CPI can be manipulated to leave out individual Inflation components

CPI can be manipulated to leave out individual Inflation components

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No.3xx).

#CPI, #inflation, #fiat money, #taxation by stealth, #indexation, #cost of living

Figure 1: Fiat money are paid to government employees. All citizens have to pay their taxes with that fiat money.

Inflation is vicious to the citizens who have to accept fiat currency from their ruling government. It is half terrible as having to use money with some use-by dates. Only governments like inflation. Inflation is often associated with the rise in CPI but the association may not be true.

1. Inflation.

It is convenient to begin the discussion with my previous posting entitled Your Fiat Money, part 2 (reference [1]).

Inflation is the steady loss of exchange value of a fiat money with time. Inflation of fiat money is caused by loss of its (government dictated) demands. When the government stop demanding payments of taxes, government fees, government charges with its fiat money the fiat money loses its value in the population. Real money like gold has no inflation.

For example, a load of bread is sold for 1 unit of fiat money. Ten years later it may be sold for 2 units of that fiat money, and twenty years later it may be sold for 4 units of that fiat money.

We say that there is an inflation. The fiat money steadily loses a percentage of its value every year. In this example it loses 7% every year. This 7% is found out from

(1+x)^(10)=2, x=0.07177= 7.1%

Inflation can only be estimated when looking backward. Even then it cannot be accurately determined as the past goods and the present goods can never be truly compared. Nevertherless people try to assign a figure on inflation based on the purchase prices using fiat money as if that fiat money has been compared against a hypothetical real money (made of gold, silver, food grains…).

2. Measurements of past inflation

Past price rises for each type of goods are easy to obtain and tabulate but overall price rises due to the loss of purchasing power of a fiat money is not easy to estimate as relative prices of different types of goods drift over time and their various price rises spread over a wide range. Fast rises and slow rises can be attributed to a variety of causes. It is hard to pinpoint how much of each rise is due to inflation alone and how much is due to other causes.

Past inflation may be estimated by looking at the required amounts of fiat money to obtain “the same” purchasing power of “the same” basket of goods, services, living conditions after a time duration.

If the yearly figures of inflation are x1, x2, .., x10, … then the compound inflation for 10 consecutive years would be

(1+x1)× (1+x2)× (1+x3)× (1+x4)× (1+x5)× (1+x6)× (1+x7)× (1+x8)× (1+x9)× (1+x10).

Compound Inflation ís not equal to the sum of yearly inflation.

Tax payers can use compound inflation over a long period to check the accuracy and honesty of the figures of inflation published by their governments. They can compare the purchasing values of their fiat money over that long period of time.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available (https://www.bls.gov/cpi/).

Sometimes prople just look at the rise of Consumer Price Index as an indication of inflation. However the switching from one type of items to another type of replacement items (even when only due to their availability) do introduce inaccuracy. That happens when some goods evolve over a long period, so that we have to compare the price of vastly different qualities of the same goods. For example, a house built fifty years ago cannot be accurately compared against a current house in terms of safety, comforts, satisfaction of ownership; or a car built fifty years ago cannot be accurately compared against a current car in terms of safety, comforts and performance. Similarly a loaf of bread sold fifty years ago also cannot be compared against a current loaf of bread in terms of taste, packaging, sanitation standards.

3. Inflation and CPI may NOT track each other.

There is another type of inaccuracy caused by the switching of the selection of replacement goods in the components of CPI.

Example:
The prices of log houses were tracked for some years then the prices of timber houses were tracked and phased in to replace the former type of log houses, then the prices of brick houses were tracked and phased in to replace the type of timber houses.

Suppose that the prices of each of those types of house all stay stationary then the CPI figures involving each period are gradually phased in, joined together to produce the figure for the whole period. The CPI stay the same for the whole period.

As the price of log houses has been phased out, its increase may become undiscoverable even if it had gone ballistic. Then log houses can come back AS A NEW TYPE OF PRODUCTS REPLACING THE OLD ONES at a steady price of say ten times the last price they were tracked for CPI. Now suppose that people start using log houses again, the new price (at ten times the old price) of log houses get phased back in and the CPI still can stay constant.

4. What kinds of spending should be included in the Consumer Price Index

(See https://en.m.wikipedia.org/wiki/Consumer_price_index.)

The inclusion should allows the index to mirror the spending of an “average” person.

However, new questions arise: What does that average person own?
What does that average person earn a year? What job does that average person do? Where does that average person live? What does that average person eat? What does that average person wear?

So the Consuner Price Index may be biased in one way or the other.

It is noted that the rise in Consuner Price Index may not follow inflation if the population increases its standard of living over time.

5. Why a government always want to have a low, false inflation figure (that is low rise in CPI).

A fiat money that is rapidly losing value through inflation will not be kept, hoarded by any user for longer than the duration of necessary transaction. That money will be forced spent at any earliest opportunity.

This makes the fiat money unacceptable for foreign trading outside the country.

Inside a country its high inflation or hyperinflation may make its economy SEIZE or self adapt to be ALMOST FREE from the fiat money (using bartering or using “real money” or privately issued credit notes). The government is then forced to control economic productions by decrees with tyranical policing (decreeing the prices of essential goods and publicly executing “economic criminals”).

So for its good public relations, a government always try to keep the inflation figure of its fiat money at some low figure acceptable to its citizens.

CPI can be obtained from governments’ websites. For examples:

Consumer Price Index, USA,
https://www.bls.gov/cpi/tables/home.htm

Consumer Price Index, Australia, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia

Some web site such as
https://inflationdata.com/Inflation/Consumer_Price_Index/CurrentCPI.asp
gives easy comparison of CPI over long periods of time.

