Lies, Damned Lies and Statistics - Calculating the Consumer Price Index

I'm going to quote from an excellent article I read today - The Core Rate over at www.financialsense.com

...what this caller was asking was how and when did they change the way they measure the rate of inflation? On a first hand basis he was experiencing inflation in his personal life with rising food and energy costs. There was a major disconnect between what he experienced in real life on a day-to-day basis and what he was told in published inflation reports. The host of the show and the financial reporter from the Times had no answers.
...
In the early 90’s the government realized it had a problem with rising entitlement costs for Social Security, Medicare, and government pensions. These entitlement payments were indexed by the inflation rate each year.
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The solution was to change the way inflation is measured.
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The Boskin Commission recommended several changes to the CPI...

The result of their implemented suggestions is the mish mash we have today, which bears no resemblance to reality. The Commissions recommendations had widespread support in the Clinton Administration, a Republican Congress and from financial luminaries such as Alan Greenspan, who was expanding the money supply at a very rapid rate as shown in the graph above.

He then goes on to explain the magic of hedonics, geometric weighting, substitution, and seasonal adjustments that are now applied to the reported CPI. He then explains why the use of a "core rate" is a fraud. He concludes:

There is no such thing as the “core rate.” The core rate doesn’t exist in the real world. Next time you see an increase at the grocery store, the gasoline station, your utility or cable bill, your children's tuition, your property taxes or your dentist's or doctor's bill, ask for the “core rate.”

That is when you will be confronted by the reality of its fiction.

That graph showing the CPI the way it was calculated before and the way it is now sure is interesting.

What we can say now is that the US is experiencing real inflation in the economy that is much higher than what is reported (6-8%). In addition to real inflation in the economy, the US has experienced hyperinflation in the financial economy—first in the stock market (the tech bubble between 1995-2000) and then in the mortgage, bond and real estate markets since 2000. If inflation continues to increase as I suspect in the real economy, I can guarantee you it will never show up in the CPI and PPI. Real inflation will be removed statistically through the magic of hedonics, geometric weighting, substitution, and seasonal adjustments.

Where do things really stand now for the United States and consequently Canada and other G8 nations?

As the US debt burden increases with each passing month, the Fed has only one option, which will be to print money. Up until now foreign central banks have relieved the Fed of most of that burden. Foreign central banks have been doing most of the money printing in an effort to sterilize capital inflows into their countries and keep their currencies from appreciating.

This issue has become more serious than is commonly recognized.
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combined foreign purchases of Treasuries and agencies equaled a stunning 97.2% of total issuance, $486.8 billion, versus $500.8 billion.

As to the purchase of corporate bonds, foreign investors took down a net of $265.5 billion, 44.7% of total issuance of $594.3 billion.
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As of 3/31/05, foreign investors held a total of $9.723 trillion of US financial assets...

As of 3/31/05, foreign financial liabilities totaled $4.634 trillion, resulting in a net foreign claim against the US of $5.089 trillion.
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The following table taken from the same Gillespie report shows just how much of our debt has been acquired by foreigners in the last decade. The Fed has had little need to monetize debt. Foreigners are doing the Fed’s dirty work.

In effect, the US is exporting its inflation and it will ultimately result in deflation in the rest of the world, ... and hyperinflation in the US when foreigners no longer finance our deficits.

Interesting top ten list at the end.

I encourage you to read the essay in its entirety.

So we are being lied to (again).

Cui Bono?

Well I think there is an interesting place to start looking right here at ATS.
Have you seen this thread? Let's pop the bubble of Ignorance...

When will "foreigners no longer finance our debts"?

Well since China is one of the largest holders of US debt. All those assets in dollar denominations and the flow of interest payments (also in dollars) have sent them on an investment, deal making and buying spree.

Examples:

NEWS: China National Offshore Oil Corp Re-ups Bid For Unocal
China bidding for Maytag corp and Huffy bikes
China a Leader in Scramble for Oil

So I figure that US corporations and their indentured political class have two choices. One is to hold dear to their principles of capitalist "free markets" and sell to the highest bidder. The other is to intervene in the name of "national security" with "protectionist" solutions.

If the later is chosen, I have a question.

