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The CPI is the Consumer Price Index.

It is a measure by the BLS (Bureau of Labor Statistics) to measure Inflation.

In the 1880's the Bureau of Labor was asked by Congress to measure the impact of new tariffs on domestic prices.  By World War I that measure started to resemble today's CPI and was used for setting wage increases for shipbuilders.  It has been published regularly since 1921, but it wasn't until the 1940's that union contracts started including it for COLAs (cost-of-living adjustments).

These days, the CPI is used for more things: Inflation-Indexed Treasury bills, COLAs for social security, computing GDP net growth, etc.

(skip past the orange hamburger to continue with Greenspan and monkey business)

Because the CPI was the core measure of many things with many implications, it became an easy target for manipulation.

There were arguments in the media in the early 1990's that the CPI was overstating inflation -- chief among them was Michael Boskin (chief economist to GHWB) and Alan Greenspan (Mr. Andrea Mitchell) then Chairman of the Federal Reserve Board.

Prior to the Boskin/Greenspan adjustment to CPI calculation, the CPI was measured by looking at the costs of a fixed basket of goods.  An identical 'basket of goods' (a term you'll be seeing a lot in this diary) was priced at current market prices for each calendar period and the changes in that cost would represent the rate of inflation.  Simple.

Boskin/Greenspan argued that when steak got to be too expensive, people would substitute hamburger for the steak and that this "substitution" would reduce the effective inflation rate.  [Actually that substitution would hide actual inflation by some 4% and instead we would get a steadily declining standard of living at 4% per year.]

There was significant pushback against the concept at the time and you can do a search for "Greenspan" "Hamburger" and "Steak" to see what I mean.

Shortly after Clinton took office in 1993, this changed.  The BLS started weighting the items in the basket of goods to make the CPI rate of growth lower.  Then they switched to a geometric weighting, and this was a big change.  With a geometric weighting, items that are rising in price more will have a lower weight and items that are essentially the same will have a higher weight.  The net effect of geometric weighting is approximately 2.5-3% per year in understating inflation.

Combining the Boskin/Greenspan adjustment (substitution within a 'VARIABLE basket of goods') with the BLS geometric mean approach, Inflation as measured by the CPI can now be understated by up to 6-7%, depending upon the circumstances.

In effect, we were able to export inflation throughout the late 90's and early 00's.  This is witnessed by the differences in the price of the Euro shortly after its inception ($0.82) vs. today ($1.32).  We have silently inflated our currency, and being the reserve currency of the world it has allowed us to expand our money supply without experiencing overt inflation.

Or have we experienced overt inflation?

Since the early 1990's the old-CPI has outpaced the current "substitution"-CPI by 35-50%.  Grandma gets 35-50% less (compared to that fixed basket of goods) than she got at the start of the Clinton era.

And we've been able to show GDP growth -- lots of it in the late 1990's, while not scaring anyone with high rates of inflation.  

In fact wages have also fallen -- and this is seen by the decline in median wages, especially with respect to the poverty line.

We already face a CPI crisis.  Our seniors have been seriously hurt, as have many others that are linked in one way or another to the CPI.

Food for thought: Obama [reportedly] wants to switch to a "chained-CPI" with understates inflation to an even greater degree.  This means he wants to have a larger amount of inflation without having to declare it, but also that anyone or anything that is linked to that measure is going to be devalued over time.

This is BAD for our seniors, this is BAD for our country, and social security is only the tip of the iceberg.  Tell this story to the hard-currency nuts and you'll get an even bigger tale of woe.  [If you can stand listening to it.]

Originally posted to polecat's smelly patch on Wed Dec 19, 2012 at 01:28 PM PST.

Also republished by Community Spotlight.

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