It's interesting to note that inflation could be
understated by 7% using the Consumer Price Index (CPI). Picked up
this article from Google.
<<Inflation, as reported by the
Consumer Price Index (CPI) is understated by roughly 7% per year.
This is due to recent redefinitions of the series as well as to
flawed methodologies, particularly adjustments to price measures
for quality changes. The concentration of this installment
on the quality of government economic reports will be first on CPI
series redefinition and the damages done to those dependent on
accurate cost-of-living estimates, and on pending further
redefinition and economic damage.
The CPI was designed to help businesses, individuals and the
government adjust their financial planning and considerations for
the impact of inflation. The CPI worked reasonably well for those
purposes into the early-1980s. In recent decades, however, the
reporting system increasingly succumbed to pressures from miscreant
politicians, who were and are intent upon stealing income from
social security recipients, without ever taking the issue of
reduced entitlement payments before the public or Congress for
approval.
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Up until the Boskin/Greenspan agendum surfaced, the CPI was
measured using the costs of a fixed basket of goods, a fairly
simple and straightforward concept. The identical basket of goods
would be priced at prevailing market costs for each period, and the
period-to-period change in the cost of that market basket
represented the rate of inflation in terms of maintaining a
constant standard of living.
The Boskin/Greenspan
argument was that when steak got too expensive, the consumer would
substitute hamburger for the steak, and that the inflation measure
should reflect the costs tied to buying hamburger versus steak,
instead of steak versus steak. Of course, replacing hamburger for
steak in the calculations would reduce the inflation rate, but it
represented the rate of inflation in terms of maintaining a
declining standard of living. Cost of living was being replaced by
the cost of survival. The old system told you how much you had to
increase your income in order to keep buying steak. The new system
promised you hamburger, and then dog food, perhaps, after
that.
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There now are three major CPI measures published by the BLS, CPI
for All Urban Consumers (CPI-U), CPI for Urban Wage Earners and
Clerical Workers (CPI-W) and the Chained CPI-U (C-CPI-U). The CPI-U
is the popularly followed inflation measure reported in the
financial media. It was introduced in 1978 as a more-broadly-based
version of the then existing CPI, which was renamed CPI-W. The
CPI-W is used in calculating Social Security benefits. These two
series tend to move together and are based on frequent price
sampling, which is supposed to yield something close to an average
monthly price measure by component.
The C-CPI-U was introduced during the second Bush Administration as
an alternate CPI measure. Unlike the theoretical approximation of
geometric weighting to a variable, substitution-prone market
basket, the C-CPI-U is a direct measure of the substitution effect.
The difference in reporting is that August 2006 year-to-year
inflation rates for the CPI-U and the C-CPI-U were 3.8% and 3.4%,
respectively. Hence current inflation still has a 0.4% notch to be
taken out of it through methodological manipulation. The C-CPI-U
would not have been introduced unless there were plans to replace
the current series, eventually.
Too-Low Inflation Reporting Yields Too-High GDP
Growth
As is discussed in the
final installment on GDP, part of the problem with GDP reporting is
the way inflation is handled. Although the CPI is not used in the
GDP calculation, there are relationships with the price deflators
used in converting GDP data and growth to inflation-adjusted
numbers. The more inflation is understated, the higher the
inflation-adjusted rate of GDP growth that gets
reported.>>
Source: http://www.shadowstats.com/article/56
