How the U.S. Government Manipulates Inflation Data

by: Philip Davis

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The PCE bothered me yesterday.

The Government told us that the PCE core price index for December was 0% – no inflation at all. I found that to be incredible – as in not credible at all – and then Tuscadog asked me how long the Bernank could keep justifying his rampant money printing with fake government data, to which I responded: "I had many derogatory things to say about that but I was literally so sickened by that BS that I couldn’t bring myself to comment on it so I just left it alone, but it’s a very sad joke that our government can tell us that there was no inflation in December while the whole planet is falling apart, isn’t it?"

Fortunately, there was a helpful article in the WSJ by Brett Arends that pointed out that the way the government justifies their low inflation figures is through "substitution and hedonics," a topic expert government BS detector Barry Ritholtz had touched on as well. As Barry says:

Hedonics asks the question: "How much of a product’s price increase is a function of "inflation," and how much is quality improvement?" Thus, the entire late 1990′s concept of Hedonics is premised upon a flawed assumption: that quality is static. Hedonics is a variation of the old trick of comparing the present with the past, instead of the present. Measuring quality improvements is a distraction from the real measure of inflation: the purchasing power of a dollar.

Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations.

What BS, right? Well, when I get mad, I do research and when my research uncovers something – I make an electronic puppet show:

Forward this to your friends and Congresspeople – let's try to get our government to get real!