Thursday, January 10, 2013

Peter Schiff Exposes Phony Inflation Numbers

Inflation Propaganda Exposed  

By Peter Schiff

Economists who hold the popular view that expanding the money supply will provide the best medicine for our ailing economy dismiss the inflationary concerns of monetary hawks, like me, by pointing to the supposedly low inflation that has occurred during the current period of rampant Fed activism. In a recent blog post aimed specifically at me, Paul Krugman noted that the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to prove me wrong. In fact, Krugman and others have even suggested that the CPI itself overstates inflation and that the Fed would be better able to help the economy if less strict methodologies were used. However, there is plenty of evidence to suggest that the CPI is essentially meaningless as it woefully under reports rising prices. 

Magazines and newspapers provide a good case in point. The truth has not been exposed through the economic reporting that these outlets provide, but in the prices that are permanently fixed to their covers. For instance, from 1999 to 2002 the Bureau of Labor Statistic's (BLS) "Newspaper and Magazine Index" (a component of the CPI) increased by 37.1%. But a perusal of the cover prices of the 10 most popular newspapers and magazines (WSJ, Washington Post, Time, Sports Illustrated, U.S. News & World Report, Newsweek, People, NY Times, USA Today, and the LA Times) over the same time frame showed an average cover price increase of 131.5% (3.5 times faster than the BLS' stats). This is not even in the same ballpark.

Some defenders of the BLS may conclude that prices were held down by the availability of free online news content or the convenience of digital delivery. But that is beside the point. Prior to the digital age, the BLS could have claimed that newspaper costs were held down by public libraries that provided free access. It's also true that online publications deliver less value on some fronts. Not only do many people enjoy the tactile process of reading physical newspapers or magazines, but they offer the secondary value in helping to kindle fires, housebreak puppies, pack dishes, and line birdcages.  

Another stunning example is found in health insurance costs, which is a major line item for most families. According to the BLS we can all breathe easy on that front because their "Health Insurance Index" increased a mere 4.3% (total) in the four years between 2008 and 2012.  Interestingly, over the same time, the Kaiser Survey of Employer Sponsored Health Insurance showed that the cost of family health insurance rose 24.2% (5.5 times faster). But even if the BLS had reported higher costs, it wouldn't have made much of a difference in the CPI itself. Believe it or not, health insurance costs are assigned a weighting of less than one percent of the overall CPI. In contrast, the Kaiser Survey revealed that in 2012 the average total cost for family health insurance coverage was $15,745, or almost one third of the median family income.

If the BLS could be so blatantly wrong in reporting the prices of newspapers and health insurance, should we believe that they are more accurate on all other sectors? If the inaccuracy of these two components were consistent with the rest of the CPI's components, inflation could now be reported in double-digits!

Even more egregious than the manner in which prices are currently reported is the way that CPI methods have been changed over the years to insure that most increases are factored out.  Since the 1970's, the CPI formula has changed so thoroughly that it bears scant resemblance to the one used during the "malaise days" of the Carter years. Main stream economists dismiss criticism of the changes as tin hat conspiracy theories. 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 formulas, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

The newer CPI methodologies are designed to report not just on price movements, but on spending patterns, consumer choices, substitution bias, and product changes. In other words, the metrics have been altered to track not so much the cost of things, but the cost of living (or more accurately, the cost of surviving). But if you simply focus on price, especially on those staple commodity goods and services that haven't radically changed in quality over the years, the under reporting of inflation becomes more apparent.

As reported in our Global Investor Newsletter, we selected BLS price changes for twenty everyday goods and services over two separate ten-year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. (The twenty items we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef, and prescription drugs.)

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, and they straddle the time in which the most significant changes to the CPI methodology took effect. And while the CPI rose much faster in the 1970's, the degree to which the prices of our 20 items outpaced the CPI was 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 117%, just 5% faster. In contrast between 2002 and 2012 the CPI rose just 27.5%, but our basket increased by 44.3%, a rate that was 61% faster. And remember, this is using the BLS' own price data, which we have already shown can grossly under-estimate the true rate of increase. The difference can be explained by how CPI is weighted and mixed. The formula used in the 1970's effectively captured the price movements of our twenty everyday products. But in the last ten years it has been quite a different story.

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. Instead, the Fed is operating as if inflation is extremely low. As a result, they are making a huge policy mistake that will come back to haunt us. During the last decade the Fed spent many years denying the existence of a housing bubble, even as a mountain of evidence piled up to the contrary. That error caused the Fed to hold interest rates too low for too long, blowing more air into the bubble and imposing enormous negative consequences on the economy. The Fed, now similarly blind to the inflation threat, is repeating its mistake, only this time the negative consequences will be even more dire.

