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What’s the “Real” Inflation Rate?

By JLP | September 20, 2010

The Bureau of Labor Statistics publishes the Consumer Price Index, which is the standard for tracking inflation. The way the CPI is calculated was altered in the early 1980s and again in the 1990s. A facebook friend of mine sent me a link to an interesting inflation chart that publishes an alternative inflation number based on the formula used prior to the alterations. As you can see from this chart (click on the chart to see a larger version), those changes had the impact of making inflation appear much lower than it would have been had the changes not been made.

According to the above chart, inflation is running at 8.50% rather than the 1.15% that the BLS is publishing. This is important because the government’s programs like Social Security base their cost of living adjustments on the CPI. So, retirees are getting a COLA for 1.15% when the actual inflation rate is 8.5%. A lower inflation number also impacts COLA adjustments for wages.

What do you think? Do you think inflation is higher than what the government is telling us?

Topics: Inflation (CPI) | 13 Comments »


13 Responses to “What’s the “Real” Inflation Rate?”

  1. Mark Says:
    September 20th, 2010 at 8:25 am

    Should we restart the discussion on mortgages and inflation :)

  2. BG Says:
    September 20th, 2010 at 11:56 am

    LOL — Mark!

    One year CDs are at 1.44%. If the 8.5% number is accurate, then the ‘risk-free’ rate is really negative 7% — which is really scary (but might be right).

    BTW, the NBER just announced that the recession ended 15 months ago.

  3. Harm Says:
    September 20th, 2010 at 2:36 pm

    There is no question that the rate is higher
    than 1.15 percent. What the government would say
    is that housing costs are down….but mine are up
    slightly (I rent). It’s a scam to reduce SSA cost
    of living increases and I-bond interest….

  4. BG Says:
    September 20th, 2010 at 4:07 pm

    Found a rare governmental smack-down defending the CPI calculations:

    http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

    It’s a long doc, but here’s is a quote from it that specifically targets the shadowstats guys — actually I think the entire thing is a defense against shadowstats, but I haven’t read it all:

    “IT IS HOPED THAT THIS ARTICLE HAS PUT TO REST some of the misconceptions and myths about the CPI. It is a myth that the BLS reduced the growth rate of the CPI by assuming that hamburger is substituted for steak. It is a myth that the use of hedonic quality adjustment has substantially reduced the growth rate of the CPI. It is a myth that the 1983 adoption of owner’s equivalent rent systematically reduced the growth rate of the CPI shelter index. Finally, it is a myth that Social Security payments are updated by a CPI that does not include food or energy.”

  5. JLP Says:
    September 20th, 2010 at 4:19 pm

    That’s some awesome sleuthing, BG. Thanks!

  6. Manny Says:
    October 12th, 2010 at 11:46 am

    Well of course they are going to defend their made up numbers. Please, does anyone believe the BLS numbers? There is no way inflation is only up what the BLS says and this has been going on for a number of years. Wake up boys & girls.

  7. Jon Says:
    November 20th, 2010 at 1:54 am

    Higher prices are already here. The summer driving season is over and gas goes up and Diesel goes way up. Green coffee prices are thru the roof. Look at the price of all the commodities. The domino effect will start taking place quickly now that we have monitized the debt. Buy the necessities now as 6 months from now you will wish you did.

  8. Larrybud Says:
    December 5th, 2010 at 7:42 pm

    The feds know that if they released the real inflation rate, that the interest on the debt would spiral out of control way sooner than it will.

    And now I’m sitting here watching Bernacke lie through his teeth on 60 minutes about how inflation is under 2%!!

  9. John Says:
    December 27th, 2010 at 10:11 am

    I don’t think there’s a grand conspiracy to intentionally understate inflation. But I *do* think the CPI is extremely flawed in one respect: It counts real estate as an investment, thereby not measuring it.

    When real estate prices goes up, my cost of living goes up tremendously. In fact, for most of the population rent and/or mortage eats up a significant fraction of earnings.

    Ignoring “point of origin”(i.e., where something was produced) bugs me as well, but it’s more a gut feeling and not something I quite have a handle on.

  10. Rick Sargent Says:
    December 31st, 2010 at 4:59 pm

    I feel so cheated by the elected government.

  11. AHBritton Says:
    January 26th, 2011 at 6:45 pm

    It seems to me if inflation was as high as shadow stats says it is than we would see much higher price increases. A 2006 car selling for $12,000 (if it did not depreciate in value) would sell for over $20,000 today, and I believe that’s a low estimate.

    I feel like that is somewhat off, but I haven’t taken the time to study the data (which would require tons of sampling) even in an anecdotal way. In addition this would mean that market investors and financial consultants, etc. have also been duped by this and are requesting no or negative interest in many contracts. This seems highly unlikely.

    Gas prices are highly volatile and other commodity prices will probably increase because of the increasing demand from the developing nations.

  12. WTP Says:
    February 25th, 2011 at 11:05 am

    Inflation is correctly measured by the government. The prices of goods and services go up one of two ways:

    1. Value of the dollar drops compared to the price of a good
    2. Price of the good goes up compared to the value of the dollar

    Sounds like both are happening today, right? The problem the value of the dollar is difficult to determine when we are in debt so much.

    If we really wanted to define another completely different type of “inflation”, it should be the value of our DEBT versus the prices of goods. IF that was a type of inflation measured, then of course we will see an increase as reflected in the prices we see every day… but that’s not something that is on the radar

  13. Douglas Nusbaum Says:
    March 1st, 2013 at 1:14 am

    As more evidence of the innacuracy of ghe BLS statistics we have the following information from a very liberal engineering college. You may be aware that Scientists, those guys who actually deal with the physical world tend to be much more liberal than most people. No doubt because the government pays for their colleges. It is all one big conspiracy.

    So these “scientists” did some actual measurements in the physical world — the internet created by DARPA which is also part of the government conspiracy. And they found that those measurements validated the BLS numbers. Thus “proving” that those BLS numbers must be wrong. The right numbers are what the conservative right says that they are. Just like they accurately predicted the results of the last election which all thinking person “KNOWS” was stolen by (your favorite pejoritive words here)

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