing that isn’t mentioned about that “50% of wage earners take home 27K a year or less” is that number includes young people working summer jobs, people working part-time by choice, people perhaps earning a few bucks, a thousand or two, selling stuff on eBay or writing blogs by choice. 30% of those workers had W-2s of less than $10,000. We have ABSOLUTELY NO idea how many of those 37,000,000 workers belong in the above categories. I have some family members who were making a few grand in 2012.. They were all working in the summer part-time. They were never in any distress because their families were doing well. They have now all graduated from college and have well-paying full-time jobs.

      It would be great if the SSA would find a way to exclude people working part-time or temp jobs BY CHOICE and show us data without those people, but I don’t think we have that kind of data anywhere.

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  62. Interesting discussion. Does anyone have a link to a consistent ‘essentials’ inflation index that might apply to the ‘99%’? Presumably not given the comment regarding how much work it would require to construct such a thing. Still, it boggles the mind, given the enormous interest in this topic, as illustrated by the fact that comments are still appearing on this article more than a year after it was written, and the large sums of money spent on the economics profession, and the large sums of money at stake in pursuits where such a measure would be of enormous interest, e.g. banking and asset management, that there are not a number of such indices, competing with one another, and stimulating and structuring debate in this area. I would be very interested to see real stock-market returns, rather than nominal returns of such an index, correlations with other economic factors e.g. unemployment, and statistical analysis of stock market performance against real bond yields/interest rates, rather than the simple nominal analyses that we often see, and that are (presumably) quite inaccurate. Indeed, I’m surprised that, in the digital age, there is not a website that will profile your life-style, choose a relevant inflation index corresponding to that lifestyle. Its impossible to plan for the future without having a clear idea about inflation!

    • I’d also be very interested in a ‘one-stop-shop’ website of economic fundamentals. ECRI is interesting but subscription only. I’m not interested in commentary and opinion on news releases: the web/media is full of that (most of it is rubbish as the information is used by typically liberal arts graduates to present their point of view: it is biased, and, more importantly, skewed to the small data set that supports their argument. I want something where I can form my own view at any point in time, not just when a journalists feels they can generate some publicity, usually after the event). I am interested in clear data. I can’t be the only one who wants to form their own opinions (and indeed, pull data together to create my own economic/business cycle indicator; ideally globally). Thanks!

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  64. I check shadow stats sometimes but trade the markets and have been around for longer than Williams. The US “economy”, the dollar, what the “dollar” is based on have radically changed over the decades and yes he’s right about the basics that the “government” like most corporations I worked for “massage” the numbers to fit their agendas. What is real to trade markets are real things like a barrel of oil which loosely has backed our “dollar” since 1971-Nixon or the deal with the Saudis that our military would protect them and middle eastern oil was our national interest. All you do is take a real commodity like oil and see how many “dollars” you need to buy one. Gold, soy beans, copper, iron ore, semiconductors,etc. and that is how you measure “inflation” and chart things. Unemployment numbers from the BLS like all the other numbers the government put out are political not reality and in fact the entire government isn’t real, it’s a front for the real rulers who do use real numbers and deal with control of real things. So the whole question to me is silly when reality is actually simple and it’s based on actual prices paid for actual goods. I never go by government “numbers” or use his just charts of real prices paid. Unemployment doesn’t matter because they don’t care about how many people aren’t working-they don’t count so they “massage” them. Anyone who thinks the government numbers mean much isn’t a businessman or trader. Statistics are meant to be manipulated for agendas for “whoever”, and business is business. When Harvard lost a third of it’s multi-billion dollar endowment in the “crash” I wrote them a nice note saying it’s all fine and dandy to have your head in the clouds, but when it comes to money you better keep your feet on the ground. Reality is pretty simple and the government doesn’t produce anything except more schemes to fleece the people they live very nicely off of.(all governments) Actually similar to the Mafia because they use fear more than any other technique to “motivate” the sheep into things which are profitable to them. The whole conversation here misses reality kind of like the Goldman Sachs hearings-entertainment.

    • A lot of paranoia in that comment.

      I’ll just ask one question:

      How can you count someone as unemployed if they aren’t bothering to look for work? And why should you count people as unemployed if they don’t WANT a job? What kind of absurdity is that? As it is, only about 7% of the people who are “not in the labor force” say that they “want a job”. And most of those people haven’t bothered to look for work in a year.

      Are these people who “want a job” waiting for the Jobs Nymph to sit on their head and bless them with a job? How do you find a job if you aren’t looking?

