CPI Inflation Report — Why You Can't Trust it

Trust in Government Economic Data [0:02]

• A survey shows that a "whopping 6%" of Americans completely trust federal government data on the economy.
• This lack of trust is consistent across all party affiliations (Democrat, Independent, Republican).

The reported trust level in government economic data is extremely low, with a mere 6% of the population expressing complete confidence, regardless of their political leanings. This indicates a widespread skepticism towards the information provided.

the trustworthiness of the government's economic data, the reports that they give.

Impact of CPI Inflation Reports [0:45]

• The CPI inflation report is crucial as its reported rate affects cost of living adjustments (COLA) for Social Security recipients, federal retirement programs, and VA benefits.
• It also influences the tax code, specifically standard deductions, tax brackets, retirement plan contribution limits, and the Earned Income Tax Credit (EITC).
• Furthermore, the CPI impacts wages, union contracts, and minimum wage laws in various jurisdictions.

The CPI inflation report has far-reaching consequences, dictating financial adjustments for millions of Americans across retirement, benefits, and employment sectors, as well as shaping tax policies.

the rate of inflation that they report affects the cost of living adjustments for social security recipients, federal retirement programs, VA benefits, even affects the tax code.

Alleged Underreporting of Inflation [1:24]

• The speaker believes it is "so obvious" that the government is underreporting the true rate of inflation.
• This underreporting is a "big problem for over 100 million Americans."

There is a strong assertion that the government deliberately reports a lower inflation rate than what is actually occurring, which has significant negative consequences for a large segment of the population.

It's so obvious to at least me and many people that the government is under reporting the true rate of inflation.

CPI Methodology Flaws: Measuring Inflation [1:42]

• The fundamental method for measuring inflation should be the simple change in the price of something. For example, if something cost $1.00 a year ago and $1.10 now, inflation is 10%.
• However, the CPI report does not simply measure the change in prices.
• Instead, it measures the "change in the cost of maintaining the same standard of living," which is described as "highly subjective" and allowing for "wiggle room for manipulation."

The core issue identified with the CPI methodology is its deviation from a straightforward price change measurement, instead focusing on maintaining a standard of living, which is seen as a subjective and manipulable approach.

The CPI inflation report does not measure the change in prices. The CPI inflation report measures the change in the cost of maintaining the same standard of living which is highly subjective which leaves a lot of wiggle room for manipulation.

CPI Methodology Flaws: Sampling [2:25]

• The government collects price data from retailers in 75 urban areas.
• Crucially, the government does not reveal the actual price quotes from specific stores or providers.
• This means consumers must "take their word for it," and the numbers are "not auditable."
• This lack of transparency is justified by the government citing confidentiality laws (Title 13 and 18 of the US Code).

A significant flaw in the CPI data collection is the inability to verify the source data, as specific price quotes are kept confidential, making the figures non-auditable and reliant on public trust in the government's reporting.

we just have to take their word for it and their numbers are not auditable.

CPI Methodology Flaws: Substitution Effect [2:56]

• The substitution effect assumes that people will switch to cheaper goods or services when the price of something rises.
• The speaker believes this effect always "understates the true rate of inflation."
• An example is given: if tangerine prices rise significantly, the government's calculation might assume the consumer switches to cheaper grapefruits, even if the consumer dislikes grapefruits.
• The government, for CPI purposes, acts as if the consumer made this switch, thus "padding their numbers."

The inclusion of the substitution effect in CPI calculations artificially lowers the reported inflation rate by assuming consumers will readily switch to cheaper alternatives, regardless of personal preference or practicality.

the substitution effect is always going to understate the true rate of inflation.

CPI Methodology Flaws: Hedonic Adjustment [3:58]

• Hedonic adjustments remove price increases attributed to quality improvements.
• For instance, if a smartphone costs $800 today and a similar but less advanced phone cost $400 five years ago, the CPI can claim that cell phone prices haven't inflated because today's phones are better.
• The additional cost is then considered an expenditure for enhanced features, not inflation.

