Does the CPI Reflect Reality?

I almost missed this earlier this week, and its on point to our prior discussion: The WSJ asked its readers: "Does the government’s consumer-price index accurately reflect the inflation rate you face?"

Not surprisingly, 75% said CPI understates inflation:





WSJ Poll
Mar-20 5:30 pm

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What's been said:

Discussions found on the web:
  1. DBLWYO commented on Mar 22

    Here is my comment on Dave Wessel’s original capital column in which the question appeared (which was not printed btw:
    —– Original Message —–
    From: Dave Livingston
    Sent: Friday, March 17, 2006 12:52 PM
    Subject: Inflation Re-Considered

    Dave – all the points you’ve made are sensible in terms of localization and personal experience. However I’d like to suggest another view – which is to look at year-over-year % changes in the CPI without worrying about the idiosyncrasies of index construction and personal experiences.

    If one would care to take the bit of trouble and dload the BLS’s CPI data and then do a small bit of spreadsheet manipulation the YOY data in % terms looks more like this:

    Date Value YoY% Trend
    Jan-04 185.2 1.93% 2.21%
    Feb-04 186.2 1.69% 2.28%
    Mar-04 187.4 1.74% 2.35%
    Apr-04 188.0 2.29% 2.42%
    May-04 189.1 3.05% 2.49%
    Jun-04 189.7 3.27% 2.56%
    Jul-04 189.4 2.99% 2.63%
    Aug-04 189.5 2.65% 2.70%
    Sep-04 189.9 2.54% 2.78%
    Oct-04 190.9 3.19% 2.84%
    Nov-04 191.0 3.52% 2.92%
    Dec-04 190.3 3.26% 2.99%
    Jan-05 190.7 2.97% 3.06%
    Feb-05 191.8 3.01% 3.13%
    Mar-05 193.3 3.15% 3.19%
    Apr-05 194.6 3.51% 3.27%
    May-05 194.4 2.80% 3.34%
    Jun-05 194.5 2.53% 3.41%
    Jul-05 195.4 3.17% 3.48%
    Aug-05 196.4 3.64% 3.55%
    Sep-05 198.8 4.69% 3.62%
    Oct-05 199.2 4.35% 3.69%
    Nov-05 197.6 3.46% 3.76%
    Dec-05 196.8 3.42% 3.83%
    Jan-06 198.3 3.99% 3.90%
    Feb-06 198.7 3.60% 3.98%

    The dates and data aren’t arbitrary – rather they are based on a look back to 1980 and looking for the breakpoints in trendlines and then doing a small bit of simple Exel trend analysis. The data’s freely available and, while it’s quite possible my math and spreadsheet skills are error-prone, it seems worth considering.

    Based on the analysis (& unfortunately my skills don’t extend to graphing the data and getting it into an email – would if I could) a graph would make it much clearer. To wit – CPI is running about 4% and the trend is definitely positive.

    Now if one takes that perspective – based on a simple long-term trend look and a slight change in data formatting to move away form the extremely noisy month-over-month statistics – things are quite a bit clearer.

    Unfortunately picture one sees is not at all appealing. Where in any discussion, headlines, economic analysis or business or investment planning decisions does one see this reflected ?

    The consequences when these chickens come home to roost – they’re already pretty grown, perhaps monstrous – will be far different than a simple quick and dirty pass at the headline numbers.

  2. DJ commented on Mar 22

    The question reminds me of the novel ‘Candide’ where they ask everyone on the boat if they’ve had the toughest life experience of anyone. And everyone says yes, they have. You ask a question like that and what kind of answer do you expect?

  3. B commented on Mar 22

    If the Fed followed CPI, they’d be at neutral-CPI + 2%-and we’d be done. It’s quite obvious they are smarter than us cynical types would give them credit for being.

    I belief I read somewhere recently where the Fed Vice Chairman stated as such.

    I’ve moderated my opinion on the Fed somewhat. Frankly, if you look at historical cycles, I’m not so sure there is much of anything they could have done to stop the equity bubble although they might have been able to temper it a little. And yes, they inflated like mad post 2000 but IMO they had little choice. Especially given what 9/11 did to the American psyche. The flight to hard assets post equity bubble wasn’t really something they could control either. Liquidity always finds a home.

  4. Mark commented on Mar 22


    I agree. Bush called Greenspan to the WH right after 9/11. I doubt that they were just having coffee. AG likely told him that a whole sector of the economy was just taken out (travel) and the effect of that. The option to reflate was chosen both for psychologcal reasons and ST economic ones. Commodities and real estate are the bubbles that popped up.

  5. Idaho_Spud commented on Mar 22

    B and Mark,

    Do you think it was necessary to keep the overnight rate at 1% for the following two years?

  6. Mark commented on Mar 22


    I honestly don’t know. Since the recovery was extremely limp whatever they were doing was struggling to take hold. Moreover, whatever was done was a sugar-induced high and we will have to pay the price at some point. If Barry is right, it’s gonna be later this year or early 2007. Could be a doozie.

