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Editorial
July 28,
2006
This editorial is
part of a series Mr. Robins*
is writing on
the ethics, and sometimes extraordinary biases he believes he has
found behind the design and presentation of many government statistics.
His view is that investors need to know much more about what is in these
statistics in order to optimize their returns. His research reveals many
surprises. For additional articles in this series, see
Editorials.
Updated and revised, December 14, 2007
Unethical Statistics – the
US consumer price index
by Ron Robins*
Media relentlessly publish the
latest government statistics, and markets react to them,
sometimes violently. Often your paycheque, government
support payments and investment income are significantly
influenced by them. But are they valid? Some astute
economists and statisticians conclude there is
obfuscation of these statistics, and subsequent
misrepresentation of them in the media - who usually
have neither the time nor expertise to examine them. Take
the US ‘consumer price index’ or CPI. These
authoritative observers note that the current US CPI
incorporates numerous and continuous changes in
components and weightings of components within the
index, rendering it a mostly theoretical exercise based
on highly questionable hypotheses.
According to John Williams (a
private New Jersey consulting economist who has
specialized in government statistics for several
decades), the “Cost of living was being replaced by
the cost of survival. The old system told you how much
you had to increase your income in order to keep buying
steak. The new system promised you hamburger, and then
dog food, perhaps, after that.” (The old system, Mr.
Williams says, existed prior to the Clinton
Administration.)
On his website at
http://www.shadowstats.com/cgi-bin/sgs/article/id=343,
Mr. Williams states that, “Inflation, as reported by
the [US] Consumer Price Index (CPI) is understated by
roughly 2.7% per year… due to recent redefinitions of
the series as well as to flawed methodologies,
particularly adjustments to price measures for quality
changes.”
Mr. Williams discusses how the
government statisticians include a concept called
‘hedonics’ to adjust values in the index. He states,
“Hedonics adjusts the prices of goods for the increased
pleasure the consumer derives from them. That new
washing machine you bought did not cost you 20% more
than it would have cost you last year, because you got
an offsetting 20% increase in the pleasure you derive
from pushing its new electronic control buttons instead
of turning that old noisy dial, according to the BLS [US
Bureau of Labor Statistics].”
Williams continues, “When
gasoline rises 10 cents per gallon because of a
federally mandated gasoline additive, the increased
gasoline cost does not contribute to inflation. Instead,
the 10 cents is eliminated from the CPI because of the
offsetting hedonic thrills the consumer gets from
breathing cleaner air. The same principle applies to
federally mandated safety features in automobiles. I
have not attempted to quantify the effects of
questionable quality adjustments to the CPI, but they
are substantial.”
The way US housing costs are
included is another oddity, keeping that component — at
32% of the CPI — low. Despite two-thirds of the US
population living in their own homes, the statisticians
use theorized ‘imputed’ home rents as the basis for the
housing statistic! Of course rents have been virtually
stagnant for years — even going down in many cities due
to overbuilding — while home purchase prices, insurance
and local taxes, etc., have been going through the roof!
For those Americans dependent on
CPI adjustments to their welfare, social security or
other government payments, they have had their payments
massively depressed. Williams says that US government
welfare and social security payments are now 70% lower
than what they would have been had the old 1970s style
CPI been used with its fixed basket of goods.
Another astute statistician, Jim
Willie, elaborates further on this point. In Domino
Distortions from Inflation, an article on his website at
http://www.goldenjackass.com/jwarticles.html, he
comments, “In my view, the [US] CPI has become little
more than a measure intended to exploit the trend of
falling imported finished product prices, in order to
keep cost of living raises down in US Government
pensions of various types…The CPI is kept low by
ignoring numerous rising prices, such as property taxes,
town usage fees (water, sewer, sanitation), professional
services (doctor, dental, lawyer), home services
(carpentry, plumbing, electrical, roofing), college
tuition, restaurant meals, sports club fees, and more.”
The US CPI affects not only
Americans, but consumers and investors everywhere. US
domestic and global interest rates, bond yields, and
returns from many other investments — all are
significantly influenced by it.
It is worth remembering that the
BLS is headed by a political appointee, who just may
have certain biases towards statistical methodologies
that most please the government --
as well as to what gets out to the media.
Reviewing the December 2007 charts
on Mr. Williams’ website, we can easily see the
startling differences in outcomes with the varying CPI
methodologies used over the past thirty years. Using the
CPI methodology as it was in 1980 shows inflation today
rising +12% year-over-year; employing the CPI
methodology as of 1990 shows inflation higher now by
+7.5%. However, today's BLS press release has their
CPI-U (urban dwellers) gaining just +4.3% over the past
year!
I believe the current US government
reported CPI is constructed to play down inflation. This
helps to keep interest rates artificially low, as well
as to lessen social security and other related
government payouts that are indexed to the CPI. Frankly,
it is unfair, misleading, and simply unethical.
----------------------------------------------
*
Ron
Robins, MBA, is founder,
Investing for the Soul, (www.investingforthesoul.com),
Huntsville, Canada. He advocates, writes and teaches on the subject of
ethical investing. This is his
first article
in an editorial series on Unethical Statistics. They concern the
ethics surrounding the construction and portrayal of US government
statistics. The articles are posted on his website and in other
publications. To contact him, e-mail to
Ron Robins or call 705-635-3034. |
