Saturday, December 31, 2011

Inflation and Government Deception

A few weeks ago, I had a brief phone conversation with my dad about the official inflation numbers given to us by the government. The interchange prompted me to do a little more research into the issue. While certainly these are fragmentary results, I cannot say I am very surprised by them. I had previously heard (but hadn't studied) that the CPI excludes some very significant factors and, thus, is artificially low. In doing some more reading on the issue, I came up with the following findings (in no particular order):

1. Inflation is most commonly understood as an "inflation" (increase) of prices. Alternatively, however, "inflation" may and probably should describe an inflation in the money supply. In this scenario, the increase in price is the result of the increase in the amount of money in circulation.

Consider an example. Take a commodity like gold that tends to be fairly immune to fluctuations due to fads (at least for the long term). When the price of gold increases, there are two possible explanations: there is either less gold available or more dollars available. Actually, both are true when spoken of comparatively. An increase in the gold price reflects both an decrease in the amount of gold in relation to the number of dollars as well as an increase in the number of dollars in relation to the amount of gold. Prices are bound to increase as long as more and more dollars become available.

2. The official government figures of inflation rely on the CPI. Yet the very government that calculates that official number has huge incentives to keep this number as low as possible, like how much they have to increase pensions or social security. Thus, they massage, manipulate, and maneuver to force that number as low as possible. See:

3. The government achieves these official, massaged numbers by removing "biases." That is, they exclude items like food and gasoline from the CPI. I don't know about you, but I personally spend money on food and gasoline. I, as a "consumer," have actually noticed a drastic increase in the amount of money I spend and have to budget for gasoline and food. It was but a few years ago when we were belly-aching over price going over $2.00 per gallon! I now pine for those days! See:

Food prices are similar. See this cute article:

4. During the years of the Clinton presidency, the CPI was significantly altered by three primary means: substitution, weighting, hedonics. These sinister manipulations are detailed in this extremely helpful presentation. (This is by far the most helpful link yet.)

5. For a more accurate and honest use of data, one must not trust the government. Rather we must believe hard-working, private citizens. The best and most detailed accounting of the data is found here:

6. According to these more honest calculations, there is an approximately 8% difference between the government's numbers about inflation and reality.

7. As implied by #2 above, the ones most adversely impacted by the government's dishonesty are those on fixed income.

8. Austrian economists who deplore increases in the money supply (ethically) and warn against run-away inflation are frequently scorned for contradicting "reality." If inflation is so bad, why don't we see it? Well, the answer is that the government is hiding it from us.

So much more could be said, but that's a start.

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