What happens when China realises that all of those US dollars and other financial instruments it holds can't buy what they need (like energy)?

If that were to happen the latest CPlie numbers would be the least of our worries.

I forget when and where I learned the saying "you don't go to war with your banker" but what happens when the bankers are at war?
.

just what China is up to and what its thinking is appears to be one the big mysteries.
they're currency is tied to the dollar though is it not?

Everyone should be aware. China is on the rise. This does not bode well for U.S. interests.

Thanx for the Xcellent thread.

Originally posted by AdamJ
they're currency is tied to the dollar though is it not?

That's correct and the US has been pressuring them to "un-peg" their currency.

I have noticed the prices of many everyday items being higher lately. Gas and food especially but these numbers are being kept out of the CPI.

I have a buddy who is a carpenter/woodworker and he tells me that the price of furniture quality wood has risen over 30% in the last two years and making things tough for him. Another buddy who's an engineer worked in glass manufacturing and now works in truck manufacturing and says the price of raw materials has risen around 20% in the last few years.

How long do they think they can hide the real numbers?
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oooo, i dont know.
im sure they will try and hide them forever.
Put it this way, i dont think they will come out tomorrow and say, 'look, we have been hiding or fudging our numbers for at least the past 20 years, just so you know. So starting now we are going to be good politicans and tell the truth'

Also im not an economist, but they always measure their debt by GDP and say its ok. What i dont understand is why GDP is the measure, i mean that includeds private companies, which to me it seems has nothing to do with the debt burden.

I think what would be more interesting is debt compared to annual govenment tax income and % of budget spent on interest. or am i just way off?

Originally posted by AdamJ
oooo, i dont know.
im sure they will try and hide them forever.
Put it this way, i dont think they will come out tomorrow and say, 'look, we have been hiding or fudging our numbers for at least the past 20 years, just so you know. So starting now we are going to be good politicans and tell the truth'

Also im not an economist, but they always measure their debt by GDP and say its ok. What i dont understand is why GDP is the measure, i mean that includeds private companies, which to me it seems to have nothing to do with the debt burden.

I think what would be more interesting is debt compared to annual govenment tax income and % of budget spent on interest. or am i just way off?

Originally posted by Gools
I have a buddy who is a carpenter/woodworker and he tells me that the price of furniture quality wood has risen over 30% in the last two years and making things tough for him

Here in North Carolina, the furniture industry has been decimated by these trade agreements. A couple years ago Pillowtex bit the dust. It damn near put a whole town out of business.

I saw this graph today and it reminded me of this thread.



These are the Commerce Department's own numbers!

How they can put out numbers like that and then claim that the CPI is running at 2.2 % for the last 12 months is a total joke. NY Times: Core inflation has risen 2.2 percent over the last 12 months

What's an even bigger joke is the people who use this number to "prove" that all is well with the economy. :shk:
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Originally posted by Gools
I saw this graph today and it reminded me of this thread.
These are the Commerce Department's own numbers!

Good catch Gools and they, including you, are not alone in having observed what is REALLY going on.

How they can put out numbers like that and then claim that the CPI is running at 2.2 % for the last 12 months is a total joke. NY Times: Core inflation has risen 2.2 percent over the last 12 months

Because it's political and while they are scientist and know how to arrive at relatively accurate approximations of the truth few regular people every read their reports and politicians and managers can always change the summary documentation to say what they want people to hear.

What's an even bigger joke is the people who use this number to "prove" that all is well with the economy. :shk:
.

Well the politicians, and their chosen economist, use the numbers they like to make the points they wish to make and they are certainly not above inventing the reality that would keep the people passive and misdirected. The American people are angry for very real reasons but there is in my opinion probably no society on the planet that have been more effectively misinformed and misdirected by it's selected leaders and their technocrat managers.

www.marketoracle.co.uk...

www.swissamerica.com.../200505160900f.txt

www.brillig.com...

www.mises.org...

moneycentral.msn.com...

So if you want to understand why prices are rising as fast as they clearly are the 'real' inflation numbers are not so hard to arrive at and for the most part just another one of those open secrets economist understand but rarely talk about.

Stellar

[edit on 28-11-2007 by StellarX]