What's Your Opinion Of The U.S. Consumer Price Index?

| About: SPDR Dow (DIA)

Summary

1) Lower than reported.

2) Higher than reported.

3) More than twice reported.

4) As Reported.

Please answer 1,2,3 or 4 in the comment section, I'll tally up responses and write a follow up.

What I have so far

Less than 9% of professional traders surveyed give the current C.P.I. releases creditability. 91% believe the actual C.P.I. is higher, 63% believe the CPI is more than twice the reported C.P.I.

What the C.P.I. determines, its history, pre 1980 calculations versus current calculation comparison to Gold and Governmental Expenditures

Since 1919 the CPI has been used as a benchmark to set US Treasury deposit rates which determine U.S. debt service cost.

Click to enlarge

Source Federal Reserve

The C.P.I. is also used in Adjusting Income and Payments for Governmental Expenditures; Social Security beneficiaries, Military, the majority of all Government Employee salaries, welfare, food stamp recipients, Government rents, nearly everything right down to school lunches.

Since 1978 there has been justifiable controversy about the creditability of the C.P.I. currently B.L.S. creditability is at a new all time low.

Fact or fiction?

Let's compare current "revised and weighted" BLS.GOV C.P.I. calculations to the constant pre 1980 calculations for;

The price for gold from 1971 to 2015
Governmental expenditures 1978 to 2015

Gold

In 1971 the US abandoned the US dollar's peg to gold, gold was trading at $40.80.

Current calculations

According to 618 million dollars in annual BLS.GOV funding the price of gold should have risen from $40.80 in 1971 to $238.77 by 2015.

Use the BLS.GOV inflation calculator on this page enter the data below.

Actual price of gold for 2015, $1,159.82

Current calculations are off by $921.05 per ounce.

Pre 1980 BLS.GOV C.P.I. calculations

2015 price of gold should have been $1,1104.78.

Actual price of gold $1,159.82.

Pre 1980 calculations were off by $55.05 per ounce for the 45 year period.

$55.05 per ounce is slightly greater than the recent 5 day range of $41 and less than half the recent 1 month range of $125.

Sources Federal Reserve Williams 1980 Pre revision CPI data

Prior to doing the numbers on Governmental expenditures lets look at the demise of C.P.I. creditability and why.

In 1969 Federal debt service cost began to outpace Federal tax receipts, buy 1971 the debt service cost/tax receipt ratio was considered "unmanageable".

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Source Federal Reserve

To resolve this problem in 1971 President Richard Nixon (prior to his impeachment hearings) and then Fed chair Arthur Burns abandoned the gold standard.

The US dollar officially became a Fiat currency enabling the US's private Central Bank to create as much money as the US Treasury needed (at their unaudited discretion) to satisfy the Treasury's debt addiction.

The US had two choices

1) To change course and use the ability to create money to bridge deficit gaps until the causes of the deficits could be discovered and resolved.

2) To maintain its course indulging in short term monetary gratification with complete disregard of the long term consequences, dollar valuation, inflation or future generations.

Unfortunately, the US chose option 2, budget deficits soared and the national debt grew from 391 billion in 1971 to 845 billion by 1979 or +116.11%.

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Source Federal Reserve

Predictably, the creation of massive amounts of money backed by no tangible assets or income flow generated U.S. dollar devaluation and double digit inflation.

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Source Federal Reserve

With double digit inflation Treasury rates soared.

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Source Federal Reserve

U.S. Federal debt service cost and all other Governmental expenditures skyrocketed generating a population adjusted per capita increase in Federal Spending of 156.38% for the 9 year duration of the US's newly created "fiat currency".

1971 & 1980 data source USGovernmentspending.com

Even with the minor modifications that had been made to the B.L.S. C.P.I. calculations "to more accurately report inflation" the B.L.S. calculations show an increase of 124%.

Source BLS.GOV

U.S. Debt to G.D.P. was closing in on 31.31%

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Source Federal Reserve

By mid 1980 the US dollar looked doomed, nearly every tangible asset on the board rallied against the US dollar, speculation frenzied, 100's of millions were being made and lost in minutes.

