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Daily Blog - Tiger Software

               November 19, 2007

        "CPI"  = Continuously Perpetuated
    Illusions about The Rate of US Inflation
You can’t stand the truth" about Inflation,
           says the Bureau of Labor Statistics

William Schmidt, - Tiger Software's Creator
      (C) 2007 William Schmidt, Ph. D.  - All Rights Reserved. 

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      without explicit written consent by its author is permitted.

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           The Government's Big Lie about The Rate of Inflation
                  Inflation Is Now Running at 7% per year
                           The Dollar Is Falling at An Annualized Rate of 8.5%.
                                    Who Would Buy A Treasury Bond That Pays 4.25%
                                              How Much Money Is The Treasury Printing?
                                                        They Won't Say.  M3<1> Is No Longer reported!

            All the heads on TV talk about how important the "CPI" is as the FED deliberates
         on whether to cut rates at their next meeting, December 11th.  But the truth is that the
         published CPI rate of inflation is only about one half the real rate, as we all experience it. 
         And if the Government really wanted to do something about inflation, it would stop wasting
         billions and billions in Bush's insane effort to control events in Iraqi a half a world away
         from the US.

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            The Bureau of Labor's Consumer Price Index understates inflation to an amazingly
        high degree/  This is easy to demonstrate.   You can go to their website and see how
        any amount spent back, say, in 1953, would now cost, if the CPI were, indeed, accurate.
        For example, we know that back in 1950 the cost of 100 regular mail stamps was $3. 
        Now it's $41.00.  Using the CPI as a predictor, we see from the calculator that the
        the price of 100 regular stamps should be only $25.68.  When I went to college in the
        Fall of 1958, tuition for a year was $2,000.   Now it is $34,530.  If the CPI were a good
        predictor, a year's tuition would only by $14,277.  When I first moved to San Diego
        in 1980, a two bed room apartment cost $315 a month.  Now the same apartment is
        $1795.  If the CPI meant something, the rent should only by $789,  In 1969,  I remember
        buying gas for $.24/gallon.  Twenty gallons cost only $4.80.  The CPI predicts the
        present cost to be $26.98.   At $3.00/gallon now, 20 gallons actually costs $60.00. 
        Well, you get the idea.  The CPI by its own calculator vastly underestimates the real
        rate of inflation.  The BLS may say that medical insurance costs have risen by only
        50% over the last 10 years, but I defy you to find anyone whose insurance policy
         has not doubled or tripled!

           The Post Office is not supposed to be making a profit.  So either it is concealing a
        lot of money somewhere, or the Bureau of Labor Statistics is not even remotely
        accurate.  It turns out that first class postal rates go up at a rate that nearly matches
        "M1" (money supply). 
It is very significant that the Federal Reserve no longer reveals
         or publishes M1.  They are deliberately concealing the real rate of inflation.
If M1
         is a better estimator of inflation than the CPI, then since 1984 the real rate of inflation
         is more like 5.3% than the 2.4% figures that the official CPI suggests.

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http://www.autodogmatic.com/index.php/sst/2006/10/04/will_the_real_inflation_please_stand_up  )

           Why do we care?  The difference between the real rate of inflation and that which
        the government is increasing.  And the wider it gets, the less various CPI cost of living
        adjustments match reality. 
Social Security payments and costs would actually be much
        higher if the government were honest.   Retired people heavily dependent on social
        security are being deliberately swindled and impoverished.  If the government were
        honest, the political pressures to raise such benefits would be much stronger.  But that
        would make the deficits even greater; it would drop the Dollar even faster and interest rates
        on government bonds would surely have to be much higher.  The US Treasury would
        have no choice but to tax the rich heavily or go bankrupt!
  Of course, if you don't care about
        such retired people, you may want to applaud that this computational sleight of hand is probably
        saving the US Treasury $200 billion a year.
  The truth is the outstanding public debt in the
        US is more than $9,000,000,000,000, $9 trillion dollars!  This works out to almost $30,000 per
        citizen.  The debt rises by $1.4 billion a day!  Maybe, the governmnent should just tell its
        citizens, "You don't want the truth because you can't stand the truth.", as Jack Nicolson did
        in "A Few Good Men".

           I have shown that the CPI has been under-estimating inflation for years.  But at least
        the techniques used were simple enough:
a fixed basket of goods were priced at prevailing
        market costs for each period, and the period-to-period change in the cost of that market
        basket represented the rate of inflation.
In 1996, influenced by Greenspan and Michael
        Boskin, chief economist for Bush I,  the underestimation process got much worse.  Pres-
        ident Clinton sought to show Wall Street that he did not wish to rock the boat.   To do this,
        he agreed to reappoint Greenspan and he signed into law basic revisions in the way the cost
        of living was calculated.  This helped fuel the bull market from 1997 to 2000. 

                                                How The CPI Is "Cooked"!
Substitution - if the cost of beef rose substitute the price of chicken which hadn't.
                 When new car prices rose the BLS used car prices were substituted.
                 ( See http://www.bls.gov/cpi/cpifacuv.htm )  When real estate prices rose, more weight
                 is given to the cost of renting which has not increased.
"The Boskin/Greenspan argument was that when steak got too expensive, the consumer
                          would substitute hamburger for the steak, and that the inflation measure should reflect the
                          costs tied to buying hamburger versus steak, instead of steak versus steak. Of course,
                          replacing hamburger for steak in the calculations would reduce the inflation rate, but it
                          represented the rate of inflation in terms of maintaining a declining standard of living.
                          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. "
John Williams at  www.shadowstats.com  )

Weighting - They went from an arithmetic weighting to a geometric weighting.  The
                 Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower
                 weighting to CPI components that were rising in price, and a higher weighting to those items
                 dropping in price.

Hedonics - Example. A specialist at the BLS decided that when a new 27" TV
                 model came out with new features and still sold for the same price of $329.99, 
                 because of the added value the TV was now worth $194 when entered into the BLS data,
                 despite the fact that people had to pay $329.99.  As new computers get more powerful,
                 their cost is reduced in calculating the CPI, even though the consumer pays just as much.
                 If the government requires a new additive to gasoline that costs 10 cents, the CPI
                  deducts that cost. 

           These rules were designed to dramatically lower the appearance of inflation.  And they do
           just that.  The real costs of housing, energy, food, medical bills, prescription drugs, tuition,
           travel and entertainment rise much faster than the government admits.
               If the CPI was calculated in the pre-1996 manner, the rate of inflation since then is 6%
          not the 3% the government reports.   ( Source:
http://www.theleftcoaster.com/archives/004721.php )
          The government is now being pushed to resort to  phrases like: "excluding volatile food and
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          ( http://www.shadowstats.com/cgi-bin/sgs? )

                  The BLS current web page says that 2006 inflation is lower than it was in 2005. 
           How misleading!
http://www.bls.gov/opub/mlr/2007/05/art1abs.htm )

                                            THE OFFICIAL CPI

"The black line represents the actual inflation rate as calculated from the Consumer Price Index (CPI-U). The red line
is a 12 month moving average, meaning it is the average of the last 12 months. Each month the oldest month drops out of the calculation and a new month is added...The annual inflation rate for the 12 months preceding October was 3.54% up
from September's 2.76%
  (Source: http://inflationdata.com/inflation/Inflation_Rate/AnnualInflation.asp )

  See also http://www.bls.gov/cpi/


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        <M3> See http://www.inflationdata.com/inflation/Inflation_Articles/M3_Money_supply.asp                
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