The government says your cost of living in the last year only went up 1.8%.
Do you believe them?
What do you think your cost of living went up by in the last year?
The Hidden Truth of Higher Prices
By: Peter Schiff, CEO and Chief Global Strategist
In dismissing the inflationary warnings of Austrian School economists, the pro-stimulus Keynesians have largely refrained from attacking the root of our logic. (Given that this involves defending the position that money printing does not lead to inflation, their reluctance is understandable). Instead they point to the lack of “evidence” that shows prices going up in step with money supply increases. Paul Krugman himself unpacked these arguments in a recent blog post designed to specifically discredit my views.
According to Krugman, the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to invalidate the fears of the inflationists.
However, there is plenty of evidence to suggest that the measurement tools used by Krugman and his cohorts to measure inflation are as deeply flawed as their
arguments. And to conclude that inflation has been quelled requires a dismissal of the macroeconomic forces that have temporarily blunted the impact of an overly loose monetary policy.
Since the 1970′s the preferred government inflation metrics have changed so thoroughly that they bear scant resemblance to those used during the “malaise days” of the Carter years. Government and academia defend the integrity and accuracy of the modern methods while dismissing critics as tin hat conspiracy theorists. But given the huge stakes involved, it’s hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the methodology and the numbers, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.
Beginning in the early 1980′s the methodologies were altered to compensate for a variety of consumer behavior. The new “chain weighted CPI” for instance incorporates changes in relative spending, substitution bias, and subjective improvements in product quality.
Essentially these measures report not just on price movements, but on spending patterns, consumer choices, and product changes. This is fine if the goal is to measure the cost of survival. But that is not the purpose for which these metrics are meant to be used. But if you simply focus on price, especially on those staple commodity goods and services that haven’t radically changed over the years, the underreporting of inflation becomes more apparent.
We randomly identified price changes of 10 everyday goods and services over two separate 10 year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. The 10 items, which we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, and electricity.
We know that people do not spend equal amounts on the above items, and we know their share of income devoted to them has changed over the decades. But as we are only interested in how these prices have changed relative to the CPI, those issues don’t really matter. We chose to look at the period between 1970 and 1980 and then again between 2002 and 2012, because these time frames both had big deficits and loose monetary policy. But they straddle the time in which the most significant changes to inflation measurement methodology took effect. And while nominal price increases rose much faster in the 1970′s, the degree to which the prices rose relative to the CPI was much, much higher more recently.
Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 121%, just 8% faster than the CPI. In contrast between 2002 and 2012 the CPI rose just 27.5%. But our basket rose by nearly double that rate – 52.1%! So the methods used in the 1970′s to calculate CPI effectively captured the price changes of our goods, but only got half of those movements more recently. How convenient.
Just to make sure, we ran the same experiment with 10 different goods and services. This time we chose: sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef and veal, and prescription drugs. The results were notably similar. The basket increased 1% faster than the CPI between 1970 and 1980 and 32% faster between 2002 and 2012. In both cases we selected a random array of food and non-food items.
To be convinced that the CPI does a poor job in gauging the cost of living, all one needs to do is look at health insurance. According to the Kaiser Survey of Employer Sponsored Health Insurance, the average annual total cost for family health insurance in 2012 was $15,745, or more than one third of the median family income of $45,018 per year. Yet these costs are largely factored out of the CPI. In 2011, health insurance costs did not even merit a one percent weighting in the CPI. Furthermore, as far as the Bureau of Labor Statistics is concerned, health insurance costs are well contained. From 2008 through 2012, the BLS’ “Health Insurance Index” increased just 4.3% (total), which is far below the general rise of the CPI. In contrast, the Kaiser Survey showed family coverage rising 24.2% over that time.
A recent poll of likely voters conducted by Fox News in the weeks before the election, revealed that 41% of respondents identified “rising prices” as their top economic concern. This response beat out “unemployment” by nearly two to one.
The underreporting of price movements would explain why inflation is a concern on Main Street even while it’s not a concern on Pennsylvania Avenue. If these price changes in our experiments had been fully captured, CPI could currently be high enough to severely restrict Fed action to stimulate the economy.
But beyond arguments over the accuracy of our inflation yardsticks, there are solid reasons that prices are not rising as fast as they could be given the printing binge that has characterized the last few years. Economies no longer come in the neatly packaged national varieties. To a very large extent monetary conditions within the United States now are being influenced by activities of other countries.
Over the past years, unprecedented amounts of dollars have been created. But much of that money does not stay within the confines of the U.S. economy. A very large percentage of it winds up locked away inside the vaults of foreign central banks, particularly in the Far East. Countries like China and Japan, that run large trade surpluses with the U.S., need to warehouse these greenbacks so that they can keep their own currencies from appreciating against the dollar. The International Monetary Fund estimates that from first Quarter 2008 and second quarter 2012, U.S. dollars held in reserve by foreign central banks increased by $850 billion, or 31%.
