Lies, Lies and Inflation Statistics

Who are the bigger liars? Argentinian feds? Or American feds?

News Flash from the pampas:

Argentina freezes prices to break inflation spiral

‘Argentina announced a two-month price freeze on supermarket products Monday in an effort to break spiraling inflation.

‘The price freeze applies to every product in all of the nation’s largest supermarkets – a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine market, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported.’

The Argentinian government moved to stop the price increases it previously denied were happening. It said inflation was only 10%. Turns out, it’s more like 30%.

But our focus today is not on the land of the gauchos…it’s on the land of honchos, HoJos and bozos…that is the land north of the Rio Grande.

Before we come to it, though, another glance south of the Rio de la Plata:

‘The International Monetary Fund (IMF) has issued Argentina with a ‘declaration of censure’ for providing inaccurate inflation and GDP data and has given it until September 29th to amend the problems or will impose sanctions.

‘The IMF Friday called on Argentina to fix its statistics “without further delay”.

‘The IMF said it would review Argentina’s progress in November and warned that if the problems are not sorted then it could impose sanctions on the country. This would bar one of South America’s biggest economies from voting on IMF policies and accessing financing.’

When will the IMF look at America’s inflation figures?

We never paid much attention to the claims that our own feds were intentionally falsifying the numbers. Too many earnest quants and honest statisticians at the Bureau of Labor Statistics (BLS). Many of them Republicans. A few Tea-Partiers, even. Too many different points of view to pull off a real conspiracy.

Instead, the feds try to report the number correctly. Still, with so much fudge in the kitchen, they were bound to get some on their fingers. Not that anyone intended to defraud the public. It’s just that institutions have biases of their own…often that the people in them don’t even see.

Adding up the cost of living numbers has built in complications. People of reasonable intelligence and ordinary goodwill can come to different conclusions about how it should be done. Then, even a small institutional bias – like an old watch near a compass – can lead you in the wrong direction.

At first, the results differ little – one way from another. And then, the institution takes ‘ownership’ of the method used. Reputations are on the line. Careers depend on it. A whole legion – with its own hierarchy, creed, orthodoxy, pensions – develops.

And then there is no retreating… no second-guessing… no arrière-pensée. Because, now, too many things depend on it. Changing it would cost billions…or trillions. And it would change the way people think too. Fessing up becomes unthinkable.

That is what happened with America’s consumer price index. Small, innocent distortions grew to become grotesque and monstrous. But the feds can’t admit it. There’s too much at stake.

Peter Schiff describes what happened:

‘Since the 1970s the preferred government inflation metrics have changed so thoroughly that they bear scant resemblance to those used during the “malaise days” of the Carter years.

‘Government and academia defend the integrity and accuracy of the modern methods while dismissing critics as tin hat conspiracy theorists. But given the huge stakes involved, it’s hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the methodology and the numbers, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

‘Beginning in the early 1980s the methodologies were altered to compensate for a variety of consumer behavior. The new “chain weighted CPI” for instance incorporates changes in relative spending, substitution bias, and subjective improvements in product quality.

‘Essentially these measures report not just on price movements, but on spending patterns, consumer choices, and product changes. This is fine if the goal is to measure the cost of survival. But that is not the purpose for which these metrics are meant to be used.’

The good intentions were there. But so was the road to Hell. Schiff took out the fiddles and tried to calculate how much prices had actually changed:

‘We randomly identified price changes of 10 everyday goods and services over two separate 10 year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. The 10 items which we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, and electricity.

‘Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 121%, just 8% faster than the CPI. In contrast between 2002 and 2012 the CPI rose just 27.5%. But our basket rose by nearly double that rate – 52.1%! So the methods used in the 1970s to calculate CPI effectively captured the price changes of our goods, but only got half of those movements more recently. How convenient.

‘Just to make sure, we ran the same experiment with 10 different goods and services. This time we chose: sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef and veal, and prescription drugs.

The results were notably similar. The basket increased 1% faster than the CPI between 1970 and 1980 and 32% faster between 2002 and 2012. In both cases we selected a random array of food and non-food items.’

Today, thanks to small course changes by the BLS back in the ’80s, the CPI is far from where it ought to be. It set out for New York…and it arrived in Buenos Aires. If other alternative calculators, John Williams and Chapwood Finance, are right… the US figure is actually more off-course than the Argentinians’.

Real price increases in Argentina are believed to be three times the official number. In the US, the BLS says prices are going up at a 2% rate. Williams and Chapwood say the real rate is 10% – five times as much!

But wait…if these numbers are correct… it changes everything. CPI numbers are used to deflate the GDP. They’re used to adjust Social Security and government pensions.

They’re used to tell you if you’re making money on your investments…or losing it. They’re used to keep tax rates even with inflation too. They’re used everywhere…like true north…every household financial pilot depends on them.

And if the official CPI were significantly understated…the results would be catastrophic! Yes, bad… Just for openers, the GDP would be in severe decline…revealing that the US economy has actually been in a depression for the last four years.

More to come!

Regards,

Bill Bonner
for Markets and Money

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Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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