Gold and silver moved sharply higher, bullion banks were facing "fails to deliver". Bankers, the Fed, US Treasury, Bureau of Labor and Statistics, Exchanges and Global Investors were in panic mode.

Click to enlarge

SourceClick to enlarge Federal Reserve

Solution

In 1980 the US Treasury, BLS.GOV and Fed still had a shred of conscience. Paul Volker the newly appointed Fed chair began a series of very aggressive rate hikes to contain inflation.

At the same time the B.L.S. was given the "all clear" by their employer (The U.S. Government) to use "revisions" more aggressively "to more accurately report US inflation and employment".

By 1983 Volker was hailed as a hero because the cumulative impact of his tight monetary policies and BLS.GOV inflation calculation magic had dropped the reported BLS.GOV inflation from nearly 15% in 1980 to under 3% by 1983.

This video tells the story in 2 1/2 minutes

The market's reaction shows the impact

A) 1979 Volker begins a series of aggressive rate hikes, the yield curve inverts. (short term rates exceed long term rates)

B) 1980 higher rates "revised" BLS.GOV inflation calculation magic fully engages, the initial reaction is muted at first as the market just doesn't believe it.

C) In 1983 after more than a decade of high inflation, inflation magically lowers from near 15.00% to less than 3.00% containing Federal debt service cost and all increases in governmental expenditures that are linked to the "official" CPI such as Social Security.


Source Federal Reserve

What the market didn't pay attention to in 1980 and still isn't in 2016 are the major revisions to the way that the C.P.I. is being calculated or the impact of BLS.GOV revision magic to U.S. citizens, U.S. debt holders or the motivation for the revisions.

The Consumer Price Index (C.P.I.) was created to help businesses; individuals and government adjust their financial planning for the impact of inflation.

Let's do the math and compare BLS.GOV inflation calculations to actual price increases from 1978 to 2015.

Actual Federal Spending per capita for 1978 was $2,093.02

Sector 1978
1 Total Spending $458,746,000,000
2 Total Population 219,179,000
3 Fed Spending Per Capita $2,093.02
4 Pensions $103,617,000,000
5 Health Care $41,292,100,000
6 Education $27,867,000,000
7 Defense $130,939,000,000
8 Welfare $38,292,000,000
Click to enlarge

Using BLS.GOV inflation calculation methods, posted on the BLS.GOV website, per capita Federal spending should have increased from $2,093.02 in 1978 to $7,068.61 by 2015 or up 273.15%

Actual Federal spending per capita in 2015 was $11,339.23 or up 456.11%, the BLS.GOV again is off this time by 182.96%

Sector 2015
1 Total Spending $3,688,290,000,000
2 Total Population 325,268,000
3 Fed Spending Per Capita $11,339.23
4 Pensions $953,604,000,000
5 Health Care $1,028,425,000,000
6 Education $133,780,000,000
7 Defense $797,878,000,000
8 Welfare $361,872,000,000
Click to enlarge

This 456.11% increase was contained by the BLS.GOV understating inflation and short changing 100's of millions of Savers, Pensioners, US Soldiers, families of fallen Soldiers, Policemen, Firemen, Teachers all other Federal Employees and Governmental suppliers out of trillions of dollars to save their employer the US government the same trillions.

You can take nearly any period on anything from home prices, oil, food, college tuition stocks or funeral costs and the BLS.GOV calculations on this page will underestimate the actual increase by a significant amount.

BLS.GOV revision magic saved the U.S. Treasury over 1.5 trillion in 2015, just in debt service cost and pensions alone.

Below the last 20 years for debt service cost and pensions (without compounding)

BLS.GOV revision magic has saved their employer the U.S. Treasury on average 1/2 a trillion per year versus the pre 1980 BLS.GOV C.P.I. calculation methods.

Sources Federal Reserve , USGovernmentspending.com Williams 1980 Pre revision CPI data

Per capita Federal spending would be closer to 35K not 11K using pre 1980 BLS.GOV calculation methods.