Apart from the statistical problems that hide inflation, there are also macroeconomic factors that have helped keep prices down despite the quantitative easing. Massive U.S. trade deficits and foreign central bank dollar accumulation mean that much of the printed money winds up in foreign bank vaults, not U.S. shopping centers. As foreign consumer goods flow in, and dollars flow out, a lid is kept on domestic prices. In effect, our inflation is exported as foreign central banks monetize our deficits and recycle their surpluses into U.S. Treasuries. The demand has pushed down bond yields which has allowed the U.S. government to borrow inexpensively. Of course, when the flows reverse, bond prices will fall, yields will climb, and a tidal wave of dollars will wash up on American shores, drowning consumers in a sea of inflation.   

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 and  that real economic value can therefore be created by putting zeroes onto a piece of paper. I think that those making such absurd claims should bear the burden of proof. For more on the interesting topic of hidden inflation, see my video that I just posted.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country


  1. Another misleading comment on inflation which is basically an exercise in cherry picking.

    Mr. Schiff picks twenty "everyday goods and services" but leaves out apparel which has seen drastic price falls.

    Mr. Schiff picks two time periods but leaves out the 22 years in between where many commodity prices have fallen relatively.

    Mr. Schiff writes "The newer CPI methodologies are designed to report not just on price movements, but on spending patterns, consumer choices, substitution bias, and product changes. In other words, the metrics have been altered to track not so much the cost of things, but the cost of living (or more accurately, the cost of surviving)." Leaving out the gratuitous snide about surviving in the end (Mr. Schiff is referencing the US here, not Nigeria) this seems exactly what the CPI should be doing, measuring the cost living. Quality changes and substitution matter. How many LPs do you buy? How many 5.25'' floppy disks? How many phone brokerage services? How many transatlantic steamship travels? How many black and white TVs? How many packs of cigarettes? How many 1995-made cell phones? An index which does not aim to control for substitutions and quality would be laughably off the mark. Do you really prefer this?

    Mr. Schiff writes, "Some defenders of the BLS may conclude that prices were held down by the availability of free online news content or the convenience of digital delivery. But that is beside the point." No, that's exactly the point. If many people, not just a few seniors who spend their mornings reading newspapers at local libraries, now read news digitally much cheaper, that matters for the cost of living. After all EPJ is free, right? Reading Mr. Schiff's columns and watching him on Youtube does not cost a dime once the fixed cost of internet access is paid. This matters.

    Finally, Mr. Schiff ignores alternative mainstream measures to the CPI which show the same ballpark of "price inflation". What about the billion-price index? What about the PCE price index?

    Just because your model shows that there must be "price inflation", there just must, doesn't mean there is. Some prices go up, others don't. The target is for a 2% increase as measured by the PCE index. The record since the 1980s is impeccable.

    1. Are you serious? It costs me as much for ground beef as it did for T-bone steak 4 years ago. But meat is meat, right?

    2. Are you serious? Ground beef costs me as much as T-bone steak did 4 years ago. But hey, meat is meat, right?

    3. Don't you think that those improvements should be enjoyed with or without inflation? Why should we say, "Oh look, society has progressed in such a way that we now have CDs and no longer need floppy disks. I guess we better mark down the inflation numbers!" That is just absurd.

    4. Keep on cherry picking.
      Apparel prices are not going up. Even if you take Mr. Schiff's numbers as true (which I don't for the reasons listed above), an increase of prices by 44.3% over 11 years (2002-2012) comes to annual "price inflation" of 3.39%, hardly the 7-9% he claims to see. His own numbers! Much closer to the Fed's target even with his flawed construct allowing for no substitutions and leaving out most of what people actually buy. So yes, I am serious, Mr. Schiff is misleading.

    5. "The target is for a 2% increase as measured by the PCE index."

      Because stealing 2% is hardly stealing at all, eh, anon?

      "Keep on cherry picking. Apparel is up 3.39%"

      That is 70% higher than the feds 2% and a fully ripen cherry.

    6. Mic, you are not quoting me correctly. At least be honest. I used Mr. Schiff's own numbers which exclude apparel (in my opinion intentionally, since this would have made his argument even weaker). Using his own numbers (which are misleading), "price inflation" was only 3.39% per year. If apparel had been included knock this down even more. Hardly 7-9% as he claims. If you believe apparel prices have gone up by over 3% a year over the last 11 you haven't been shopping much for clothes.