      • Molly, There is a better number than the Unemployment Rate, which the Government manipulates to its benefit. Do you really believe the Unemployment is dropping every month when the jobs created is less than the jobs lost? Answer is to look at the Labor Participation Rate (i.e. the Employment Rate), which is the lowest it has been since the 1970s!

  65. I would like inflation measurement that did a costing for some sort of complex project. Hollywood tends to do rather similar effects spectacles quite frequently. However it’s hard to say how accurate the published budgets etc are but it’s pretty consistent that the budget figures have been on the rise.

    By looking at say top x “Most expensive films adjusted for inflation” for every 5 years going to past might be interesting when a median figure and its delta was computed for each interval excluding those out of the interval.

    Another method would similar in methodology but instead of expensive films, look at large amount of executive compensation packages.

  66. I just eye balled figured according to the methodology I suggested of the “Most expensive films” wiki page from 2006 and today (2014).
    I didn’t do any calculation but the change in that 8 years seems to be something like 30-40%.

    • How do you differentiate between a rise in production costs for that industry, and inflation then? Inflation is the general rise in prices, so you need to measure across all, or at least a representative amount, of sectors to talk about it.

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  69. Your argument completely misses the point. Shadowstats is not trying to come up with a new way of calculating the CPI. Does the pre 1980 and 1980 CPI missed important aspects of inflation? Absolutely because a bit of history shows that up until the era of central banks, inflation was considered as an increase in the money supply. It is just asinine to waste time trying to figure out how that money is flowing through the system and affecting prices but one doesn’t need to be a rocket scientist to understand that it is affecting prices! That present calculations of CPI exclude items such a energy and house prices speaks volumes to the “value” of present CPI calculations. At least Shadowstats provides a consistent methodology for evaluating the evolution of some of the impact of prices over time. The BLS CPI doesn’t even do that!

    • Shadowstats provides a consistent and monstrously incorrect methodology for calculating the CPI, based on mathematically nonsensical assumptions. We went over this more than a year ago. It’s worse than useless, it’s totally misleading, not to mention absurd, and not to mention politically driven.

      The headline CPI certainly does includes energy and food. The ‘core’ CPI doesn’t, but is a more useful tool for the FED in monitoring inflation.

      House prices more tricky, but let’s just say that if the CPI used house prices between 2008 and 2011 the CPI would have gone down, by a lot, and inflation-truthers would have had nothing to try to mislead people with.

      • LOL! Yes, The Fed has increased the money supply, year on year from around 1.2 % in 2007 to above 17% in 2010 and it’s been hovering above 10% since then. And during that time “inflation” has gone from a “high” of 4% in 2008 and has been at or below 3%. And you think that your CPI “calculations” are more accurate than Shadowstats?!? What are you smoking??? I don’t even argue for the validity of Shadowstats as an accurate measure of inflation, I argue that at least its a consistent crap measure whereas as what the government is doing is massaging numbers ALL THE TIME to meet political objectives. While you, even from your assessment of “house prices being tricky” just emphasizes my point that it’s a waste of time trying to figure out how money is flowing through the economy because there is no model that can reflect the fact that maybe in your part of the country house prices have gone down but it’s obvious that you don’t get to New York, San Fran or even London very often.

        • First of all, the Fed doesn’t control the money supply. It controls the monetary base. But the monetary bases consists of currency plus bank reserves, and bank reserves can’t be spent, so an increase in the monetary base may or may not translate to an increase in the money supply. That’s exactly what’s happened. The monetary base has soared, but the M2 stock, which is the ‘money supply’ that matters most, has been growing at about 6% between 2010 and now. But even this doesn’t automatically lead to higher inflation, because if the money doesn’t circulate, inflation doesn’t occur. So your argument that if the money supply increases inflation must increase simply isn’t true. Where did you dig it up, anyway?

          As for ‘consistency’, Shadowstats simply use the BLS figures and adds a constant. So whatever ‘massaging’ (your word, but not true) there is in the BLS numbers are just carried forward into Shadowstat’s numbers anyway. And he’s trying (although failing) to be consistent with a measuring process from at least 35 years ago. Guy must really love the past.

          You say there’s no model to reflect different inflation rates in different parts of the country? Wrong. The BLS publishes separate indexes for 3 metropolitan areas every month, and for 11 others every other month. Does Shadowstat’s do anything remotely like that?

          In 2008 Greenlees and MClelland at BLS wrote a paper refuting every point that Williams made (and was still making 5 years later. Here’s the URL. Why don’t you read it?

