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Washington's Biggest Lie (And Why It Continues To Be Told)

Normal people have no trouble defining how they measure inflation in their own lives. They compare what the same exact purchases of goods and services cost them today versus one-year earlier. It would include everything they spend on.

Big ticket items like gasoline, insurance (health, life, auto and property/casualty), food and utility bills have the greatest impact. Increases in other major expense categories such as college tuition, property taxes, FICA, Federal, state and local income taxes can also add tremendously to your year-over-year true cost of living.

Those of us old enough to have lived through the 1970s remember the bad old days when prices were escalating at a sickening pace. The value of a dollar fell 30.9% in the five years through 1974 and plunged 91.87% cumulatively in the decade ended Jan. 1979.

The officially reported 1980 CPI increase of 13.91% was the 'straw that broke the camel's back' in terms of what our leaders were willing to admit to. They decided to change the way CPI was calculated to avoid making people even more upset.

Intentionally understating CPI also served to diminish COLA (cost of living adjustments) in government salaries, pensions and social security obligations. It also kept the rates paid on government borrowing somewhat below what would otherwise have been demanded by bond vigilantes. Those nasty lenders insisted on being compensated for the fast-diminishing value of their dollars.

Unions across America used the high CPI rates to justify huge increases in pay and benefits. While inflation calmed down from the roaring period described below the BLS again adjusted their calculation of CPI in 1990 to further understate the truth as most of us see it.

Today's headline core CPI excludes food and energy completely. That's impossible for us to do that in our real lives. Remember the old sub-$2 per gallon gasoline prices? How about the health insurance premiums, grocery expenses and electric bills you're paying today versus four or five years ago?

CPI Year-to-Year Growth

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the U.S. Government's Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not-seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

The chart below shows the Shadow Government Stats -Alternate CPI estimate. It figures inflation based on our own government's official methodology for computing the CPI-U in the years through 1980.

Under the old rules US inflation has been in the double-digits for much of the preceding five years. The 'new' BLS numbers want you to believe price increases since 2008 have been quite mild.

The Bureau of Labor Statistics also uses a technique called 'substitution' to hold down their reported inflation figures. If an item in their index goes up in price they can assume consumer would simply trade down to something cheaper instead.

If your favorite rib-eye steak went from $7.99 to $12.99 per pound you'd simply eat hamburger instead. Have those organic bananas gotten too expensive. Try prunes. Need a replacement for your Lexus? Buy a Kia instead. Presto, there's no inflation evident in any of those situations according to the BLS.

All these changes in the way CPI is calculated have been duly disclosed to the public. That does not make them any less dishonest when viewed the way most people gauge changes in their real cost of living.

Fed Chairman Ben Bernanke has put Bond Vigilantes on the endangered species list with his multiple, and now eternal QE programs. Interest rates are no longer useful as measures of present or future inflation.

If truth in advertising were being strictly enforced the BLS might be renamed just the BS.

Please post comments to this article letting others know which view matches your personal, real-life experience.

Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.