      The Federal Reserve's target is widely known. You can prepare for it. Invest your money elsewhere, unless you are prepared to have a real negative return. That is not stealing. Buy a gold ETF and use online banking to keep your funds in a checking account to a minimum for transactions. You can mimic your own gold-standard that way if you believe that would be more honest.

      It's certainly not stealing, the Fed tells you what the real return on money will be. "Price inflation" has been remarkably stable around 2% recently. You could have a much better case arguing for stealing under a hypothetical gold standard which would have seen much much more volatility of "price inflation".

    7. You are correct about my interpretation of your 3.39%. My apologies. To say it is not theft when the FED prints digits is not something I can wrap my head around. If I were to create a few digits in my account, I would not consider the action lawful. To say one can plan accordingly shows an inability to imagine all the different conditions people live under. What exactly is a hypothetical gold standard? Brenton Woods? The only standard to support is a gold coin standard, or better yet just let the market provide money. (Have we reached the "Then they fight you" point in Gandhi's progression?)

  2. One more point about the cherry-picked newspaper and magazine prices which presumably prove that "the government" is lying. To prove the lie Mr. Schiff states he is looking at "cover prices". The BLS is not, most people don't pay the cover price but rather pay a subscription price to the WSJ or Sports Illustrated. Just looking at cover prices is not the correct methodology, but rather once more cherry-picking to mislead the reader.

  3. Prices are going up. You don't need a computer model to tell you that. Peter Schiff, once again, is right.

    1. Nobody disputes that prices are going up. The Fed's target is for 2% "price inflation" each year. You might not like this, but you know that's coming and can make your investment and purchasing decisions accordingly. What Mr. Schiff is misleadingly (the case for why this is so, I made above) claiming, is that "price inflation" is much higher than this target due to some "government conspiracy" involving inappropriate substitution or outright fraud (the cherry-picked newspaper numbers). Newspaper cover prices don't show the prices people pay for subscriptions which are much more important for a lot of publications than newsstand sales. I just today received a subscription offer for one of his examples trying to entice me with an offer of 73% off the cover price. Mr. Schiff knows this or should know this, which makes me think he is not serious or intentionally misleading and certainly not right.

  4. Looks like John Williams has inflation a little over 5% currently. That is higher than the CPI but much lower than what Mr. Schiff seems to believe.

    1. does not change the composition of its index since 1990. So no cell phones, no iTunes, no online anything. is even worse than Mr. Schiff's index.

      Do you really believe that any index which does not at least attempt to measure actual consumer purchases (substitution to new products) or which does not at all control for quality (compare the safety features of new cars in 1990 to those today) is accurate? Shadowstats as well as the index set up misleadingly by Mr. Schiff are much much worse than the CPI.

    2. Where do you come from? Are you from Earth? Almost everything I buy has either increased in price or decreased in quality over the last ten years. Sure, you can always look at things like electronics, where the productivity increases outpace inflation, but that doesn't mean we're not being robbed of the price decreases that would have occurred due to the increases in productivity.

    3. Anonymous: Sure it has increased in price. That's the goal. The target is to have low but stable "price inflation" around 2% per year. That's feature not a bug. And the record on this has been impeccable over the last 20 years. There is ample literature showing convincingly (at least to me) the benefits of slightly positive inflation. I have outlined this many times before in response to similar comments on this blog. The two main reasons are avoiding the zero-lower-bound for interest rates more often and giving a bit of a buffer against downward wage rigidity. Check google for many, many articles on this topic. Maybe you prefer falling prices, most senior citizens do. However, the economy as a whole is much much better off with low but positive and stable "price inflation".

      People are not being robbed. You know that's the goal, plan for it. You don't have to keep your money lying around under your mattress or in a savings account paying 0.01% interest. Use other investments which are today easier to make than ever before. Many comments by Austrian economists suggested buying gold ten years ago, the time frame you mentioned. If you did, that was a great investment! Why didn't you? Of course, now it's a bit late and gold will likely fall over the next years as the "hyperinflation around the corner" fails to materialize and the gold bubble will burst.

    4. So, to paraphrase your tirade, "Falling prices are good for everyone individually, but they are bad for the mythical entity called 'society'. What's best for 'society' is that everyone is forced (due to inflation) to stick all their money into investments. Never mind that this benefits only Wall Street. You must send your money to them if you want to keep up so that our GDP numbers can look good! Never mind that the financial industry takes up an unacceptably large part of our economy already."