6. Method to keep CPI constant while prices go up.

The method is to withdraw a line of products, use another line of substitution products, then reintroduce the products as A NEW LINE OF PRODUCTS SUBSTITUTING the previous substitutions.

For example to remove the effect of price increase in milk, a government may ask milk producers to withdraw full cream milk for a while, transfering the component of milk price to skim milk which are left at constant price. After a while, full cream milk is then reintroduced as a new line of products at ten times its previous price. The component of milk is then gradually transfered back to full cream milk. Now skim milk is then withdrawn from the market and later on reintroduced into the market.

In this way CPI can stay constant even when full cream milk and skim milk takes turn to increase their prices by ten times each.

So the claims that Inflation is reflected in CPI’s supplied by governments should be read with skepticism. Unfortunately, the statement has been told often enough and for long enough so that a number of tax payers have started to believe in it without questioning. (A lie told once remains a lie but a lie told a thousand times becomes the truth, by J. Goebbels [9].)

Significant components for Australia are listed below and it is easy for Australian government to intentionally overlook or over-emphasize some particular components to bias the inflation figures:

Fresh Foods (exempted from GST),
Ready Foods (with applicable GST),
Clothing (including GST),
Consumable (including GST),
Residential rents (exempted from GST),
Housing loan interests,
Medical expenses and Health Insurances,
Schooling fees,
Cars and Transportation costs (including GST).
Communication, phones, computers, network costs (including GST).
Short term loan interests,
Fees on Financial Service (banking fees, superannuation custodian fees, superannuation compliance fees, superannuation consultant fees)
Brokers, Investment consultant fees,
Capital Gain Taxes on selling investments or major items.
Other government taxes, fees and fines.

Suspicion should be raised if large, significant components are omitted for any particular consumer spending pattern. Indeed in around 1986, Australian CPI included the non-inflationary computer prices (of 286, XT models of PC). This kept the CPI low for that year but the age-pensions paid to old people was pegged to that CPI and pensioners suffered.

7. Calculating your own inflation index

As government supplied CPI’s are unreliable and designed to be biased, tax payers need to check government supplied CPI’s against their own indices. This is done by following the price of the same items of major spending over years such as housing costs, food prices and gold price (stored values for later use).

Inflation indices will roughly follow the price increase of housing, food and gold.

Vietnamese standardized gold slabs for trading

Figure: Vietnamese standardized gold slabs for trading.

References:

[1]. Your fiat money (Part 2), posted January 12, 2017.

[2]. Your fiat money, posted January 9, 2017.

[3]. Why does the Federal Reserve aim for 2 percent inflation over time?, Board of Governors of the Federal Reserve System,https://www.federalreserve.gov/faqs/economy_14400.htm, updated January 26, 2015, accessed 03 Mar 2017.
[4]. Neha Sharma and Shalu Yadav, The Indian village that has returned to bartering, BBC News Services,http://www.bbc.com/news/world-asia-india-38180075, 5 December 2016.

[5]. Patrick Bodenham, Will Spain’s coal belt survive through online barter?, BBC News Services,http://www.bbc.com/news/world-europe-38731808, 2 February 2017.

[6]. James Melik, Haggling and bartering gain appeal, BBC News Services,http://news.bbc.co.uk/2/hi/business/7883050.stm, 12 February 2009.

[7]. Mark Lowen, Greece bartering system popular in Volos, BBC News Services,http://www.bbc.com/news/world-europe-17680904, 12 April 2012.

[8]. Dallas police fire pension board ends run, bank stops 154m withdrawals. http://www.dallasnews.com/news/dallas-city-hall/2016/12/08/dallas-police-fire-pension-board-ends-run-bank-stops-154m-withdrawals
[9]. Joseph Goebbels quotes, azquotes.com, http://www.azquotes.com/author/5626-Joseph_Goebbels.
[10]. https://www.moneymetals.com/news/2017/05/04/higher-inflation-consumer-prices-001061, (added on 10 May 2017).
[11]. http://www.zerohedge.com/news/2017-05-13/arizona-passes-bill-end-income-taxation-gold-and-silver
References added after 2017 November:
[12]. http://www.gold-eagle.com/article/deepening-crisis-hyper-inflationary-venezuela-and-zimbabwe
[13]. https://us-issues.com/2017/11/21/social-security-inflation-lag-calendar-partial-indexing/

[14]. http://www.silver-phoenix500.com/article/fed%E2%80%99s-%E2%80%9Cfrankenstein%E2%80%9D-policies-are-about-turn-their-master

[15]. https://mises.org/wire/dollar-dilemma-where-here

[16]. https://straightlinelogic.com/2018/08/04/how-inflation-destroys-civilization-by-nick-giambruno/

Added after 2018 Aug 15th:

[17]. https://www.silver-phoenix500.com/article/anatomy-hyperinflation

[18]. https://us-issues.com/2018/08/19/anatomy-of-hyperinflation/

[19]. https://akahinews.com/2018/07/29/venezuelas-bolivar-currency-worthless-as-inflation-hits-1-million-percent/

[20]. https://dailyarchives.org/index.php/history/1046-ben-bernanke-says-hitler-was-the-guy-who-got-economics-right-in-the-1930s

[21]. https://yapaholic.com/2018/08/19/us-national-debt-heres-what-you-need-to-know/

[22]. https://www.caseyresearch.com/how-inflation-destroys-civilization/

[23]. How Venezuela’s crisis developed and drove out millions of people, https://www.bbc.com/news/world-latin-america-36319877

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