January 30, 2013

Shadowstats is Wrong on Inflation

Shadowstats is a website and newsletter that claims that the government inflation numbers are wrong.   The Shadowstats site claims the government is incorrectly calculating inflation and that the data is intentionally manipulated by the government for political reasons.  

They say in their 2004 article "GOVERNMENT ECONOMIC REPORTS: THINGS YOU’VE SUSPECTED BUT WERE AFRAID TO ASK!" on the consumer price index that :

"Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year."

They have also been predicting hyperinflation to occur within the year since 2008.

If you use some common sense and a little math I think its relatively easy to refute the claim that inflation is really 7% higher than government reports.

Lets just look at the past 10 years.   The governments BLS inflation calculator says that over the past 10 years inflation has been 28% total or about 2.5% compounded annually.    Shadowstats would have us believe that this number is 7% lower than the real figure so they are claiming that inflation has really been more like 9.5% a year.    Ok, but what does 9.5% annual inflation look like?   Over 10 years an annual inflation rate of 9.5% would cause prices to be 2.48 times as high.

Now comes the common sense part:   Has the price of EVERYTHING gone up 2.5 times in the past 10 years?   Its true some things have more than doubled.  Gasoline has gone up a lot (and then down a lot then up a lot then down a lot then up a lot)  It seems that health care and college tuition have gone up substantially too.     But there are clearly many things that have NOT doubled in cost or even come close.

Housing certainly has not doubled in cost in the past 10 years.   According to the Case-Shiller housing index  the composite index for 20 markets went from 132 to 144 between Oct. 2002 and Oct. 2012 (latest data).   Thats only 9% increase over 10 years.  

2003 Toyota Camry had an MSRP of $19,000 to $25,000 range.   Todays 2013 Toyota Camry has MSRP range of $23,000 to $30,000.    Thats more like a 15-25% increase, and clearly not double.   This is just one example but I'm sure you'll find similar pricing changes across most new cars.

Health insurance premiums have more than doubled in the past decade.  See figure 15 of this KFF report.  But thats an exception and even that hasn't gone up the 2.5 multiple that Shadowstats claims would demand.

Look at the typical household budget and you'll see that housing and transportation are the two largest expenses and those costs have certainly not gone up anywhere near the 9.5% annual rate.  In fact in the past 10 years they've gone up closer to 1-2% rates.    Its not much of a stretch to see that if the top 1-2 expenses haven't doubled then all spending has not doubled either.   Only the extreme worse items have doubled in the past 10 years.   Thats the exception and not the norm. 

Shadowstats is wrong on inflation.

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