Q&A of the Day – Inflation Then vs. Now – Is the Rate Being Manipulated?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
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iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Today’s entry: Submitted via talkback regarding the change in inflation calculations overtime.
Bottom Line: You’re right, the methodology over calculating the inflation rate, via the CPI, or Consumer Price Index just isn’t what it used to be. As we’ve seen the overall inflation rate touch 41-year highs this year, having peaked nationally in June at 9.1%, but actually still peaking in South Florida last month with a fresh 41-year high of 10.7% - one of the questions by many has been...in reality could it be even considerably worse? What’s more, some have wondered if the current methodology is something that’s potentially conspiratorial (theoretically protecting President Biden and Democrats with an artificially suppressed rate in an election year). As always there are two sides to stories and one side to facts. Let’s break down the facts.
- The last time the consumer inflation rate was as high as it is today, the calculations used were different
- Two major changes in methodology have taken place
- The two major changes focused on the cost of housing and a change in the basket of everyday consumer goods used to calculate inflation
At this point if you have specific suspicions about inflation manipulation you might feel as though your concerns are being realized. But, as is often the case, there’s much more to the inflation calculation story. First let’s dive into what changed starting with housing.
The original housing inflation calculation used current housing prices, as in the cost to purchase a home today. The current methodology instead measures the cost to rent a home. The change was driven by one primary factor. Owning one’s home is an investment, thus as prices appreciate there’s benefit to homeowners as opposed to depreciating assets that work as an expense. Additionally, most homeowners aren’t especially impacted by the rate of housing inflation due to fixed rate mortgages or outright owning their homes. Using the current cost of rent for average homes reflects a net expense increase for properties which is believed to more accurately reflecting of the impact of inflation on consumers over time. Next, up the changes to the basket of consumer goods.
The original goods calculation used a static basket of staples. Those staples included the most commonly purchased items which included items like toiletries and cleaners along with groceries that included eggs and milk. Now, you probably have noticed consumer purchasing habits, perhaps even yours have changed over time. That includes far fewer households purchasing items like eggs and milk on a regular basis. Additionally, it was realized that Americans’ habits tend to shift based upon cost factors. For example, when inflation is low, and the economy is strong, Americans tend to purchase more name brand goods. When inflation is higher, and budgets are stretched, we tend to purchase more generic brands. These factors were taken into account as well. Instead, a system was created where every two years the most commonly purchased consumer goods are added to the basket which determines this piece of the inflation component.
Now that we’ve discussed the changes, if you’d like to take exception with the methodology, you’re welcome to. But actually, whether the methodology potentially has holes in it or not is secondary to the crux of today’s question as to whether something potentially nefarious has happened to artificially reduce the consumer inflation rate. The answer in short is no. Not at all. How can I be so certain?
The change in the housing inflation measurement was changed in 1983, in the immediate aftermath of the US inflation crisis of the late 70’s and early 80’s. The government economists responsible for calculating inflation went to work in determining whether they could improve upon the reporting system as it was critical to public policy decisions. The housing piece they determined artificially inflated the rate of inflation by up to 2%. Notably, this was during the Reagan administration, and these were Reagan economists. As for the consumer goods recalculation. That began twenty years ago during George W. Bush’s administration and was set to be reevaluated/updated with current consumer trends every two years. So, here’s the broader point...
The existing models have been used for 39 and twenty years respectively. The changes took place during Republican administrations. If anyone had serious objections to these calculations, they could have and should have been raised many moons ago. It wrecks of little more than political expediency for those who’ve attempted to use this line of thinking to cast a doubt over the current calculations. While I have very strong opinions politically, they’re based on the facts. I believe it's important that we establish those and go where they take us. The manipulation that’s taken place has been with the attempt to spin this into a narrative as opposed to the numbers themselves. Though yes, obviously it’s accurate that the calculations today are different than the last time inflation was this high, and yes if the prior methods were used reported inflation would potentially be up to about 2% higher.