Sector 2015
1 Total Spending $11,444,243,457,684
2 Total Tax receipts $3,249,886,000,000
5 Fed Spending Per Capita $35,184.04
4 Total Population 325,268,000
3 Deficit ($8,194,357,457,684)
6 Pensions $953,604,000,000
7 Health Care $1,028,425,000,000
8 Education $133,780,000,000
9 Defense $797,878,000,000
10 Welfare $361,872,000,000
Click to enlarge

The Way it was prior to 1980

Measurement of consumer inflation traditionally reflected measuring the cost of maintaining a constant standard of living, as measured by a fixed-basket of goods.

The changing costs of maintaining a constant standard of living were measured by pricing out a fixed-basket of goods and services-same components, same weighting-period after period.

Whatever the percentage change was in the cost of that basket of goods that is how much income would have to rise in order for someone to maintain a fixed or constant standard of living over the given period.

Tracking changes in the cost of a fixed basket of goods was the approach to estimating inflation, going back to at least the 1700s. Prior to 1945, the fixed-basket CPI tracked by the U.S. government was known as the Cost of Living Index.

It assumes you

Lived in the same size home
Ate the same food
Used the same amount of Energy
Your children attended the same schools
Had the same medical coverage
Bought the same brand of drugs
You drank the same amount and brand of Alcohol
Ate at the same restaurants
Attended the same type of theatrical productions
Drove the same type of car
You had the same household staff that worked the same hours

You get the idea; it was a fixed basket measuring the cost of a constant standard of living

The way it is now

The CPI now consists of more than 80,000 items in over 200 categories arranged into eight major groups, "Hedonic Quality Adjustments" are applied then the data is "weighted" to reflect a "more accurate" representation of inflation.

Are you kidding me? I don't think I've purchased 80,000 different items in my entire life.

Current calculations allow substitution of lower-priced and lower-quality goods in the basket (i.e. replacing Château Laffite Rothschild with Boones Farm wine you're still getting a bottle of wine, it does the same thing, so there is no change in price that impacts inflation) It actually can lower the reported rate of inflation versus the fixed-basket measure.

Geometric weighting; a purely a mathematical gimmick that automatically reduces the weightings of goods rising in price, and vice versa, it has no demonstrated relationship to consumer substitution of goods based on price changes. It was explained as a surrogate for a substitution measure.

More frequent re-weightings of the CPI index from every ten years to every two years, which moved the CPI closer to a substitution based index, but the change was not considered a change in methodology.

Ongoing re-weightings of sales outlets, also moving closer to a substitution-based index and creating other constant standard of living issues. If you can no longer afford your tailor you can by your clothes at K-mart, you're still getting a pair of slacks so you've helped inflation moved lower.

"Hedonic" quality adjustments, altering the pricing of goods and services for nebulous quality changes that could not be priced directly and that often are not viewed or recognized by the consumer as a desired improvement. (You buy a new boat, it's the same length and power as your old boat but it costs 50% more, according to the BLS.GOV your new boat is going to last twice as long therefore the price has actually gone down).

It just goes on and on and on, the excuses and justification for revisions are just beyond pathetic. What these revisions are doing to Pensioners, Savers, Federal employees is beyond criminal.

There is only one reason the BLS.GOV "revisions" are in place and 91% of us know it, it's to save their boss the Treasury.GOV trillions at the expense of US citizens and debt investors.

Sure we've all made money on their misrepresentations but I'd rather be reviewing quality long term positions rather than trying to profit from their next lie.

If the survey response is high enough (more than 500) I'll write a follow up.

My next article will be a comparison of Franklin Roosevelt's & Fed Chair Marriner Eccles (NYSE:FE) version of Economic Recovery versus Bernanke's and Obama's (BO) version.

In short FE stimulus in 1933 embraced the 3 R's

Relief
Recovery
Reform

BO stimulus also embraces the 3 R's but they have a different meaning

Rob
Rape
Run

Banqiao Banking and reporting has never worked and will never work for any economy.

Granted I've enjoyed double and triple digit returns from the decades of bad US policy decisions but I'd like to maintain the buying power of these returns for future generations.

I run a family office from a tax free spec of an island 1,770 kilometers south east of Palm Beach Florida. As the head of a family office my sole professional purpose is the preservation and enhancement of family wealth. I do not sell a newsletter and will not manage a penny of US funds but I do have 1/3 of my portfolio in US markets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.