When these countries decide that holding huge amounts of dollars is no longer in their interest, the money could come flooding back onto these shores, where it will exert upward pressure on domestic prices. In the meantime, the current flow of funds allows for a windfall for U.S. consumers. An artificially supported dollar means that we do not pay as much as we could for imported products. The low prices at Walmart are not the result of a sluggish U.S. economy, but by greater production abroad and dollar support from foreign central banks.
But in the meantime, it’s not as if those dollars have been neutered of their price raising power. Rather than being spent by U.S. consumers to push up domestic prices, they are creating inflation abroad and helping to push up the prices of U.S. Treasury Bonds, which foreign central banks buy with their excess dollars.
Given how weak the economy has been since the crash of 2008,it is surprising that domestic prices have risen at all. While there have been many similarities between the Great Depression and the Great Recession, one great difference was that the crash of the 1930′s was accompanied by significant deflation. By some estimates, prices fell by about a third. And so while consumers and businesses then struggled with unemployment and dropping share prices, at least they were cushioned by falling prices. Today we have no such support.
The Bureau of Economic Analysis reports that in December of 2008 food and energy spending, as a share of wages and salaries, had fallen to a low of 18.7%. Today that figure stands at 22.1%, an increase of more than 18% in just four years. This indicates that the stimuli of the past four years have failed to create the beneficial impact its architects had hoped. People who are spending a higher percentage of their incomes on necessities like food and energy are likely to be experiencing lower living standards.
Unlike Krugman and the Keynesians, I would argue that it is impossible to create something from nothing. I believe that printing a dollar diminishes the value of all existing dollars by an aggregate amount equal to the purchasing power of the new dollar. The other side takes the position that the new money creates tangible economic growth. I think that those making such absurd claims should bear the burden of proof.
sangell says:
For sure inflation is not uniform nor is it the same across the United States. Take auto insurance. It is a must have. Can’t drive without it ( legally anyway) but the price varies wildly by geography. Try getting a quote from Flo or the Gecko without entering your zip code. I used to buy produce in Virginia at Krogers and it could be rotten in two or three days. You live in California or Florida and you get fresh produce that lasts a week or more in your kitchen. Why? Because it didn’t spend a week on a train or truck before it got to the store. That’s not CPI inflation, that’s real life inflation when the head of lettuce you paid $2 for goes into the garbage can before it goes into your stomach. Electricity prices vary too and not just because of the cost of producing it. California mandates the utilities there buy every kilowatt some Malibu millionaire econut windmill produces and he gets the free power and you get the bill for his spare kilowatt.
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12th January 2013 at 8:34 pm
DaveL says:
“WHAT’S YOUR INFLATION?”
Mine has risen to two Viagra in the past six months!
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12th January 2013 at 8:38 pm
napari says:
Ice cream on sale used to be two for $5. Now its 2 for $7. bakery products have gone a lot also.
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12th January 2013 at 8:52 pm
sangell says:
AR-15′s and 5.56mm ammo aren’t on the CPI and they are experiencing hyper inflation.
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12th January 2013 at 8:54 pm
KaD says:
And where the prices haven’t gone up the product/ packaging has shrunk. Another ‘hidden’ inflation.
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12th January 2013 at 8:54 pm
JIMSKI says:
I can tell you how much my inflation is with no problem. Last year my wife and I made about 9% more than we did in 11. We are still saving the same amount for “retirement” and although we had additional expences with a freshman in BGSU all of the money for that was saved money. Yes I know how quaint and old fashined that we saved for a future expence. So atthe end of the year I have pretty much the same cushion in the bank as the year before and no new toys like big screens or atv’s.
Looks like 9% inflation to me.
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12th January 2013 at 9:07 pm
Davos says:
Most of our cow is gone. We’re ready to buy a new one. Today I bought ground beef. I don’t like the pink-slime additive so I bought the natural but not organic brand.
Davos’s cow: $1.90 pound for every fucking cut from ground beef to soup bones to tenderloin.
Supermarket cow: $6.98 pound for ground fucking beef.
Granted the drought had a terrific amount to do with that.
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12th January 2013 at 9:08 pm
AWD says:
“there is plenty of evidence to suggest that the measurement tools used by Krugman and his cohorts to measure inflation are as deeply flawed as their arguments”
Inflation, the invisible tax.
77% of the population (that work, not the 128 million getting money from the government) saw their paychecks shrink this week as the payroll tax kicked in. Obamataxes are kicking in. And inflation is a constant given these days, thanks to Bernake devaluing the dollar. All I can say if fuck Krugman with a chain saw and fuck Bernake.
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12th January 2013 at 9:11 pm
Eddie says:
Bacon is up 39% over the last ten years.
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12th January 2013 at 9:12 pm
sangell says:
Not only does container size shrink there is also product substitution. I saw where the ratio of premium coffee to low grade coffee has shifted in recent months. Obviously the ‘blend’ that is being sold to the public is shifting too.
