Today is April Fools’ Day — the celebration of hoaxes — so I decided it would be appropriate to write about the way the US government measures inflation.
This is a multilayered hoax because the most widely followed inflation gauge — known as the Consumer Price Index (CPI) — is not only being outright fabricated in some instances, but is also being manipulated statistically to make price increases look smaller than they actually are.
Last Thursday, I explained that lots of people are already looking into how the Census Bureau collects data that goes into the CPI, which is a product of the Labor Department’s Bureau of Labor Statistics (BLS).
The biggest question right now is how many data collectors at Census were simply filling out the forms on their own without actually conducting interviews. (There’s a simultaneous probe of the unemployment figures.)
I suspect that CPI fraud was substantial. And because of this fraud — the filling out of detailed questionnaires by Census workers without interviewing people — not only was the price data compromised, but people also were being cheated on the Cost of Living Adjustments that are inflation-based.
But this is today’s April Fools’ point: The government’s CPI has been a joke for a very long time, twisted into knots by politicians of both parties who need to reduce payments to retirees and others.
In fact, the CPI is so unreliable that even the Federal Reserve won’t use it. “This is one of the more difficult and troubled surveys,” Keith Hall, former head of the BLS, told me the other day.
The monthly Consumer Expenditure Survey done by Census — a big piece of the CPI calculation — takes more than two hours to complete. Because of the length, fewer and fewer Americans are willing to participate. Or they don’t really give honest answers.
Would you, for instance, tell Census employees what subscriptions you buy and what groups you belong to? Are you a member of a health group, a swim club? Do you have a global positioning device? What kind of articles do you wash in self-service laundry machines?
The BLS takes the answers to those and hundreds of other intrusive questions, somehow attaches prices, and comes up with a figure that is supposed to show by how much prices have risen or fallen.
But since early in the Clinton administration, the government has been trying to make inflation look lower than it really is. And, Washington would say, this is happening for good reason.
Since Social Security is going broke, politicians feel they need to keep increases to monthly benefits as small as possible — artificially, if necessary.
The latest money-saving effort is something called a “chain weighted” measure. This is a version of something I’ve written about a lot — geometric weighting. In brief, it means that if something becomes too costly (like steak), then people won’t buy it. They’ll buy hamburger instead.
So even though steak prices are up, that increase won’t show up fully in the CPI. Therefore, the CPI no longer measures the cost of living — it measures the cost of surviving! April Fool’s!
Hedonics is another trick of the trade. Let’s say the price of cars goes up, which it does every year. But the full increase isn’t counted in the CPI because someone decided that the value the buyer is getting — a better radio, nicer paint job — has offset some of the cost increase.
And there’s the concept of “owner-occupied rent.” The rise in real-estate prices isn’t calculated in the CPI. Instead, there’s a formula that estimates what it would cost for you to rent your own home — and that’s the increase that goes into the CPI.
Who the hell can come up with a legit figure for something like that?!
So there’s cheating, like I suspect was going on in the gathering of data in Census’ Philly office. And there’s the other kind of cheating done by the politicians and the academics who concoct stuff like hedonics, chain- and geometric weighting and owner occupied rent.
This is where you are supposed to laugh at all the silliness. In essence, all of us are being pranked. Happy April Fools’ Day!
The next CPI report is due to be released April 15. As I mentioned last week, the Philly Census region again had trouble meeting its interview quota. To paraphrase OJ’s lawyers, “If they can’t cheat, they can’t meet.”