Mark Twain (Mark Twain) once wrote in his autobiography, “There are three kinds of lies in the world: lies, damn lies, and statistics.” This statement accurately captures the “skeptical spirit” of Americans; however, he could have added “government statistics.”
In the current debate about inflation, this skepticism is showing. The Consumer Price Index (CPI) compiled by the U.S. Bureau of Labor Statistics (U.S. Bureau of Labor Statistics) shows that since reaching a peak of 9.1% in June 2022, the US inflation rate has declined sharply to the 2% target level set by the Federal Reserve, and has remained above 3% since then.
The trend of other price indicators compiled by the US government — including the PCE Price Index (the inflation index favored by the Federal Reserve) — compiled by the US Bureau of Economic Analysis (Bureau of Economic Analysis)) is basically consistent with CPI.
Former US President Trump and others don't think so.
Trump said during a campaign in June: “If you actually know the real numbers, when you add everything up and not just type in the numbers they want to hear, that number could be 40% or 50%.”
At a time when Americans see high prices as the biggest threat to household finances, voices questioning government data have found listeners. Measuring inflation involves complex calculations, such as terms such as “hedonic adjustment” (hedonic adjustment), and even well-known scholars are scratching their ears when defending their views.
What economists see is what Adam Smith (Adam Smith) called the “invisible hand” at work; what others see is something more “sinister.” Recent reports about the $18 McDonald's Big Mac package have sparked rumors about a pricing conspiracy. Furthermore, the left and right do not trust the Federal Reserve. Some believe that the Federal Reserve is an “economic manipulator” and should be abolished.
Former Federal Reserve Chairman Ben S. Bernanke wrote in “21st Century Monetary Policy” (21st Century Monetary Policy): “America has a strong populist tradition. From President Andrew Jackson (Andrew Jackson) to members of the 21st century 'Tea Party Movement' and the 'Occupy Wall Street' movement, populists have always been hostile to the concentration of financial and government power in the eyes of people.”
This animosity has existed since the US Bureau of Labor Statistics released its first national CPI data in February 1921.
The Wall Street Journal once accused the Bureau of Labor Statistics in an editorial entitled “Deceptive Index Numbers” (Deceptive Index Numbers) of using “Bolshevik calculation methods” to assume “an impossible minimum wage of $2,600 per year (equivalent to $0.045 million today).” The article also wrote that “a series of radical adjustments” to the CPI made it “look more suspicious than ever before.”
In fact, updates to the various components of the CPI are critical to maintaining the index's relevance. For example, cars and radios weren't common enough to be included in the first few years of the CPI release. Straw hats became popular in 1919 and later became unpopular.
Some components of the CPI have been preserved and can be used to make long-term comparisons. In 1913, the price of a round steak was 22.3 cents per pound, which today is around $7; the actual average price in May of this year was $8.25. However, the price of butter in 1913 was 38.3 cents per pound, which is around $12 today. The average price of butter in May was $4.59.
Although CPI used a “Bolshevik method of calculation,” it soon became an indispensable tool in the business world. In 1922, “Barron's” used CPI in an article to show how prices fell from the high point of post-war inflation, and concluded that further commercial recovery was “quite guaranteed”. Later, America soon entered the “Roaring 20s.”
Comparing today's spending with that of the Great Depression (Great Depression), you can see the changing nature of American spending.
From 1935 to 1939, food accounted for 33.9% of the average household expenditure; today this share is only 13%. During the Great Depression, clothing consumption accounted for 11% of American wages; today, that ratio is 2.6%. However, the share of housing costs increased from 33.7% to 36.1%, and the share of health care costs increased from 4% to 7.9%.
The Bureau of Labor Statistics compiles CPI based on a survey of businesses and households in metropolitan areas, and collects approximately 0.094 million prices and 8,000 rental housing quotes every month.
Indices that measure inflation are compiled by category, region, and various variables, such as the controversial “sticky price” (that is, the core indicator) used by both the CPI and PCE, which does not include food and energy prices.
Excluding food and energy prices seems counterintuitive because they account for a large portion of consumers' daily expenses, but such products are easily affected by price fluctuations outside of normal supply and demand, causing more drastic fluctuations, and they exist outside the scope of the Federal Reserve's actions. Think of the 1973 oil embargo, which tripled in a few months, or the soaring food prices caused by the Russian-Ukrainian conflict in 2022. The central bank has no tools to deal with this external shock.
The CPI's calculation of housing costs has also raised questions. The calculation uses the rental cost for the house the tenant lives in, uses the implied rental cost for the owner's own home, so why not consider the cost of ownership? Owned homes, along with associated costs — such as interest on mortgages, property taxes, and home improvements are treated as capital goods, that is, investments rather than consumer items.
Perhaps the most controversial calculation method is the so-called “hedonic adjustment.” If the quality of a product increases — for example, a PC with a better processor and more memory — its price will also rise, but this is not counted as inflation measured by CPI.
Bill Gross (CPI) wrote in an investment outlook newsletter for Pimco (Pimco) in October 2004: “This (CPI) is a scam.” Gross believes that the “hedonic adjustment” lowered the annual inflation rate by 1%. In 2000, an economics professor at Harvard University who was extremely averse to the calculation method of “hedonic adjustment,” “used the foul phrase beginning with F at least twice” in an argument with Barron's columnist Gene Epstein (Gene Epstein).
The reason why the Federal Reserve favors the PCE price index is mainly because it responds faster to changes in consumer habits than the CPI, and the PCE price index also covers a wider range, including indirect payments, such as insurance bills provided by employers. The PCE price index is generally a little lower than the CPI.
In May, the US core PCE price index rose 2.6% year on year, in line with market expectations, and recorded the smallest increase since 2021. Yields declined after the data was released because some investors thought this was a sign that the Federal Reserve might be preparing to cut interest rates.
However, Federal Reserve Chairman Powell refuted this idea. He said that first, you need to make sure that you get a “real interpretation of the actual inflation situation,” which is what everyone needs.
Editor/Jeffrey