Outside the Box

Is The Government Lying To Us About Inflation? Yes!

March 22, 2013

In today’s Outside the Box, Gary D. Halbert (my old and very dear friend and former business partner of many years) reminds us about a few significant facts concerning the Consumer Price Index (CPI) that mainstream economists and the media tend to ignore. The central question is whether the CPI is really indicative of the actual inflation rate. Not likely, says Gary, since the US Bureau of Labor Statistics (BLS), which compiles the CPI, has engaged in methodological shenanigans over the past couple decades (as has been well documented by John Williams of ShadowStats, among others). The upshot of all their monkeying with the numbers is that the official rate of inflation may be two to four times lower than the actual rate (which is rather convenient if you’re a government bureaucrat trying to hold down interest costs and Social Security payments).

These changes are hotly debated in academic circles. There are many economists who agree with the changes and can show with their models that inflation is low. That is the currently accepted wisdom, or what passes for it. The problem is that inflation only shows up, as one person put it, in the things we actually buy. If your main costs are food, energy, education, and healthcare (ring any bells?), then inflation is a great deal higher than 2%. Other items are actually falling in price. It comes down to the mix of items in the calculations and whether you buy into the concepts of substitution (if beef gets too expensive we buy hamburger rather than steak) and “hedonics,” which says that prices of products drop over time as quality and manufacturing efficiency improve, so the calculation of inflation should take this into account.

Which means you can have official inflation at a low level (or even falling for certain items), while the amount you actually spend out of your very real pocket is rising! And thus the debate.

Having refreshed us on the basic techniques of CPI massage, Gary turns to food and energy, which the BLS includes in “headline CPI” but omits from “core CPI.” He points out that while headline CPI jumped an unexpected 0.7% in February, core CPI rose only 0.2%. That is, food and energy price increases accounted for more than 70% of the rise. “Not good for the economy,” he notes.

And of course, this is all bad news for unwary investors, since

Those who believe that inflation is only 2%, when it may be 5-8%, may be making investment decisions that are almost guaranteed to erode the purchasing power of their money over time. This is especially true with low-yielding investments such as CDs, Treasuries, etc.

Gary wraps up by taking a look at “chained CPI,” which he explains as follows:

[C]hained CPI assumes that when prices rise, consumers will resort to entirely different products, rather than just seeking a cheaper brand. For example, if beef prices rise, chained CPI would assume that consumers might opt for chicken to save money.

The chained CPI debate is raging as we speak: I got an email from the AARP this morning, urging me to tell my Senators to say no to chained CPI being used to calculate Social Security cost-of-living adjustments (COLA) – sounds like they may vote today (Friday) on a bill to do just that. But as Gary points out, we either calculate benefits using chained CPI – which, yes, is tough on those living on a fixed income – or we eliminate the cap on salary subject to Social Security taxation (that is, we raise taxes). As Gary says, “Either way, somebody’s got to pay, and it might end up being a little [of] both.”

Finally, a quick note: I am doing a webinar on Tuesday for Mauldin Circle members. The current state of the equity markets brings back memories of 2007. As the market continues to reach new highs, stock selection on both the long and short sides requires considerable expertise. That is why I decided that now is a good time to introduce you to one of the leading long-and-short investment managers, Jacob Gottlieb, CIO of Visium Asset Management. During our conversation on Tuesday, March 26 at 12:00 p.m. EDT (9:00 a.m. PDT), we will find out what’s on Jacob’s mind – his investment themes and where’s he seeing equity opportunities on both the long and short sides.

 If you are not aware of Visium, they are a premier long/short multi-strategy manager with over $3.7 billion in assets. It’s a firm I have been watching for some time. Bloomberg cited Visium as one of “The 100 Top Performing Large Hedge Funds.” Take a look at this recent write-up on Visium: “The Quiet Ambition of Jacob Gottlieb.”

 You will need to register for this exclusive webinar through The Mauldin Circle. If you are a Mauldin Circle member and a qualified purchaser or an investment advisor, a webinar invitation has been sent directly to you by email. A replay will also be available to qualified registrants. If you are unable to listen in to the live discussion, be sure to register so you can receive the replay information. If you are not a member of The Mauldin Circle and are a qualified purchaser, please join today. Upon qualification by my partners at Altegris, you will receive an email invitation . I apologize for limiting this discussion to qualified purchasers and investment advisors, but we must follow the rules and regulations. I look forward to having you at this exclusive Mauldin Circle event. (In this regard, I am president and a registered representative of Millenium Wave Securities, LLC, member FINRA.)

