There Are Three Kinds of Lies: Lies, Damned Lies, and CPI Statistics

I believe that when Mark Twain made his famous quip about statistics, he actually had Bureau of Labor Statistic bureaucrats in mind. The U.S. government claims that the official inflation rate, known as the Consumer Price Index, has been holding steady at around 2% to 3% per year. Personal experience and a wealth of data contradict this “official” statistic. In the following video, economist Peter Schiff presents a laundry list of evidence that proves the state is lying about inflation rates.

There are three primary reasons why the state has a tremendous incentive to lie about real inflation rates. The first reason is that the Federal Reserve could not continue on with its “stimulus” and bailout programs claiming that they are having no impact on inflation.  These programs are necessary in order to keep the state and all of the major financial institutions solvent. Should the Fed stop printing money, interest rates would rise and the whole state-run apparatus would become insolvent.

The second reason is that Social Security benefits are tied to the CPI metric. Given that the redistribution of wealth from grandchildren to the elderly currently accounts for 10% of U.S. GDP, a large rise in the CPI would send entitlement costs spiraling out of control.

The third reason is that the official GDP numbers are also tied to the CPI. So if the CPI were calculated to reflect real inflation rates, the state would have to admit that the standard of living has been declining over time, not rising.

Schiff points out that a Fox News poll taken in October indicated that inflation was the most important economic concern among voters going into the elections, beating out unemployment by almost two to one. It is certainly curious why so many people would be concerned about inflation if the CPI really was holding steady at 2% to 3% annually.

To prove there are problems with the official CPI, Schiff calculated the price changes of a basket of 20 goods that consist of common household purchases. Schiff’s CPI basket of 20 goods included: eggs, new cars, milk, gasoline, bread, rent for a primary residence, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store-purchased beer, apples, public transportation, cereal, tires, beef, and prescription drugs.

From 1970 to 1980, the CPI rose 112% according to official statistics. During the same time period, the price of Schiff’s basket of 20 goods rose 117%. This leads to a difference of just 5% points. The conclusion that can be drawn here is that his basket and the methods used to calculate CPI during the 1970s are a good approximation of each other.

From 2002 to 2012, the CPI rose 27.5% according to official statistics. During the same time period, the price of Schiff’s basket of 20 goods rose 44.3%. This leads to a difference of over 16.8% points. Alternatively stated, the prices in Schiff’s basket rose 61% faster than the official CPI.

The CPI method has been changed several times over the past few decades, and it now incorporates hedonic regression. This method assumes that if, for example, the price of steak were to rise faster than hamburger meat, the CPI should be calculated using the hamburger index. Obviously this kind of calculation means that declines in quality of living are now built into the CPI statistic. Further, it means that comparisons of inflation rates between the 1970s and 2000s using the official CPI is like comparing apples and oranges.

Taking this one step further, Schiff decided to check how accurate some of the BLS’s price indices actually were for individual goods. He looked at the BLS “Newspapers and Magazines Index” between 1999 and 2012, which supposedly represents the price changes of newspapers and magazines over time. Schiff compared the BLS statistic to his own basket of papers, which included: The Wall Street Journal, Washington Post, Time, Sports Illustrated, U.S. News and World Report, Newsweek, People, The New York Times, USA Today, and The Los Angeles Times.

The BLS “Newspapers and Magazines Index” between 1999 and 2012 says newspaper prices rose by just 37% over that time frame. However, Schiff’s basket of papers rose 131.5%! Alternatively stated, the actual price increase was 3.5 times the official statistics.  He points out the ridiculous hypocrisy of these newspapers regurgitating the official CPI, claiming that there is no inflation, yet they have raised their own papers’ prices by over 130%.

Another major index that he attacked was the BLS’s health insurance index. Health insurance is also a component of the official CPI. Schiff points out that according to the official government statistics, during a 5 year period from 2008 to 2012, health insurance only rose a mere 4.3%. He questions whether or not Obamacare would have even passed congress if these numbers were legitimate. According to a Kaiser survey of employer sponsored health insurance, the actual increase in insurance premiums over that same time frame is 24.2%. Alternatively stated, the actual increase in health insurance was 5.5 times greater than is reported in the official CPI statistic.

He also points out that the weighting for health insurance costs in the CPI basket is only about 1%! The Kaiser survey indicates that the average annual cost for health insurance is around $15,000 per year. That’s almost one-third of median household income! If the government is so wildly off with its statistics on newspapers and health insurance, why should we believe any of the official inflation statistics?

Of course, Schiff isn’t the only economist to pointing out the flaws in the official CPI.  If you are interested in seeing what inflation would look like if it was calculated using the same methods as the state used in 1980 and 1990, look here. Using the old 1980 method, real inflation rates are hovering around 10% per year!


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