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UPCOMING ARTICLE: Accuracy of Foreign CPI vs US CPI

PARt I - The Fudging US CPI vs Fudging European CPI

Means & Motive

I cannot prove that the US is drastically fudging the CPI. The intent of this article is to show that the US has more motive and the means to inflate CPI than does Euro-area countries.

The benefits to the U.S.Govt (or any Govt) of an artificially low CPI:
a) Social Security benefits, would not increase as much (BIG SAVINGS)
b) Yields on regular treasuries would be less, because the yield is always higher in higher inflation.
c) various labor costs are indexed to inflation.
 

Counterargument: since government employees pensions are indexed to the official calculation of inflation, wouldn't they be disincetivized to fudge CPI and make it appear lower?

There is a HUGE incentive to mismanage the CPI and underreport inflation. It saves the Govt tons of money. Since the government manages it's own currency and manages it's own CPI, the US has the MOTIVE and the MEANS to fudge the CPI.

European Governments have all the same motives to inflate CPI. But, they lack the means. European governments, as a rule, are more honest because they have the European Union watching over them. As well, there is a watchdog keeping the infidividual countries honest: Eurostat publishes its own inflation figures to compete with the national estimates.

Conclusion. To Fudge the CPI: Europe has the MOTIVE but not the MEANS

PART II - Engendering Inflation US vs Europe

Basically the same argument as above applies.

The Euro is controlled by a central committee, the ECB. The currency is not controlled by a single country. Thus for the Euro to be printed in great quantities and engender inflation, their has to collusion by a majority of European states.

In Europe, the individual states have created a banded together and created various watchdogs over themselves. These watchdogs manage the currency of the group as a a whole and manage inflation in the group as a whole.

In his 2008 Investment Outlook, Bill Gross, wrote that over the last ten years, the average rate of inflation for 24 foreign countries was 7%.  The US officially reported average inflation over the same period of 2.6%.

       
 

 

Source: ISI Group. Countries Represented Above:

Belgium
Brazil
Chile
Colombia
Ecuador
Estonia

Germany
Indonesia
Iceland
Ireland
Italy
Japan (Tk)

Spain
Switzerland
Thailand
Turkey
Taiwan
Vietnam

The Law of Purchasing Power Parity

Inflation in Currency A = Inflation in Currency B + Change in Exchange Rate

If the US indeed had LOWER inflation than the rest of the world, the concept of Purchasing Power Parity dictates that the US Dollar should have APPRECIATED over those very same currencies. The dollar's exchange rate should have appreciated to where one dollar buys more of the basket of foreign currencies.

The opposite has happened: The US Dollar has actually depreciated 30% over the same period.

How can this happen? How can the numbers fail to add up? 

Looking at the Law of Purchasing Power Parity Again:

Inflation in US Dollars = Inflation in Basket of Non US Currencies + Change in Exchange Rate if Basket vs US Dollar

There are only three components

  • Reported Inflation in US Dollars
  • Reported Inflation in Basket of Non-US Currencies
  • Change in Exchange Rate

Where's the faulty data.

The Change in Exchange Rate is historically known. That number can't be fudged.

Therefore there are two possibilities:

  • Reported Inflation in US Dollars is LOWER than actual.
  • Reported Inflation in Basket of Non-US Currencies is HIGHER than actual.