The Government Response
I’ve given the CPI – the Consumer Price Index – something of a hard time lately. If you’ve been following my articles, you know I’ve been critical of some of the changes to the way the CPI is calculated. The danger is that inflation might be misstated, and I’ve pointed to articles that suggest that the official CPI number may be too low. I thought it would be a good idea to take a look at the government’s side of this.
The Bureau of Labor Statistics has a website – BLS.GOV – with questions and answers about the CPI. Here’s some selections from their FAQ about this very influential inflation indicator. “Has the BLS removed food or energy prices from its official measure of inflation? – No.” I’m okay there – I didn’t say they did. The next one is interesting. “The CPI used to include the value of a house in calculating inflation and now they use an estimate of what each house would rent for — doesn’t this switch simply lower the official inflation rate?”
Now the way they’ve phrased the question, the answer is no, but if you read a little further, they concede that there has been some change. They point out that the standard has changed to match the way the rest of the world calculates this. Everybody calculates home value that way. Now, that’s not unreasonable, but it is a change.
For me, the bigger question is this: is the Bureau of Labor Statistics faithfully doing their best to produce an unbiased result that accurately represents inflation trends? When I look at it from their perspective, I have to credit them with good faith. I believe this government office is doing what they believe is right and noble. But I also have to consider the reality of the times. The CPI is an intensely politicized piece of financial data. The financial markets eagerly await the monthly announcement of the new CPI indexes – and trillions of dollars hang in the balance. A stunning amount of government spending is pegged to the CPI. Governments rise and fall based on their ability to manage the economy, and in the U.S. we’ve seen that inflation is a force that can kill a political administration. So it seems clear to me that there is political pressure on the BLS to come up with numbers that suit the political needs of the administration it serves.
Where’s the right inflation number? BLS says negative 1%, John Williams at ShadowStats.com says it’s 6%. Most likely the truth is somewhere in the middle. We’re going to have inflation. We’re going to have it for decades to come. Are you planning your portfolio accordingly?