Why Reported Inflation Seems Different Than Reality
Tyler Durden
12/20/2012

Via Lance Roberts of StreetTalkLive,

The subject of inflation has remained an emotionally charged topic of debate over the last several years. As rising prices for individuals, and businesses, has negatively impacted their prosperity; reported inflation has remained at very low levels.
. . .
However, a bit of history is needed for context. The government produces a measure of inflation called the consumer price index (CPI) which is generally broken down into two reports: Headline and Core. The only difference between the two measures is that the core reading strips out the volatile food and energy components. It is this core reading that economists, and the Fed, focus on much to the aggravation of average consumers who quickly point to the fact the food and energy are big part of their daily lives.
. . .
The sole purpose in measuring inflation is to help businesses, individuals and government adjust their financial planning for the impact of inflation. Inflation erodes future purchasing power, and decreases economic prosperity, if not accurately accounted for. The accuracy of measuring inflation, and accounting for it properly, is essential to long term economic prosperity.
. . .
The original calculation of CPI, which measured the change in the cost of an identical fixed basket of goods priced at prevailing market costs each period, worked reasonably well for the intended purpose into the early-1980’s. However, as the pressure of increasing deficits weighed on political parties, the need to find solutions to reducing spending, without actually cutting spending, led to several substantial changes in the calculation of inflation.
. . .
Shortly after Clinton entered the White House the Bureau of Labor Statistics (BLS) altered the calculation of inflation by changing the weighting of goods in the CPI fixed basket.
. . .
But the manipulation of the data did not stop there. Aside from the weighting changes the BLS instituted a system of “hedonic” adjustments. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them.
. . .
Lastly, there is "intervention analysis" in the seasonal adjustment process. Intervention analysis is critical to the highly volatile areas of food and energy.. . . to smooth out the volatility. As a result, sharply rising gasoline prices are never fully reflected in the reported headline inflation number. However, declining prices, which are never adjusted, do show an impact to reducing inflation.

The obvious problem with these manipulations is it changed the measure of inflation from a cost-of-living adjustment to a reduction-of-living adjustment.

According to John Williams:

Zitat

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"In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made. In like manner, anyone involved in commerce, who relies on receiving payments adjusted for the CPI, has been similarly damaged. On the other side, if you are making payments based on the CPI (i.e., the federal government), you are making out like a bandit."

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Read more at:
http://www.zerohedge.com/news/2012-12-20...fferent-reality

John Williams of ShadowSats reconstructed CPI = blue line: