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!


Headline inflation statistics are mostly meaningless junk. They capture lots of statistical oddity, and much less economic reality. Clueless economists today often flap around trying to make the case that low headline inflation proves (beyond a shadow of a doubt) that present-day money-printing exercises are not excessive. Of course, that’s another argument for another article.

The point is that markets (and prices) are not determined so much by the supply of, and demand for money, but by the supply of and demand for goods and services. This means that money-printing exercises to address inflation or deflation are usually pretty futile in addressing the wants and needs of a society, and therefore pricing phenomena. As I have shown in the past, hyperinflation is triggered by the unavailability of goods and services, not the over-availability of money. The money printing usually starts post-hoc, because society and governments have lost control of everything else, and money printing is a swift and easy last resort.

Western nations have experienced peculiar pricing phenomena in the last ten years.

From the BBC:

These figures are for the UK, but other Western nations have experienced a similar predicament. Essentially, goods and services whose supply has increased as a result of increased East Asian productivity, cheap labour, and economies of scale (clothes, consumer electronics, etc) have dropped in price, whereas goods and services whose supply has remained relatively static (particularly energy, and products connected to energy) have risen in price. Of course there are also oddities such as transport insurance in the graph above; every market has fundamentals of its own, and quirks like government intervention into the manner in which a service is delivered can drastically shift prices in services.

What the focus on money supply (i.e. the notion that pumping QE money at money-lenders so they can lend more will somehow fix the economy) really demonstrates is the powerlessness of Western governments (especially America) to control the supply of energy, and save Western industries from being undercut by cheaper East Asian competition. It is (quite literally) throwing money at a problem, hoping that someone will innovate or strategise the West out of its present debt-fuelled malaise.

Of course, eventually, the soaring price of energy will make alternative energy generation (solar, etc) more economically viable than hydrocarbons. Eventually, food costs will be rebalanced by new and more efficient food production sources (subsidies distort markets and prevent them from compensating as quickly as the market desires, but that’s another story). But eventually (as John Maynard Keynes put it) we are all dead.

Western governments should have invested heavily in better energy and food infrastructure a long time ago, to keep the costs down for consumers. No need to raise taxes; simply divert the vast quantities of money that go to needless foreign wars to food and fuel security.

All the while, monetary authorities print and print to cancel out the deflationary effects of mass-Chinese production, while costs on energy and food continue to squeeze Western consumers, particularly the elderly and disabled who live on fixed incomes. Commentators spew worthless rubbish about monetary solutions, when really the problem is food and fuel infrastructure and availability.

And much of this is brushed under the rug, because headline inflation rates are low-to-moderate. Of course, you can’t brush reality under the rug. Eventually even those with jobs have so little disposable income that they get furious, and do something about their predicament. It looks like that process has already begun.

Who is Failing the 99%?

With predicaments like this, it’s clear something is going badly wrong.

But what’s worse than wrong?

As Einstein put it:

The definition of insanity is doing the same thing over and over again and expecting different results.

Many commentators, including much of the establishment, are advocating the same old solution: take more productive capital out of the economy in the form of taxes for the government to spend. As I pointed out yesterday, total government spending and unemployment are strongly correlated:

This is empirical evidence that increasing government spending does not necessarily decrease unemployment. But there’s something worse going on here.

While Obama might talk a good game on jobs, his record speaks not of job creation, but of massive tax breaks for corporations.

From the Daily Mail:

General Electric paid no tax at all in America last year and even managed to get a $3.2billion ‘rebate’ from the government.

The utilities giant allocated just 7.4 per cent of its $5.1billion U.S. profits in tax – around a third of what others companies its size are paying.

But through a complex series of measures GE, which is America’s largest company, will not even have to hand that over.

So where are all the jobs that these tax breaks were supposed to create?

Corporate profits have recovered from 2008 under Obama:

So in spite of all his pro-jobs rhetoric, all of that stimulus and all of that quantitative easing just hasn’t sparked a recovery for jobs.


As I wrote a few weeks ago:

The most annoying thing about the establishment’s ongoing obsession with maintaining the status quo, and supporting and bailing out older and larger companies?

Dinosaurs don’t create jobs.

According to the Economist, research funded by the Kauffman Foundation shows that between 1980 and 2005 all net new private-sector jobs in America were created by companies less than five years old. “Big firms destroy jobs to become more productive. Small firms need people to find opportunities to scale. That is why they create jobs,” says Carl Schramm, the foundation’s president.

And small business is being crowded out of the market by big government and its crony capitalist friends.