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Minyan Mailbag: What's the Real Deal With CPI?


CPI is understated because of several biases.


Prof. Succo,

I have no idea what the inflation number is. It obviously varies by your age and demographics, as different consumers have different inflation depending on consumption.

As a person who has to eat, pay energy bills, pay employees, has insurance of every imaginable kind, tuition, etc., I feel it.

I'm glad the BLS lives in a world with minimal inflation. Maybe I can visit them.

Minyan Ron


You are not alone.

Government calculation (manipulation) of CPI, as well as other statistics like GDP, all of which were affected by politicians (much of it under Clinton, George I, and George II) has vastly changed these numbers from where they would be if they were calculated as they used to be 15-20 years ago.

CPI is understated because of several biases. The concept of CPI originally was "take a fixed basket of goods and track its price change." What this did was measure the cost of a stable standard of living. The government, in its infinite wisdom (Clinton), rationalized that this was not necessary because people could substitute goods. For example, if the cost of a steak rises, they would take out the steak and substitute a hamburger. This got away from measuring the cost of a standard of living to measuring the cost of survival. Eventually they will substitute a hamburger with dog food.

Add to that hedonics and other little tricks and we get a CPI much different than what it used to be. We have calculated current CPI the way they used to calculate it and we get an 8% number today versus around 2-3% that they report.

It is the same with unemployment. Clinton took the "discouraged worker," one that had been out of work for a year, and decided that he is not really looking for a job. This significantly changed the level of unemployment reported. If we go back and calculate the unemployment rate the way it used to be calculated we get a current rate of 10-12%.

And to conclude our story, if we do the same to GDP we get zero or worse.


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