The practice of hedonic adjustment allows the CPI to dismiss actual price hikes by attributing them to product enhancements, effectively masking true inflation by focusing on perceived value rather than outright cost increases.

So if a cell phone 5 years ago was $400, but now with these additional features and all these quality improvements within the phone, if you take that into consideration, then the price of cell phones did not inflate at all.

CPI Methodology Flaws: Theoretical Questions and Housing Costs [5:02]

• The CPI includes "theoretical questions that do not reflect real prices."
• Approximately 33% of the entire CPI is based on housing costs.
• For housing, the heaviest reliance is on the "owner's equivalent rents" question.
• This question asks respondents to theoretically estimate how much they would pay to rent their own home, a figure not based on "hard data or real market rates."

A significant portion of the CPI relies on subjective estimates, particularly for housing costs via the owner's equivalent rents, which are not grounded in actual market transactions, leading to questionable data.

Can you believe that your cost of living adjustments are based on these types of questions?

Congressional Research Service Report on CPI Reliability [5:41]

• A report from the Congressional Research Service (accessible via congress.gov) raises questions about the reliability and usefulness of federally produced data, including the CPI.
• These concerns stem from the CPI's methodology.
• Another listed concern is that survey response rates for the CPI are falling, which leads to a "lower quality of data."
• Surveys are generally voluntary, and the declining trend in responses means lower quality data, as higher response rates are typically associated with higher quality data.
• Response rates have been falling over the years, indicating deteriorating data quality.

Official reports acknowledge issues with the CPI, specifically highlighting how declining voluntary survey participation negatively impacts the quality and reliability of the data collected.

Questions have recently arisen surrounding the reliability and usefulness of certain federally produced data including the consumer price index the CPI and these concerns arise from the CPI methodology.

The Problem of Underreported Inflation [7:30]

• Many people's cost of living adjustments and pay raises are tied to the CPI inflation reports.
• For fairness, this inflation figure needs to be accurate, but many, including the speaker, believe it is not.
• Alternative, straightforward inflation calculation methods (like Shadow Stats or true living cost measurements) show that real-life expenses are rising much faster than the government's reported rate.

The discrepancy between reported and actual inflation rates creates an unfair situation where people's financial adjustments are based on inaccurate figures, leading to a loss of purchasing power compared to true living costs.

when you look at other straightforward ways of calculating inflation, like if you're going to look at shadow stats or even use the true living cost measurement, it shows you that real life expenses are rising much faster than the government's reported rate of inflation.

Government Incentives for Underreporting Inflation [8:02]

• The speaker believes the government is incentivized to underreport inflation primarily to "save money."
• There are 74.5 million Americans receiving Social Security benefits. Reporting the correct inflation rate would require significantly higher COLA payments.
• Higher payments to millions of recipients would also increase the government's borrowing needs and associated interest payments.
• This doesn't even include the millions of others whose COLA is tied to the CPI.

The financial motivation for the government to underreport inflation is significant, as it directly translates to lower payouts for social security and other benefit programs, as well as reduced borrowing costs.

Well, from my perspective, it's pretty straightforward. It's all about the money. So, I'll just say my perspective is because the government wants to save money.

Money Supply vs. Reported Inflation [9:01]

• Another way to assess inflation is by looking at the money supply.
• The CPI report indicates inflation is running at about 3% (headline or core).
• However, the money supply is growing at a rate of 5%.
• Even at 5%, the money supply growth is described as "relatively slow" compared to the pandemic period.
• A 5% money supply growth while reporting 3% inflation represents a "massive under reporting," leading to a 2% difference in COLA year after year, which compounds.
• During the pandemic, reported inflation was 8%, but the speaker suggests it was "really running at 15%."

Comparing the growth of the money supply with the reported CPI figures reveals a consistent gap, suggesting that the official inflation rate significantly underestimates the monetary expansion and its potential impact on purchasing power.

if the money supply is growing at 5% and they're reporting 3%, then that's still a massive under reporting.