Pink slime was being injected into our hamburgers. Water is injected into our hams to the point the cheaper brands should be called ‘seafood’ as it is mostly saltwater. I bought some off brand bacon not long ago because the brand I normally buy was not available at this store. It was sliced so thin I thought it could be used as a tissue sample in a laboratory
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12th January 2013 at 9:12 pm
Steve Hogan says:
The government is nothing but a collection of liars, thieves and murderers. They lie through statistics (CPU, unemployment, liabilities), steal your money through taxation and money printing, and use the loot to enrich the arms merchants while slaughtering helpless brown people in other countries.
Then these a-holes use the blowback from their interventions as an excuse to establish a police state here at home.
They get money and power; you get the shaft.
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12th January 2013 at 9:15 pm
AWD says:
Hyperinflation In Action: Beer For Bag Of Cash
In May 2011, Belarus surprised its citizens by devaluing its currency by 50% overnight in an attempt to kickstart its economy, leading to swift and brutal hyperinflation. And while written narratives of the most recent episode of monetary collapse are one thing, nothing is quite as amusing, and grounding for those attempting to “value” money (such as Nobel prize winning economists writing out of their steel exoskeletal ivory towers), as watching a bag of cash be used to pay for seven boxes of beer. And nothing is quite a cathartic as spending several hours trying to count said cash – cash backed by the “full faith and credit” of the Belarus central bank…
If you want to see what things will be like pretty soon, watch this:
http://www.youtube.com/watch?feature=player_embedded&v=RgAcHeL1dro
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12th January 2013 at 9:21 pm
sangell says:
Never met a helpless ‘brown person’. Seen quite few ones who are dangerous though.
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12th January 2013 at 9:21 pm
Davos says:
Taxed Enough Already and AWD
Now it is 8,660 Belarus rubels for 1 US dollar. So Guinness, my favorite beer is $9.99 a six pack today, I know because I picked up a few sixes. $86,513.40 in rubels for one fucking 6 pack.
In January of 2011 it was 2,999 Belarus rubel for 1 US dollar before those dickheads revalued it, so my Guinness six pack would have been $29,960.00 in rubles.
If those poor bastards had gold or silver they’s be able to buy 4 times the beer they used to.
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12th January 2013 at 10:06 pm
Bruce says:
1 1/4″ dry wall screws 5Lb. box made in China – Tod1ay $19.95
Three years ago the same 5lb. box of screws was $11.99
I just bought a tiny bag of #12-24 x1″ Machine Screws to repair a mount on a compressor. They also are made in China and cost $1.28 . Yes……$1.28 For three fucking little bitty screws. At cheap Chinese products dealer Home Depot no less. That’s almost .43 for one damn Chinese Machine screw. One screw would not thread properly so really I paid $1.28 for two screws. It’s a good thing I only needed two.
I don’t know what the percentages are but the cost of materials for almost everything I do has gone way up since 2008 and the cost of tools and tooling has gone up even more. And a lot more of it comes from China. More and more when someone wants a quote or bid on something when I hit them with the numbers their jaw drops and their eyes bug out.
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12th January 2013 at 10:12 pm
Administrator says:
The fact that producers are shrinking the packages instead of raising the price also contributes to something I’ve recently seen popping up both on personal finance boards, and in personal conversations: people expressing surprise and frustration at their inability to control their soaring grocery bills. They don’t feel like they’ve shifted their consumption habits–indeed, in many cases, they’ve been cutting back on expensive items like meat and cheese–but somehow they just can’t keep the cost down, and they don’t understand why. That’s because many of them haven’t noticed that they’re getting less product in their packages. They may not even be aware that they’re running out of things sooner. But week in and week out they’re having to buy more groceries at each trip, and that’s adding to a much bigger bill. They know the price of meat has gone up, because that’s something that you usually buy by the pound. But they’re less aware that the price of everything else has gone up too.
The biggest downside of this sort of thing is that it keeps us from shifting our buying habits the way we probably should. When prices go up, because inputs are getting scarcer, people should substitute away from things that have had the biggest price increases, and towards stuff that’s still relatively cheap. But if customers don’t see the price increase, they won’t change their buying habits. That is, of course, exactly what the food processors want. But it’s bad for consumer budgets, and not so good for economic efficiency.
Megan McArdle
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12th January 2013 at 10:30 pm
Llpoh says:
I have suffered little or no inflation re products I have purchased for my business for several years. My purchased product prices are lower today than they were a decade ago. Wages and reg costs have gone up. My customers, who supply consumer products, have put through modest increases to the consumer. Overall, costs to my business have risen less than 2 percent per year, except for govt imposed costs.
Without the government adding to my cost base, I would be able to offset all increases via increased efficiency. But some of the additional costs of govt to my business are extreme.
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12th January 2013 at 11:02 pm
IndenturedServant says:
@admin,
Do you mind sharing links to some of the personal finance boards you frequent?
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12th January 2013 at 11:50 pm
Administrator says:
IS
The sites I read every day are all listed under my Favorite Websites on the right side of the page.
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12th January 2013 at 9:43 am
IndenturedServant says:
Thanks admin
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12th January 2013 at 12:51 pm