Saturday, September 18, 2010

How The Government Lies About Inflation; Substitution, Weighting, and Hedonics

The article borrows liberally from the web site Much of the site is dedicated to what he calls a “Crash Course” on why our economy will soon implode into it’s own footprint. The Crash Course is divided into about 20 sections; the first sections on money is right out of the Ron Paul playbook. He also is an advocate of the controversial Peak Oil theory. But the section on “Fuzzy Numbers” does a better than average job of explaining how GDP (Gross Domestic Product) and Inflation numbers are manipulated by the government. It is not uncommon for someone to remark that these are the cooked numbers, and Matenson explains how this is done.

Inflation is determined in a report from the Bureau of Labor Statistics (BLS) called the Consumer Price Index (CPI). The BLS tracks the price of a certain "basket" of goods and services and documents the rise of fall of the prices of the "basket" to determine the inflation rate. But during the Clinton Administration this was changed by something called the Boskin Commission and three additional formulas were added to the mix; substitution, weighting, and hedonics. The effect of these formulas was to reduce the official rate by almost two-thirds. As an example, lets say the BLS using the pre-Clinton method, reported an inflation rate for 2007-2008 at 11.3 %.

Matenson explains, “...we no longer simply measure the cost of goods and services from one year to the next, because of something called the "substitution effect." Thanks to the Boskin Commission, it is now assumed that when the price of something rises, people will switch to something cheaper. So any time, say, that the price of salmon goes up too much, it is removed from the basket of goods and substituted with something cheaper, like hot dogs. By this methodology, the BLS says that food costs rose 4.1% from 2007 to 2008”.

Next there is “weighing.” This uses the argument that if some item or service price increases too fast, than people will either buy less or find a cheaper alternative. Therefore you’ll be happy to know that when your healthcare or gasoline prices go up and start eating more of your paycheck that will not be counted as inflation. The last item is hedonics, which is the absurd concept that if something costs the same year to year, but has added features or improvements, then you are paying less than its actual worth. Here’s an example;

“a 27-inch television selling for $329.99 was selling for the same price as last year, but was now equipped with a better screen. After taking this subjective improvement into account, the price of the TV is adjusted downwards by $135, concluding that the screen improvement was the same as if the price of the TV had fallen by 29%. The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would cost you to buy, but $195.”

Matenson says that hedonics are now used to adjust as much as 46% of inflation. More over, this fraudulent reduction of the inflation numbers have cheated any person who receives an entitlement or pension with a COLA (Cost Of Living Allowance) tied to the inflation rate, such as Social Security or Medicare. “Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are.”

So indeed the government is cooking the books and the result is people all over the country are struggling, but the government citing these manipulated inflation rates tells us everything is just fine. My next article will discuss how the same misdirection is used on the GDP to try and convince the public they’ve never had it so good.


  1. Where do you get this quote "Social Security payments whose increases are based on the CPI, would be 70% higher today than they actually are".

  2. This came from "Crash Course Chapter 16: Fuzzy Numbers. The complete quote is "The social cost to this self-deception is enormous. For starters, if inflation were calculated like it used to be, Social Security payments, whose increases are based on the CPI, would be 70% higher today than they actually are. Because Medicare increases are also tied to the CPI, hospitals are increasingly unable to balance their budgets, forcing many communities to lose services. These are real impacts."