Have a great week. I know mine will be eventful – daughter Amanda is due to give birth to granddaughter Addison on Monday!

Your thinking about the world Addison will discover analyst,

John Mauldin, Editor
Outside the Box

Get John Mauldin's Over My Shoulder

"Must See" Research Directly from John Mauldin to You

Be the best-informed person in the room
with your very own risk-free trial of Over My Shoulder.
Join John Mauldin's private readers’ circle, today.

Is The Government Lying To Us About Inflation? Yes!

By Gary D. Halbert
March 19, 2013

Consumer Price Index Jumped in February

On Friday, the Labor Department reported that the Consumer Price Index (CPI) jumped an unexpected 0.7% in February. This was above pre-report estimates and was the highest monthly reading since 2009. We should be very concerned, right? Let’s take a closer look.

Upon further examination, we…

Get Varying Expert Opinions in One Publication with John Mauldin’s Outside the Box
Every week, celebrated economic commentator John Mauldin highlights a well-researched, controversial essay from a fellow economic expert. Whether you find them inspiring, upsetting, or outrageous... they’ll all make you think Outside the Box. Get the newsletter free in your inbox every Wednesday.

Discuss This


We welcome your comments. Please comply with our Community Rules.


Paul Steinmetz

March 25, 2013, 7:20 a.m.

Every couple of months Doug Short has a chart that shows how CPI and CPI based on Shadowstats would look side by side. He has updated it because of this article. Take a look on how he sees the stats. I for one have spoken to him on occasions about this exact subject and he stands by his analysis. It’s a good read. http://advisorperspectives.com/dshort/


March 24, 2013, 2:51 p.m.

Mr. Halbert please make up your mind.  If the actual inflation rate is already in excess of official rates used for SS COLA, and the CPI used for social security is adjusted down, it feels like a “cut” in benefits to me.  I guess you ran into conflicting “messages” that don’t meet your political needs.


March 23, 2013, 7:50 p.m.

If steak gets too expensive, we’ll buy hamburger, and when hamburger gets too expensive we’ll switch to chicken.  Then when gets too expensive, we’ll start trapping squirrels in the front and back yard, and if squirrels get too rare, we’ll trap rats and mice.  Eventually we’ll be reduced to eating soup stocked with sticks, tree bark and fescue.  Meanwhile back in Washington DC, the Democrat geniuses in Congress will still be eating steak and voting themselves, their staffs, and bureaucrat buddies raises.

Scott Wolfel

March 23, 2013, 4:22 p.m.


As always an excellent piece, although I thought it was a little anecdotal (as opposed to offering a statistically rigorous alternative measure) and didn’t emphasize the most important point that, if inflation is significantly higher, “real” GDP is significantly lower and at 5%-8% has been negative for a long time. If “official” inflation has been running at ~2% and “official” real GDP growth has been ~2%, under alternative measures the economy has been “growing” (um shrinking) -1% to -4% a year. Plugging in Shadow Stats or other data, we haven’t had “growth for decades.

On a separate note, you HAVE TO - YOU MUST - check out this EXCELLENT and SHOCKING story on the explosion of the disability insurance program ($260 billion a year and counting, 14 million people and counting)l. As a teaser, the most shocking statistic was that while we’ve created 150,000 jobs a month since the recession, 250,000 a month have applied for disability.

While it’s a good read, also listen to the “This American Life” story (“Trends with Benefits”), because it’s more shocking and evocative to hear. Segments (ie: 1 in 4 people in Hale County, Alabama. on disability and the Dr. who gets them there, the “disability industrial complex” and legal system that gets people benefits in a non-adversarial hearing, States paying consultants to move people off of welfare roles and unto Federal disability and children going on disability, and often staying, in order to supplement their family’s income) are very disturbing illustrations of another broken government program and the law of untended consequences on steroids.

While you’ve covered the story before at a high level, this piece takes a detailed look under the hood of a broken government system. I’ve been religiously reading your newsletters for well over a decade, and invariably they are one of the best things I read, and have never felt compelled to recommend something. (I regularly read the best Hedge Fund letters and macro research, including many of your friends,) . While I’m not sure you can reprint from NPR (you can link to it), this is a story that needs to be heard by your 1 million closest friends. http://apps.npr.org/unfit-for-work/




March 23, 2013, 3:26 p.m.

