The CPI Lie! Price Inflation Is Even Worse Than Advertised

The CPI is a lie.

Price inflation is even worse than advertised.

According to the December 2023 CPI report, price inflation was  3.4 percent on an annual basis. That doesn’t seem too bad. But in reality, prices are rising far faster than the data indicates.

Here’s the ugly truth: the CPI drives markets and motivates policy, but it is nothing but speculation, estimation, and wild guesses.

There are a number of problems with the CPI data spit out by the Bureau of Labor Statistics.

The first is selection bias.

The BLS calculates CPI by analyzing the total price of a “basket of  goods.” Obviously, the things the government chooses to put in that basket and the weight it assigns to each category have a big impact on the final CPI number. 

Under the current formula, 10.9 percent of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods, primarily energy and food costs, make up 26.6 percent of CPI. Services including healthcare, rent, internet and cell phone service, etc. account for the remaining 62.5 percent of the basket.

So, why these particular divisions and percentages?

Because the government number crunchers decided it should be that way.

In other words, it’s arbitrary.

The people who created the formula would almost certainly claim they based it on some kind of objective methodology. They would make it sound sciency. But when you boil it all down, the things in the formula are in the formula because a relatively small group of government people decided that’s the way it should be.

I'm skeptical of this approach.

You don’t have to be a total cynic to recognize there is a lot of room for bias in creating or changing the formula. It’s also reasonable to assume that government people are going to be biased toward making the government look as good as possible.

HOW THE GOVERNMENT “FIXED” THE CPI

According to the BLS, periodic changes to the CPI calculation are necessary because “consumers change their preferences or new products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme of the CPI market basket. The item structure is a central feature of the CPI program, and many CPI processes depend on it.”

The BLS is constantly tinkering with the CPI formulation, but in 1998, it made wholesale changes to the CPI calculation because the powers that be decided the data was “overstating” inflation. The Bureau of Labor Statistics called the changes “sweeping.”

In reformulating the CPI, the BLS followed the recommendations of the Boskin Commission, a committee appointed by the Senate three years earlier. The committee was originally called the “Advisory Commission to Study the Consumer Price Index,” and its job was to ferret out possible bias in the computation of the CPI. You’ll be shocked to learn that this government commission discovered bias that was making the government look bad.

Ultimately, the Boskin Commission determined that the consumer price index overstated inflation — by about 1.1 percent per year in 1996 and about 1.3 percent prior to 1996. Based on these conclusions, the BLS went about making changes to CPI to address this “issue" by ensuring the formula consistently spit out smaller numbers.

Simply put, a congressional committee that had a vested interest in making people think inflation isn’t that bad arbitrarily decided that the index used to measure inflation was overstating the problem of rising prices.

To be even more blunt -- the government cooked the books.

If you run today's price data through the old CPI formula, you will find that the increase in prices is nearly double the number the government reports. So, when the Bureau of Labor Statistics reported a 3.4 percent CPI in December 2023, it was closer to 6.8 percent when calculated using the 1970s formula. 

 You can find alternate CPI charts at ShadowStats.com.

There is every reason to believe the 1970s formula wasn’t particularly accurate either. The BLS builds in all kinds of geometric weighting, substitutions, and hedonics into the calculation. By manipulating the numbers in the formula, the government can basically create an index that outputs whatever it wants.

HOW THE CPI MISCALCULATED HEALTH INSURANCE COSTS

The recent understatement in the increase of health insurance costs reveals just how badly the CPI fails in the accuracy department.

In October 2023, the BLS adjusted the health insurance CPI formula. With that change, the CPI showed a 1.1 percent increase in health insurance costs during that month. That’s a significant jump, but it wouldn’t surprise anybody who has priced health insurance recently.

Why did the agency make this sudden adjustment?

As it turns out, the old formula showed a 37 percent collapse in the cost of health insurance between September 2022 and September 2023. Through those 12 months, health insurance costs fell an average of 4 percent every single month according to the CPI. This dropped the health insurance CPI to 2018 levels.

Clearly, this did not correlate with reality. No sane person believes the cost of health insurance dropped 37 percent in one year.

Now consider this: with health insurance costs supposedly declining when it wasn't thanks to bad data, monthly CPI and core CPI were significantly understated for 12 straight months, and the annual numbers will carry this distortion forward for the next year.

In other words, bad data begets bad data.

But don’t fret; the BLS “fixed” the problem with the adjustments. Between October 2023 and October 2024, the CPI cost of health insurance will rise incrementally.

As WolfStreet put it, “The BLS has turned the health insurance CPI into chickensh!t.”

This ignominious fiasco of an important metric within the CPI data occurred because the model that the BLS used to estimate the health insurance CPI – the ‘retained earnings method’ – after working reasonably well for years, blew up amid the distortions and money flows during the pandemic.

“Rather than coming up with an alternative estimate right away, back in 2021 when these issues became apparent, the BLS let this fiasco run for two years, overestimating by a moderate amount health insurance inflation in 2022, and causing health insurance CPI to just collapse over the past 12 months through September 2023, back to 2018 levels.

And this was just a tweak. The BLS didn’t rework the formula. It continues to use the same “retained earnings” method that blew up back in 2020.

If the BLS blew it this badly on health insurance, why should we believe what it tells us about the cost of food, energy, or anything else?

The answer is clear: we shouldn’t.

So, why would the government do this? Why would it want to understate rising prices? Why did it reformulate CPI in the 1990s to make inflation look milder?

Because inflation is a tax on working people, and politicians would prefer to keep you in the dark about just how quickly they’re picking your pocket. The government wants to hide the true extent of the inflation it creates by borrowing, spending, and printing money. 

What better way to do that than by trumpeting bad data month after month?

The CPI is what it is. It's the only data we've got. But anytime you hear it mentioned, you should just understand that price inflation is even worse than they're telling you.

And act accordingly.