Bloomberg: CPI Inflation Data is a "Lie"

by: Barry Ritholtz

We have long railed against the absurdity of the CPI data. The ridiculous adjustments, the lack of correlation between CPI prices and reality, as well as the Fed focus on the core (inflation ex-inflation).

For the most part, the media has dutifully reported the nonsensical CPI data as if it were scripture. This drumbeat of criticism -- both here and elsewhere -- has begun to penetrate the MSM. We've seen a few critical columns over the past year or so. But I never expected to see this kind of critical reporting in a mainstream outlet: CPI's Lie on Household Inflation Doesn't Wash.

Perhaps the era of uncritical reporting is waning.

Here's the Ubiq-cerpt:™

The U.S. consumer price index continues to be a testament to the art of economic spin.

Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.

Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.

Millions are falling behind inflation because wage increases aren't keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation.

And there's also a goliath looming in the U.S. economy that makes the government's consumer gauge more deceptive. Even with the stinging reality that housing values are dropping in many markets, homeownership costs such as taxes, maintenance and financing are still rising much faster than the index.

We've already discussed the increases in energy, and other commodities. And we have painfully detailed the specifics of Agflation. Let's expand on some of those examples from the Bloomberg column:

• Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.

• Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. The Labor Department's Bureau of Labor Statistics only tracks "owner's equivalent rent" (OER). Housing costs/Owners’ Equivalent Rent is 23.158% of CPI.

• During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.

• Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate).Oh, and ‘Owners’ Equivalent Rent’ doesn’t account for real estate taxes.

A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs.


Those of you who are fellow tri-state residents (NY, NJ, CT) will be as thrilled as I was that BLS shows transportation costs are declining; especially since the MTA [NY] said it will be increasing NYC subway fares .25 (12.5%) to to $2.25 per ride. Commuter railroad fares on both the Long Island Rail Road and Metro-North rail lines are rising 8% to close its budget gap.

This is now far, far beyond spin - its simply outright lying to present a version of reality that radically differs from the "Real" one (pun intended).

So why haven't we gotten a more realistic version of inflation -- one that has a high correlation with the construct known as reality? Well, it would wreak havoc with GDP, and potentially, the stock market. An accurate cost of living increase -- in theory, what CPI is supposed to measure -- would’ve eradicated a whole lot of GDP gains over the past 5 years.

That "Real Real' GDP figure -- adjusted for CPI inflation, which was adjusted for ACTUAL inflation -- would be far more in in line with the lack of growth in real income and ‘real’ jobs . . .

As reflected in the plummeting dollar, many of the gains of the past few years were purely inflation driven, nominal asset price increases -- not real (after inflation) gains.

CPI's Lie on Household Inflation Doesn't Wash
John F. Wasik
Bloomberg, September 24 2007

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