Benson's Economic
& Market Trends
Using the
Consumer Price Index to Rob Americans Blind
Richard Benson
Apr 14, 2004
Most Americans
have been led to believe that the Consumer Price Index (CPI)
actually measures, from one year to the next, the "cost
of maintaining a constant standard of living" as the prices
for goods we purchase increase. Indeed, we are foolish enough
to believe that the index is an accurate measure of the price
increases for the same basket of goods we buy every year.
If this were actually true, the index would show an honest increase
of 3% - 4% in price, there would be no productivity miracle,
interest rates would be much higher, and bond and stock prices
would be lower. Of course, with an election approaching, our
elected officials don't want the CPI to be an honest measure
of the cost of maintaining the same standard of living or quality
of life. They want a politically convenient index, cleverly devised
to hardly ever rise at all!
What you should find unsettling and fraudulent are the ways that
the CPI is manipulated to ensure there is no inflation, regardless
of how high the prices rise for things we must buy to live. Manipulating
the CPI - specifically because the benefits to the retired on
Social Security, Medicare and Medicaid are tied to it - and making
people believe that inflation is low, will keep the "fraud"
of monetary inflation alive. The government simply can't afford
to keep the promises it has made, and it needs to use this clever
accounting fraud. If productivity is really so high, why isn't
government policy pushing through a 10% flat increase in Social
Security benefits so that the retired can get their share of
the productivity miracle? (Maybe the real miracle is robbing
them without them noticing!) By changing the definition of
"what inflation is," our government won't have to pay
nearly as much to retirees as they were anticipating. The implications
of defining inflation away are vast, and the magnitude of the
fraud is extraordinary!
The primary sources of manipulation are: 1) Making sure the wrong
items are in the index; 2) Taking "hedonics" to ridiculous
extremes; 3) Getting consumers to do more of the work and receive
less services; and, 4) Changing to a Chain Weighted Index.
First, it is not a coincidence that the CPI assumes that everyone
in the country rents their home. (Rents have been declining over
the last year in some major cities, such as San Francisco - 6%;
Denver - 4.3%; and, Atlanta - 4.5%). Making sure that the CPI
does not pick up the real cost of housing is critical because
the very reason that rents are soft is that with easy mortgage
credit available, former renters are leaving the rental market
and buying houses instead, which has pushed up housing prices.
Over the last four years, housing prices have risen 45%, so how
could the index possibly be kept so low if housing prices were
actually part of the "cost of living"?
The drop in rents is very material since the cost of housing
is a full 30% of the CPI. Unfortunately, for those 80 plus million
Americans with incomes tied to the CPI, 69% of households own
their home. So,
over two-thirds of Americans are forced to use a Consumer Price
Index that has absolutely no relevance to them! To say the cost
of living is going down for homeowners is just ridiculous! If
the CPI was honestly set to measure the costs associated with
owning a home for those 69% (vs. renting), the index would be
rising over 3% a year! Those 80 plus million Americans who are
short-changed include recipients of Social Security, Medicare,
welfare and food stamps, as well as retired military and many
private pensions.
To
take a closer look, my wife and I prepared a monthly "nut"
spreadsheet on our own personal expenses. We own our home and
car outright (so we don't have a mortgage or car payment), but
we still have all the usual expenses, including: Insurance for
Health Care, Automobile and property; electricity; DSL connection;
telephone; property taxes; monthly maintenance; etc. Before we
have even purchased a gallon of gas, a piece of clothing, or
a single grocery item, our annual nut amounts to over $25,000
and it is rising around 8 to 10 percent a year. We recommend
you do the same and then compare your "housing cost"
to the CPI. You'll notice that you probably do not live in the
world the government describes!