          Click to access art1full.pdf

        • I guess actually understanding what is stated in a post is not one of your core skills. First, the money supply (i.e. is the total amount of money available in an economy at a particular point in time) is managed by the Fed via 1. Changing reserve requirements; 2. Changing the discount rate; and 3. Open-market operations.

          Second, you first validate my point that the calculation of inflation by the BLS is actually useless by pointing out that depending on the circumstances that money supply inflation will not be reflected immediately in consumer prices.

          Third, I cede your point that Shadowstats is using the BLS estimates and applying a different (inflated) factor based on historical differences in CPI due to changes in methodology. If the historical differences in CPI change then his numbers could be off but it seems that the BLS are still using geometric averages, hedonic et al so they are consistent. What you fail to grasp is that Shadowstats is reducing the role of weightings, and quality adjustments to what they were pre 1980.

          Fourth, I had read that paper more than 5 years ago and it’s useless. First of all the authors just try to come up with more justifications for geometric weighting, substitution and hedonic adjustments which only serve to lower the CPI. Speedier computers don’t make people more productive, there is no objective justification for switching to geometric weighting, nor is the owner’s equivalent rent of any value since a more accurate measure would be using selling prices and rental prices and in relation to substitution of hamburger vs steak, I’ll highlight the real differences between the two. First of all that hamburger produced in a CAFO may appear to be cheaper (i.e. $1) but is actually an externalisation and displacement of the cost of producing the hamburger which don’t appear in the CPI to the consumer. This includes the cost of quality water which before could be obtained from the tap but for health and safety reasons requires either one purchase bottled water or purchase an expensive filter to strip out all the toxins out of the water, the cost of corn, soy and grain which is now also being used as livestock feed and is subsidised by the federal government, as well as the direct damage of eating a CAFO hamburger which because a feed fed livestock has up to 3x less the omega 3 and omega 6 oils while being full of fat, steroids and antibiotics. The same is the case for pork and chicken. When all things are factored in terms of impact on the environment, health, well being of livestock and nutritional value to humans, the actual cost of that CAFO hamburger is probably close to $100. Each of the decisions made in relation to the regulations, policies and upkeep of the animals that produced that CAFO hamburger ends up costing the consumer. All the other funds from the consumer have been sucked out upstream before they eat the burger and downstream after they have consumed the burger leaves the consumer with less money to actually purchase the burger. So although it cost $1, it is not even close to a burger or steak from say 1980. So what you have at the end is a significant drop in quality for a massive increase in cost because whereas before the price of the hamburger generally tended to reflect its cost plus the profit to the producer. Now it’s not even a substitution, it’s a con. Nor does the BLS’ CPI calculation address the fact that sizes of standard food items have decreased significantly since the beginning of the crisis while the prices have stayed the same. The actual cost for the same quantity of a particular item is significantly higher but never reflected in the CPI. Finally the basket of goods is completely arbitrary and can be easily manipulated by tweaking the geometric weights of the items in the basket.

          These are just a couple of examples of how CPI is manipulated to keep “inflation” low but in the end consumers end up paying more. That’s why despite your ivory tower logic when you ask people on the street whether they feel like prices are going up, they almost all inevitably say yes and why the BLS CPI is utterly useless because not only can one not tell how money is flowing through the economy and down to consumers, the government has further obfuscated matters through massaging the CPI numbers as well as regulations, policies, subsidies and bailouts that heap more in more costs on consumers without them realising it and which are not reflected in the CPI.

          Finally, what’s more interesting is some research done by an economist Mark Brandly who by adding CPI and the foregone price deflation together estimated the damage to an economy done by the Fed. He calculated what CPI would have been between 1959 and 2005 if the money supply had been fixed by using actual money supply and actual CPI data. He determined that the actual CPI in 2005 was 6.7 times higher than the CPI in 1959 and that absence increases in the money supply, the CPI would have fallen by 80 percent. So due to the Fed actual CPI was 34 times larger than what the CPI would have been.

        • Just a question to start – in the second paragraph you imply that inflation is not really a rise in the general price level, because that price level does not reflect the increased money supply which hasn’t worked its way through yet. So can you give me your definition of inflation? I suspect it’s the same as the Austrian school.

        • I would have thought that is obvious except for the analysis for what the fascists (i.e. corporation in partnership with government) have done to the food. If you read the first post, I already stated in my first post that before the 20th century, inflation was considered a general increase in the money supply. It’s impossible to determine how the money will flow through the economy and effect consumers but it will effect consumers in a number of ways. All the governments have managed to do is to take people’s focus away from the amount of money being pumped into the economy (and stolen from consumers generally through declines in purchasing power highlighted in my last post).

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