  7. B commented on Mar 22

    Did you see the economy take off? It didn’t. Actually, that liquidity found few takers until the tax cuts were enacted. Then it found a home in the wallet of those who then had more cashola. As Mark states a significant amount of the economy was in jeopardy. A situation we had never see in the history of our country. I would go further than just travel and say that everything was in jeopardy because if you pull one block out, the whole economy collapses.

    And, for all of that reflating, has the stock market done much? Has the economy done much? Are we really creating alot of great jobs? Is capacity utilization similar to other economic expansion periods? I am not saying what is right but I am asking you to take the other side of the argument. You know that you must in order to maintain some sense of balance. So, the question I have is that if this economy is all we can mount in the face of such massive liquidity, what would have happened if they wouldn’t have been so accommodative? Dow 4000? Massive depression similar to the post 1929 equity bubble?

    I think there is a fair argument to be had that they had no choice. An argument that is valid. Not necessarily fact. Did they go to far? Hindsight is 20-20. Alan Greenspan has a responsibility to 300 million people. What would they say? I want to lose my job? I want the Dow to continue to drop? I want my trillions lost in equities to turn into more trillions lost? Reflating helped create some stability and helped people recover many of the equity losses via their homes. Will they now lose that as well? Maybe. But, maybe they can massage us through this who freakin mess with minimal dislocations. So far, so good.

    A stock market correction is in the cards. That doesn’t mean the economy will fall apart. It’s time because there is too much complacency globally. I think I know what will cause it but no one really knows. It’s some times the gopher no one expects. And, if the housing market starts to take a very hard landing, do you want the Fed to pump more liquidity into the system to create a softer landing or do you want them to watch us hit a deflationary patch that could turn into Japan? Another massive recession or worse? I know what I want. I know what the Japanese would say in hindsight.

    My point is that it’s easy to take one side of an argument. I’ve been guilty of hammering the Fed. But, the reality is likely not so clear cut. Remember, the Fed’s private discussions are never to be known. They may have been pissing down their leg looking at possible outcomes that would scare the bejesus out of everyone.

  8. Get Long Vega commented on Mar 22

    Here’s an interesting interview with John Williams, the man behind ShadowStats. I’m not a conspiracy-theory-guy, but Williams does make some very interesting observations about how the government has changed the way it measures economic output and inflation. Sure, maybe the books are being cooked and have always been cooked. And we can have any opinion on that we want. But don’t let me focus too much on that! Because IMO it’s what stock and bond and currency prices are doing that really matters.


  9. EKC commented on Mar 22

    CPI is kept low so the Fed pays less in social security. Otherwise, system will be bankrupt. Seniors are getting screwed by bogus numbers.

  10. Mark commented on Mar 22

    This is why I say we are fighting the wrong war, at least in the public debate. Perhaps this is all understood behind closed doors but I don’t see much evidence of it. The war is as much or more psychological and economic as it is religious, political or miltary. Why do you think bin Laden choose the targets he did? A very, very smart guy IMO.

  11. JO commented on Mar 22


    “So, the question I have is that if this economy is all we can mount in the face of such massive liquidity, what would have happened if they wouldn’t have been so accommodative? Dow 4000? Massive depression similar to the post 1929 equity bubble?”

    Could one argue that Fed action has simply postponed/delayed these worst-case scenarios? An honest question, not barbed or anything.



  12. B commented on Mar 22

    Barbed isn’t so bad. As long as it is a debatable barb. I too have wondered if we have delayed the inevitable. Frankly, I subscribe to the opinion that the longer we delay things, the more chance the system will work out the dislocations without incidence……sort of…….depending on……….. Time will tell. Gulp!

  13. aaaa commented on Mar 22

    all that data from last couple of years is FAKE and most guys know it…and what really matters is that NOW system needs major RESET as Paul Valcker did in the past …but it is very difficult decision and only guys with courage can do it

  14. JO commented on Mar 22

    “the more chance the system will work out the dislocations without incidence……sort of…….depending on……….. Time will tell. Gulp!”

    Good thing that some of us are able to keep a healthy sense of humour about this. Definitely needed. Thanks for your honest response.

    Here’s hoping that time tells a good story, I guess. I have to admit, though, I’m a bit sceptical when it comes to our ability to “work together” on solving such problems. By “our”, I’m referring to some nebulous concept of humanity.

    What was it Camus said? Ah, found it: “If Christianity is pessimistic as to man, it is optimistic as to human destiny. Well, I can say that, pessimistic as to human destiny, I am optimistic as to man. ”

    Cheers and good luck.

  15. Mark commented on Mar 22


    If by “work out” we mean the gradual erosion of asset values through inflation but the avoidance of calamities I think you are right. This is what is happening now. What was the return on the S&P last year? 4.9% with dividends reinvested? What was that in REAL terms using REAL inflation numbers? Less than zero. Unless you are making in excess of 6 or 7% on your investments, you are likely losing real wealth.

  16. Robert Cote commented on Mar 22

    Those who buy gas get two votes.
    Those facing tuition in the next 10 years get 6 votes.
    Those with medical expenses also get 6 votes.

  17. cm commented on Mar 23

    Looks like 75% of respondents need a refresher in “prosperity”.

  18. B commented on Mar 23

    That is what I mean Mark. There is no free lunch but if this is containable……….it’s better than the alternative.

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