Good article highlighting the inherent difficulty of measuring cost inflation. I have the benefit of having a dear aunt, Ph.D economist, who sat on the board composing CPI many years ago. For many years CPI did overstate, as (e.g.) it failed to account for increases in quality. So the absolute rise in cost of tires raised CPI (e.g.), while the lower cost per mile (i.e. normalized cost) was ignored. I understand that is one of the “biases” that has been “‘corrected”.

I have also noticed the increase in food prices and numerous decreases in package size. However, I note that a Toyota Sienna costs less than 10 years ago. And of course virtually all sectors of information technology now cost less for greater capability [my Dell laptop 2-1/2 years ago cost 50% more than today]. And let’s not forget that mortgage rates are about 50% of where they were for many years. So inflation really is a function of each individual’s buying patterns.

Proposed fixes to CPI and/or Social Security will similarly affect people differently depending upon buying patterns and stage of life. Whatever the changes, they will make some folks less happy than others.

Craig Honey

March 23, 2013, 11:58 a.m.

Isn’t the weakness of this thesis that, if the government is so Machiavellian, why wouldn’t they inflate CPI rather than depress it?  This higher headline rate would push up both prices and wage demands thus inflating government revenues through sales and income taxes by stealth - a far more sure revenue increase than trying to push tax increases through Congress.  With average maturity of US treasuries over 10 years, the interest payments are locked in for some time - so marking the value of bonds in portfolios gets whacked when rates rise but a lot of those are on the Fed’s balance sheet and are not there for investment purposes (albeit China and Japan won’t be happy).  Further benefit will be to improve the asset/liability math on DB pension plans and a weaker dollar would make exports more competitive.  Seems to me there are many reasons to “inflate” inflation.
If the numbers are so easy to manipulate, then Japan should be able to move out of their deflationary spiral pretty easily with a few tweaks on their data inputs.

Nick Jacobs

March 23, 2013, 2:46 a.m.

The notion of using “chained CPI” is simply a scam, which the 1% would like to perpetrate on retired people. As Jim Beeton points out, if the cost-of-living adjustments to Social Security are so small that seniors have to eat dog food and buy clothes from the Goodwill instead of eating beef and buying new clothes, their standard of living has been reduced.
Using “chained CPI” to adjust Social Security really would be a reduction in real benefits. This is not a matter of politics, it’s fact.

The whole point of measuring inflation is to distinguish between real price increases and nominal price increases.
“It seems that only in a politician’s mind can a slower rate of increasing benefits be called a “cut.”” NO, John, if the slower rate of increase is less than the rate of inflation, then it really is a cut. You know that. Gary Halbert knows that. So whom is Halbert trying to kid?

Just to be clear, I don’t agree with everything in Jim Beetem’s contribution. Of course the government lies to us, all the time. This is not a Republican/Democrat thing, both parties do it when in power. Think Iraq.

John Voeller

March 22, 2013, 10:29 p.m.

It is good to see this kind of discussion but it would be good to take it from the specific to the general.  For example, all food products are identified under the UPC barcode system which correlates to SKU numbers used by each individual purveyor. For the past five decades, I have done a simple calculation in my head of the cost per lb of everything from candy to cars to anything that had a significant human-directed process in its creation, i.e. almost all retail goods. What was fascinating was how completely different things so often came near each other in price in a given era which one might lay to the common element of human handling, transport and sales costs being very similar in all types of goods.It was easy using this test to watch prices climb on a unit weight basis as the package sizes, ingredient mixes and other changes were made with their associated advertising fluff designed to divert attention from the reality. In the last three years, I have watched portions change downward in packages the same or larger than before. I have watched ingredient mixes change with some being more comical than I could imagine. The Hershey Air Bar with the air bubbles in them which is a great excuse for less chocolate at the same price with the promise it tastes better.Inflation becomes invisible when you track by SKU instead of pound but I can guarantee any housewife will tell you these same things as she laughs at the idea we now have low inflation. This coupled with the nutrient removal from foods to gain the much greater profits from those nutrients becoming nutriceuticals which the remaining food is processed forconventional consumption is a another form of inflation in food. SImply put, if you antificpated 1-2 billion new food clients moving from a simple asian diet to a more western consumption and you knew that same population was not going to provide any substantial portion of that new diet, where and how would you be ready for this new market opportunity.


March 22, 2013, 7:07 p.m.

Why not account by price increases due to reduction of net weight sold to the public. Inflation as measured by officials is misleading. I suspect real inflation is well above official statistics, and has been for quite a while.