Second,
the CPI is managed down by arbitrary decisions made by bureaucrats
on the "quality improvements" in goods and services,
pleasantly referred to as "hedonics." When you buy
a computer that has "more storage" or purchase a new
car made with more plastic rather than steel, the bureaucrats
at the Bureau of Labor Statistics, Bureau of Economic Advisors
and the Federal Reserve, get all excited because productivity
and deflation can be "defined into existence" the same
way that the Federal Reserve can "print new money out of
thin air." While there are some benefits from quality improvements
in the cost of goods and services, the extent of the "arbitrary
hedonic adjustments" are breathtaking and, alone, are adding
1% to 1.5% of real Gross Domestic Product (GDP) growth by "magically
lowering inflation" by the same amount. All you need
to do is look at the actual number of dollars spent on "technology
equipment" in the GDP. Dollar spending hardly changes, but
"real spending" is rocketing up. Take a look at the
price deflator for tech equipment, falling from 90% to 60% over
the past few years, to realize how arbitrary these hedonic adjustments
are and how devoid the adjustments are of any common sense.
Looking forward, the good news is all the attention being paid
to the rising cost of health care, but these costs may prove
to be "embarrassing" in an election year. So much so,
that the CPI is in the midst of a major "make-over"
to include all those tremendous "hedonic improvements"
in health care that granny is getting from her HMO. The government
staticitans have entered the world of science fiction: "Please
beam me up Scottie."
Third, every time we pull into a gas station in the rain and
have to swipe a credit card and pump our own gas, we remember
the old days when a gas station attendant actually provided service,
checked the oil, and cleaned the windshield free of charge!
In my own business, travel reservations are made over the internet
which is convenient but time consuming when researching flights.
For other services, just try and get through to technical support
(which is generally a fee-based service) or speak to a customer
service rep; the whole day could be spent on hold waiting to
speak to someone in Bangladore or Calcutta. Everywhere we look,
the consumer is now providing a portion of the labor in order
to receive normal services. Yes, this holds measured prices down
but the downside is the loss of the purchaser's valuable time.
The government masters of the CPI who welcome "hedonics"
turn a "blind eye" to this significant cost phenomenon.
Moreover, we spend an additional 30 minutes a day cleaning "spam
off of our computers. Not one minute of this lost time shows
up as a cost and drain in productivity.
Remember, "Only the good stuff counts." Do you
honestly think the time you spend delayed in traffic, on a train,
or on an airplane, would be calculated in the CPI? What about
the extra hour we get to spend at the security gate at the airport?
What does that do for your "productivity"? Isn't that
a real material cost?
Fourth, in order to guard against anyone actually seeing inflation,
the Bureau of Labor Statistics, at the Federal Reserve's urging,
wants to use an "Expenditure/Chain-Weighted Index."
This price weighting idea works something like this: If you consume
a very small amount of something and its price goes up a lot,
it will affect the CPI very little because it has a very small
"Weight in the Index." This, of course, is correct.
What the Federal Reserve and the Bureau of Labor Statistics want
to do next is insidious and should be criminal fraud - the Fed
wants the Bureau of Labor Statistics to change the weights as
the prices change.
This is the way the Index will be constructed: As the cost of
some items goes up and you can no longer afford to buy them,
you are then forced to use that item less and find a less expensive
alternative. Then, the weight of that expensive item goes down,
but the weight of the less expensive item goes up, resulting
in prices that have hardly changed at all! (George Orwell
would simply love this!) Indeed, think about Granny in the
kitchen: She used to buy steak and croissants but the price got
so high that she now has to eat spam and dough balls fried in
lard. Since she doesn't buy steak anymore and now eats spam and
uses lard (items she never used to buy) her cost of living has
gone down! (Granny's weight for steak is now zero.) Obviously,
Granny's standard of living went down when the price of steak
went up. What matters in today's world is not Granny's standard
of living, but her cost of living! Granny's costs need
to be kept down and the way to do that is to keep her CPI down!
If Granny receives $400 a month to live on, it is truly convenient
to make sure her "cost of living" stays the same even
if surviving on $400 a month means she freezes in the dark, cancels
cable, and eats what her dog eats. Yet, she should feel good
because the CPI tells her that costs haven't gone up. The real
miracle in America isn't the productivity miracle; it's the
never rising Consumer Price Index.
The Federal Reserve wants to run an easy money policy and
keep interest rates down; the Treasury wants to short-change
social security recipients and buyers of TIPS and I-Bonds. Fudging
the CPI is the way to go; however, this strategy is intellectually
dishonest, morally fraudulent and will remain quite effective
until Americans start looking at their actual cost of living,
or discover one day that what's good for Rover is good for them.
Richard Benson
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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