johnnymk

Finally, even the Wall Street Journal has reported on growing concerns that the federal government is fudging inflation numbers.

The WSJ says that several critics are seriously questioning the veracity of the Fed's official inflation figures and the methods it uses to calculate them.

Considering the real spikes in food, housing, energy, commodities and transportation costs, one wonders how the government is really tabulating inflation.

The Journal cites a number of experts who claim that inflation statistics are increasingly being determined based on the principles of what federal economists call "hedonics".

The paper defines hedonics as "a way of accounting for the changing quality of products when calculating price movements."

Hedonics proponents say that without it, there would be no way to factor in current rapid technological advances when assessing the value of the countless products on the market.

Take the price of a TV, for example.

According to the Journal, one commodity specialist at the Bureau of Labor Statistics recently had to determine the value fluctuation of a television from one month to the next, though the price of the set had not changed.

He "decided the newer set had important improvements, including a better screen. After running the changes through a complex government computer model, he determined that the improvement in the screen was valued at more than $135. Factoring that in, he concluded the price of the TV had actually fallen 29%."

By employing such economic gymnastics, federal statisticians can actually lower the overall rate of inflation.

Now comes the debate over whether such assessments are fair or ridiculous.

As the Fed slowly raises interest rates - the result of a recent inflation upturn - many say the hedonic method is perverting the truth about the state of the economy.

Opponents say the formula is too subjective and that it may well be keeping inflation artificially low, masking the problem.

The Consumer Price Index (CPI) is critical to businesses and consumers alike.

It dictates how much the government spends on Social Security payments, and it plays a major role in adjusting things like alimony payments, food stamp benefits, lease payments and tax brackets.

For the most part, the government benefits by keeping the rate artificially low - as it can cap its own massive payroll growth and unending entitlement programs.

But many consumers have begun to feel that there must be a discrepancy in the government's inflation calculations.

Otherwise, how could inflation have stayed so low for so long even as housing, medical and other living costs have shot through the roof?

According to Bill Gross, head of Pimco, the world's largest bond fund, the CPI is nothing more than a con job intended to hide the true rate of inflation.

As the WSJ reports, Gross blames the Fed's increasing reliance on hedonics - and he believes the true inflation rate is actually 1 percentage point higher than the government admits.

Financial Intelligence Report believes it could be 2 or 3 points higher.

Other experts concur. "Price decline and quality improvement are not the same thing," says Andrew Harless, another economic analyst. Therefore, when an index combines the two, it will more than likely be inaccurate.

Harless believes the use of hedonics leads to a process that is just too subjective to provide an accurate reading. The CPI "takes something you can't really measure and applies a metric to it in ways that are arbitrary," he says.

Housing is a prime example.

The sector represents about 30% of the CPI. But in its calculations, the Fed measures the cost of renting a home - not the cost of buying it.

This enables it to duck the recent housing price hike.

Financial Intelligence Report believes there is no way a reasonable person can believe inflation has been as low as the federal government claims it has.

We also believe it has been understating inflation for more than a decade. And even if inflation is downplayed by just 1% a year, after a decade this fraud would wreak havoc on the U.S. economy.

Notably, commodity prices globally would become much more expensive as producers realize the dollar is far less valuable than we claim it to be.

Interestingly, commodity prices have seen a massive run-up as the dollar has collapsed. We believe this is due partly to the "inflation lie".

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zippyjuan

Rental housing is included while home selling prices are heavily discounted because only a small percentage of the total popluation is buying a home at a given point in time. Rental rates generally average out the costs of purchasing and maintaining a home over time. If I bought my home twenty years ago for $100,000, my expenses of keeping it have not gone up in those twenty years, except for property taxes (assuming a fixed mortgage). If I just sold that house and bought a new one for $500,000, my housing costs just took a huge jump. Food and utility prices are very volitle and difficult to track changes in - they can be lower in summer and higher in winter. Usually the number for inflation is quoted as "excluding food and utilities". That said, the consumer price index probably does understate inflation when actual money spent on living expenses is calcluated.

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Itsme

It has been my feeling that many businesses themselves are fudging on inflation.

I think that businesses don't want consumers to think prices are rising so they don't want their goods to be the item that drove the CPI up. So, they find out the specific items that the government uses to calculate the CPI and they work hard to keep the prices of those good stable. They, instead look for items that are not used in the calculation of the CPI and raise those prices. In this way they get some higher income and preserve their reputation.