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The Inflation Data Conspiracy E-mail
Written by Eben Esterhuizen   
Wednesday, 14 May 2008

The Inflation Data Conspiracy
Photo:peterandringa, Creative Commons, Flickr
Call me a conspiracy nut if you like, but I'm starting to believe that the U.S. government is actively manipulating inflation data. PIMCO's Bill Gross recently suggested that the U.S. government wants to keep Social Security payments and other government costs pegged to an artificially low index, and he even suggested that this practice may have fueled the housing bubble. "The government can claim there's no inflation but all they're measuring is a reduced standard of living," argues Peter Schiff at Euro Pacific Capital.

Conspiracies aside, let's look at the way the index is constructed. Some suggest that U.S. inflation data is understated due to the fact that nondurable goods, such as food and gasoline, make up only 12% of the Consumer Price Index (CPI). And those prices have been skyrocketing over recent months: gas prices are up about 25% over the 12 months ending in March while food prices rose 4.5% over the same period.

Other analysts argue that that the official inflation figures don't accurately reflect what's going on in the U.S. housing market. "That's significant because the cost of buying a home has twice the impact on CPI as does the prices of all nondurable goods combined," says Chris Isidore at CNNMoney.com. For example, official U.S. CPI data showed only an 11% rise in home ownership costs between 2002 and 2006, a time that the National Association of Realtors reported that existing home prices climbed 34%. "The reason for the low CPI reading is because the CPI looks at equivalent rents, rather than home prices," adds Isidore. This is why Gross argues that the disconnect between CPI and the housing market may have helped fuel the housing boom, since it kept mortgage rates lower than they should have been.

If you find all this interesting, be sure to check out www.shadowstats.com. The site is run by John Williams, an economist based in California. He believes that the government's CPI is understating true inflation by at least 3 percentage points and perhaps as much as 7 percentage points. So instead of an annual inflation rate of 4%, the true number could be between 7% and 11%, according to Williams.

If conspirators are correct, inflation is getting out of control. Ironically, this could be a lifesaver for the banks. "If it [inflation] continues to take hold, inflation will erode the real value of the debt burdening so many in Britain and help to float banks away from the rocks and into calmer waters," says David Wighton at the London Times. Perhaps there is a method to the madness after all.

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Comments (2)add
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written by David Neubert , May 14, 2008
You are a conspiracy nut. Governments manipulating the inflation calculation is nothing new. The real question is how long it will take the financial markets to stop trusting the government and have a private sector calculator of inflation.

In Brazil, the most popular inflation index is not calculated by the government but by the University of Sao Paolo. No one trusts the government calculation.
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written by Jeanne Roberts , May 22, 2008
No, you're not a conspiracy nut, and I think you've hit on something. Since both SS and government pensions are tied to the index, or CPI - as well as wages and other corporate costs - it makes sense for them to keep the index low and most of us near poverty. Hungry people don't have much fight in them, and would rather have a PB&J than a gun.
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