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Home / Industry Insights / Inflation Machinations for the Nation
Inflation Machinations for the Nation

Inflation Machinations for the Nation

Leave the statistics to the statisticians: CPI (Consumer Price Index) as a fairly accurate measure of inflation.

The “consumer price index” or CPI is regarded as a fairly accurate statistic in most modern industrial nations. There has been a recent trend to dispute this, coming from senior government officials, and even some central bankers. One has to wonder about the motivations of these critics of the CPI. Since the CPI is used in many countries to increase pensions and government entitlements, it is a quick and dirty way to decrease government programs without saying that is what you are doing. “The statisticians got it wrong” is a much easier message than “we are cutting your benefits”.

The “CPI overstates inflation” cheerleaders are following a long and established tradition among kings, dictators, communist leaders and other tinpot majordomos of leaning on their statisticians to paint as favourable an economic picture as possible. Communist leaders such as Nikita Kruschev dictated a much lower inflation rate than was really the case to maintain a rosy picture and show the capitalist west a thing or two about economic management. This led to the strange situation of senior communist officials shopping with hoarded “hard U.S. dollars” in special state luxury stores, since the ruble had been debased so much by runaway inflation. Any Russian economist or statistician pointing out the actual level of inflation ended up with a very cold vacation in Siberia.

Alan Greenspan, the Chairman of the U.S. Federal Reserve, the current U.S. administration, and U.S. politicians of all stripes could teach a few lessons to those who dictated the level of inflation ahead of them. Backed by a pliant financial press and an investment industry which wants any reason to keep markets aloft, they have succeeded in mocking their own statistics agencies with a credibility that Kruschev would have envied. It was the so-called “free market” fan Newt Gringrich who said, with little to no shame in public, something to the effect that unless the Bureau of Labour Statistics (which calculates the CPI) lowers it (the CPI), then Congress would tell them how to do it or do it themselves! A confidence builder in the unbiased nature of U.S. statistics if there ever was one.

The statistical dictators claim the CPI is overstated using the quality adjustment argument. Our cars might cost more, they say, but we now have air bags which save our lives. This can be disputed, as our fathers drove cars that were less safe by our standards but they were not legally required to have these safety features. Is it truly safer to drive a modern car than a Model T Ford? Our fathers didn’t have to put up with the heavy usage of trucks of the highway system, or the incredible state of disrepair of the highway system. How many people had bridges collapse under them in the 1950s compared to how frequently this has happened in the 1990s?

With all this smoke and innuendo, the United States government has recently had a report from a group of economists, the Boskin Commission, on the overstatement of the CPI. They concluded that it was probably 1.1% too high, with .6% of this coming from quality adjustments which they admitted were on the fringe of economic analysis (read as ‘not founded in fact’). The Bureau of Labour Statistics (BLS), which produces the CPI, has quite rightly pointed out that the Boskin Commission concentrated on finding overstatements because of quality adjustments and that there were probably equally as many understatements. Did the Boskin Commission calculate the reduction in quality of life because of the violent crime wave in inner city America? The elderly in these areas buy a lot more locks and probably take a lot more taxis to get groceries than their parents did. The decline in public school quality is a big issue with politicians. Perhaps a higher cost to this should be considered because of the quality decline. The strong commercial success of tutoring services makes an argument that this service might be a necessity to the average family. Do these “lower quality” adjustments have a champion like Newt or Al to push the BLS to action?

In the statistical dictatorship that the full court press in Washington envisages, politicians would have a field day. What inflation? It’s now constantly targeted. Finding your pension dollars stretched? We assure you that your shopping habits need to be improved (or maybe switch from choice cuts to pet food).

This is a very dangerous path along which the U.S. economic elite is beginning to tread. Leave the statistics to the statisticians. Politicians have no business dictating to the Bureau of Labour Statistics.