The Crash Course - Chris Martenson [58]
Using this methodology, the BLS reported that food costs rose 4.9 percent in 2007.4 However, according to the Farm Bureau, which doesn’t employ these tricks and simply tracks the same shopping basket of the exact same 30 goods from one year to the next, food prices rose 9.2 percent over the past year.5 That spread of 5.1 percent makes a huge difference. Recall from the “Rule of 70” in Chapter 5 (Dangerous Exponentials) that a 5 percent rate of growth will result in a complete doubling in just 14 years. What this means is that even smallish-seeming underreporting of inflation will result in big differences over time. One critique of using substitution as a method is that our measure of inflation is no longer measures the cost of living, but rather the cost of survival.
The next statistical method, weighting, has the effect of reducing the amount of those goods and services that are rising most rapidly in price, under the assumption that people will use less of those things as prices rise. This is the least defensible of all the statistical tricks, because over time it has deviated widely from reality. For example, the Bureau of Economic Analysis (BEA) reports that health care represents about 17 percent of our total economy, but the BLS only weights it as 6 percent of the CPI. In our high school weight gain example, this would be like only including a fraction of the weight of those who had gained the most, which serves to overcount those who had gained the least or perhaps even lost weight.
Because health care costs have been rising extremely rapidly, reducing health care weighting has had a dramatic reduction in reported inflation. In 2008, if health care had been weighted at a level that matched its true economic proportion, CPI would have been several percentage points higher. CPI weighting leads to undercounting inflation.
Next comes the most outlandish adjustment of them all, one which goes by the name “hedonics,” a name whose Greek roots translate to “for the pleasure of.” This adjustment is supposed to account for quality improvements, especially those that lead to greater enjoyment or utility of a product, which makes some sense, but which has been badly overused.
Here’s an example: Tim LaFleur is a commodity specialist for televisions at the Bureau of Labor Statistics (BLS) where the CPI is calculated. In 2004 he noted that a 27-inch television priced at $329.99 was selling for the same amount as last year but was now equipped with a digital tuner.6 After taking this subjective improvement into account, he adjusted the price of the TV downwards by $135, concluding that the benefit derived from the tuner improvement was the same as if the price of the TV had fallen by 29 percent. The price reflected in the CPI was not the actual retail store cost of $329.99, which is what it would actually cost you to buy the TV, but $195. Bingo! Based on that adjustment, the BLS concluded that televisions cost a lot less than they used to, and in response, inflation was reported to have gone down. However, at the store you’d discover that these same televisions were still selling for $329.99, not $195.
Another complaint about hedonics is that they’re a one-way trip. If I get a new phone this year and it has some new buttons, the BLS will declare that the price has dropped because of all the additional enjoyment I will receive from using the features attached to those buttons. But if my new phone only lasts 8 months before ceasing to work, instead