CPI: Not a True Index of Inflation

by: Thomas Noon

CPI was an index worth watching before the 1974 return to open gold trading under Gerald Ford and for some time thereafter. But it was then "modified" several times to "properly reflect" true inflationary trends. These modifications -- oddly -- always resulted in LOWERING the reported rate of inflation. There are massive entitlement programs that use the reported CPI as their mandated benefit-adjustment tool - so it saves billions for the U.S.Gov't if the CPI is only 0.1% lower. Enough said.

Strange how things have changed. Now CPI is being reported at 1%+/- YOY and is dangerously close to falling into negative territory. The fear by the Fed now is that - by using current CPI as a measure - the reports will show deflation. Perhaps the CPI will now be modified again to return to earlier methodologies and show that inflation is truly the case - not deflation.

As an easily "modified" index, CPI is not worth tracking today as an inflation indicator, although it is common practice in print and on MSNBC. (See HERE)

This is not unlike unemployment stats where, when you remove everyone who has stopped looking for work - and is then chronically unemployed, the reports from the government eliminate them and thus report "unemployment" to not show the percentage of people that would be "employed" under a better economy. You would think it would make common sense to include all "unemployed" in the "unemployment stats" -- but common sense and government reports don't always go for walks on the beach arm-in-arm.

Enlightened Economics (HERE) discussed in 2008 how CPI has been "adjusted" over time by the government to hide real inflation.

The following is a more up-to-date plotting of CPI vs. an alternative measure, starting in 1983, when the first "modification" was made to CPI. Readers will note how the disparity then accelerated in 1993, at the last modification. The period since 2005 appears to show 3% as the reported CPI and 9-10% as the true inflation (as CPI was measured prior to 1980).


For another discussion of measures of inflation (i.e. devaluation of the currency), see "The Gold-Suit Index".

SO.....when analysts use CPI since the 1980 highs in gold and state that gold should be at $2000-$2400 today, maybe the right way would be to start before the 1979-81 spike period and grow it at the true rate of devaluation of the currency. Using the unmodified inflation rate, gold would already be well over $4,000, starting at a less-crisis level of 1978-79.

Inflation is not hovering around 1% today, in my unbiased opinion. Is the price of what anyone buys food for - or shoes - or car repairs - rising at only 1-3% for the last 5 years? When was the last time you bought a week's groceries and paid under $80? When was the last time that you paid $18.95 for a pair of high-quality shoes or had a $55 repair done on your car?

Ignore CPI. It will only make you angry.

Disclosure: Long GLD, SLV, Physical gold