Monday, August 15, 2022

True Rate of Inflation ‘Much Higher’ Than Official Government Figures Show: Expert

Prices advertised outside of a grocery store in the Flatbush neighborhood of Brooklyn, New York City, on June 15, 2022. (Spencer Platt/Getty Images)

True Rate of Inflation ‘Much Higher’ Than Official Government Figures Show: Expert

By Tom Ozimek

While the White House took a victory lap on Aug. 10’s declining inflation print, some experts say the true rate of inflation in the United States is much higher than the officially reported data indicate.

The Bureau of Labor Statistics (BLS) reported that the headline pace of inflation, as reflected in the Consumer Price Index (CPI), ticked down to 8.5 percent in July from a 41-year high of 9.1 percent in June.

At the same time, the month-over-month CPI inflation figure came in at zero percent—meaning the pace of price growth was unchanged between June and July—prompting President Joe Biden to take a victory lap saying that the “economy had zero percent inflation in the month of July.”

Some analysts and Biden’s political opponents objected to the White House messaging on “zero” inflation by arguing that the president was cherry-picking the data by focusing on the month-over-month pace of growth while overlooking that the year-over-year rate of inflation—the established method for measuring inflation—remained a historically elevated 8.5 percent.

Further, some analysts say that the official figures understate the true pace of inflation, citing factors such as a lag in housing costs being reflected in the government’s CPI inflation gauge.

Former President Donald Trump also argued last month that the pace of price growth in America was “much, much higher” than official data suggests, telling rallygoers in Arizona that inflation is “going higher and higher all the time.”

“It’s costing families nearly $6,000 a year, bigger than any tax increase ever proposed,” Trump said at the July 22 rally.

Former President Donald Trump attends a rally in support of Arizona GOP candidates, in Prescott Valley, Ariz., on July 22, 2022. (Mario Tama/Getty Images)
Former President Donald Trump attends a rally in support of Arizona GOP candidates, in Prescott Valley, Ariz., on July 22, 2022. (Mario Tama/Getty Images)

Alternative Inflation Measures

An alternative CPI inflation gauge developed by economist John Williams, calculated according to the same methodology used by the U.S. government in the 1980s, puts July’s inflation figure at 16.8 percent in annual terms, nearly double the official figure and not far from his measure’s 75-year high of 17.3 percent logged in June.

Williams views the current BLS methodology for calculating inflation as a flawed measure of how members of the general public experience changes in their cost of living.

“Individuals look to the government’s CPI as a measure of the cost of living of maintaining a constant standard of living, as well as measuring that cost of living in terms of out-of-pocket expenses. Without meeting those parameters, an inflation measure has limited, if any, use for an individual,” Williams wrote in a note elaborating on his theory.

“Where the CPI at one time met those parameters desired by the public, government efforts turned the CPI away from measuring the price changes in a fixed-weight basket of goods and services, to a quasi-substitution-based basket of goods, which destroyed the concept of the CPI as a measure of the cost of living of maintaining a constant standard of living,” he said.

Williams’ alternative approach to CPI inflation has its critics, including economist Ed Dolan, senior fellow at the Niskanen Center.

In a detailed blog post analyzing Williams’s approach, Dolan says he backs Williams’s view that the current government methodology understates inflation and he supports alternative measures to the official CPI price index that would more closely reflect public perceptions of inflation.

Still, Dolan believes that rates of inflation provided by Williams’s method are “implausibly high” because of a range of factors and that a more accurate rate of inflation could be arrived at by subtracting 2.45 percentage points from Williams’s number.

Such an adjustment would put July’s inflation at 14.35 percent, which is lower than Williams’s 16.8 percent but still far higher than the official 8.5 percent.

While Williams doesn’t believe the government is deliberately falsifying inflation data to mislead the public, he thinks the methodology BLS has adopted understates the inflation rate in order to reduce inflation-indexed transfer payments such as Social Security benefits.

The BLS has issued a detailed defense of its methodology (pdf), in which it disputes claims that it undercounts inflation while acknowledging that the CPI “is not, and can never be, a perfect index” and that the agency “must always be working to enhance” the measure’s accuracy.

Shelter Costs ‘Wildly Understated’ in Inflation Data

Charlie Bilello, founder and CEO of Compound Capital Advisors, believes that the true rate of inflation is “much higher” than the BLS’s figure of 8.5 percent, arguing that the cost of shelter isn’t being adequately reflected in the government’s headline numbers.

“Shelter is the single biggest component of CPI (33% of the Index) and is still being wildly understated (@ +5.7% YoY) with rents up 12.4% over the last year and home prices up 19.7%. Which means that the true inflation rate is much higher than 8.5%,” Bilello said in a statement.

The dynamic of shelter costs being understated in the government’s inflation data were elaborated on by David Wilcox, senior fellow at the Peterson Institute for International Economics (PIIE) in an analysis.

Wilcox noted that the BLS methodology relies on two main components—”rent of primary residence” and “owners’ equivalent rent”—to gauge housing costs in the overall inflation index.

With rent of primary residence, the BLS uses a relatively complicated formula that tracks incremental changes in rents over a six-month period across a sample of some 48,000 rental units that are divided into six panels.

While Wilcox says this methodology has the benefit of allowing the BLS to include more units in its sample and better controls for differences in the characteristics of rental units, there’s a disadvantage in the form of the rent index being “more inertial than rents are in real life.” Basically, this means it takes longer for a price jump in rent to be reflected in the CPI measure.

“If rents on every occupied rental unit increased X percent on some given date, six months would pass before that increase was fully reflected in the sample,” he wrote.

The second shelter component of the CPI, owners’ equivalent rent, also uses a similar methodology that relies on a structure of six rotating panels and it, too, is subject to a lag.

In order to reflect shelter costs in a more timely and accurate way, Wilcox recommends revising the BLS approach to capturing housing-related costs in the inflation index by incorporating data from private firms. He suggests the data could include “asking rents” on residential properties, which are rents that new tenants would be charged, rather than just current occupants, as is now the case with the BLS’ calculations.

“If a new paradigm along these lines could be built, it would provide a timelier representation of rent changes. It should also allow a vast expansion of the rental base the BLS draws upon to construct the indexes,” Wilcox says.

But under the BLS’s current methodology, the contributions to headline CPI inflation “will manifest more slowly in the official index than it will be experienced on the ground by flesh-and-blood renters,” Wilcox said.

In an emailed statement to The Epoch Times, Bankrate Chief Financial Analyst Greg McBride expanded on the theme of housing costs in the CPI inflation measure.

“Shelter costs are still rising at a knee-buckling pace, and accounted for 40 percent of the increase in the core CPI,” McBride said. “Change in rent prices, in particular, tend to lag increases in home prices so we can expect to see continued moves higher for months to come in what is the biggest component of the inflation index.”

The so-called core CPI inflation measure, which excludes food and energy and is viewed as a better gauge of underlying price pressures, remained unchanged in July at 5.9 percent in annual terms, and up 0.3 percent in monthly terms, according to BLS data.

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