Thursday, January 27, 2011

WSJ: Why You Can't Trust the Inflation Numbers

There's a WSJ reporter who appears to actually understand economics. Brett Arends has been putting out some pretty decent analysis. Here he is on inflation:
A surprising number of people on Wall Street will tell you not to worry too much about inflation.

After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.

It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?...


It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.

• First, the official inflation numbers should be taken with a fistful of salt.

Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.

According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%...

... it makes sense to treat the government numbers with skepticism.

Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!...

• The second reason to treat the official inflation figures with some mistrust is that they look backward. They register what just happened, not what's about to happen next...

• The third reason to be mistrustful of the inflation picture? Simple. Economics.

We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base.
Wow, sign this kid up.


  1. It is really so simple an idea. It's harder to believe the official numbers if you aren't being lazy and gullible.

  2. I majored in Economics in college, and some people who "worked" at the BLS came in to talk to us about "working" there. They told us that they were contantly under pressure to low-ball inflation numbers since Social Security is indexed to the inflation rate. So, yes, the "official" inflation rate is a joke.