yellen statisticsA week or so ago, the Chair of the Federal Reserve, Janet Yellen, gave her bi-annual address to Congress on the state of the economic union. In it, she mentions several statistics the Fed is watching closely, unemployment and inflation in particular.

However, there are many scoffers who question the validity of those numbers. Investopedia, one of the more respected sites, has a particularly harsh view of almost all government statistics.

Who Publishes Those Statistics?

As it happens, both unemployment and inflation statistics are compiled and published by the Federal government’s Bureau of Labor Statistics, an agency of the Department of Labor. That, the critics say, is the problem: politicians cook the books to make us feel good and them look good… so they can be re-elected.

Is that true, though? Is your government “cooking the books?” Let’s take a look at one of the most quoted, and disputed, sets of statistics people look at: the Consumer Price Index, or CPI.

The goal of the Consumer Price Index is to get an idea of whether inflation went up or down. That information matters to most of us, for many reasons, so we want to know. Critics of the CPI seem to feel the inflation number in understated, pointing to some item which has gone up way more than the 1.6% the Fed quoted last week. “Why, the price of steak at Safeway went up 20% just last week — how can they say inflation only went up by only 1.6%?”

Indeed, how can they? Without using the NSA, how can any government know how much you paid for your steak this month? Not just you, but the other 310 million people in America? How do they calculate the price of steak if you had a coupon for 20% off, and the person behind paid full price? And what if steak was on special this week? Is that inflation going down, or something they should ignore? And what if you see the price in Safeway went up and you decided to switch to Costco and ended up paying less? Is that now deflation? How does a government tally all this information up — assuming they even can get their hands on that many billions of transactions?

Can we just admit that it’s impossible for anybody to accurately measure each and every transaction everyone makes? And that it’s also impossible to determine an accurate way of dismissing non-recurring things like discounts, coupons, and other irregularities in prices?

The fact that 100.0% accuracy is impossible doesn’t mean you can’t “get an idea” by monitoring some transactions. As long as we understand that all government statistics are approximations and estimates, we can put them to good use.

How You Feel Statistics

Should the price of steak even matter? If the government ignores it, because it’s such a small fraction of total spending, critics complain that they’re selective and arbitrary in what they put in. So they put it in, but then they get lambasted for understating its impact.

Let’s look at some numbers to see how this plays out. If you earn and spend $40,000 (after taxes) a year, how much of that do you spend on steak? $200 maybe? If that. Well, that’s only half a percent of your total expenses. If the price of steak went up by a whopping 20 percent in a single month, it may feel quite dramatic to you, but it will add only 0.1% to your overall inflation. Simple math.

It’s a known trait of the human brain to exaggerate a point of pain and to tune out things that don’t change.

Nowhere is this as evident in the national accounts as when people evaluate the CPI. Your rent of $1,500 per month didn’t change this month, so you ignore it. The price of beef, though, hit you in the eye and you grumbled all the way back home, because you invited your friends over and you promised to throw a few burgers on the grill, and now you’re stuck with a higher bill than you expected. If a pollster stopped you at the front door and asked you if you believe inflation was going up more than 1.6%, you’d say, “Heck, yeah!” And give him an earful.

Let’s take gas prices. Say the price of gas went up 10%. Your monthly gas expense might go from, say, $80 to $88. Annualized, your inflation is $8 x 12 = $96, which comes to 0.2% of your annual expenses.

So… 10% inflation on one item (even a significant one) doesn’t mean you suffer inflation of 10%, even though it may feel like that to you.

The Basket

So, you’re the government and your citizens want to know by how much prices went up or down. How do you measure that? Bharat is a vegetarian, and I love a good ribeye. So, when the steak price jumps for half the population, but leaves the more sensible half unaffected, how should the BLS calculate inflation statistics?

Most governments solve this dilemma by picking a “basket” of representative purchases. It’s like those mythical 2.3 children: nobody actually has that many children, but that’s what the average comes out to. Same with the “basket.” (They’re very transparent about all of this, by the way.)

A while ago the BLS started fiddling with the basket, taking out some things and adding some new things. The critics went ballistic (and they still haven’t calmed down).

But what is the government supposed to do? Do you still buy film? No. But film was in the basket for decades. So, should the government just bury their head in the sand, or face the wrath of the critics for daring to make a change? Times change, and the basket has to change, because the things people buy change, too. Remember record players? Should they remain in the basket? What about cell phones? The amount you spend went from $40 for that old “dumb” phone to over $600, the price of an iPhone, even though you never pay that overtly. Should they factor that in? How?

This brings us to the “hedonic” thing. You point at the price of that $1,500 big screen TV set you see at Best Buy. Wow, TV’s have gotten expensive. But have they? The BLS says that’s not inflation: “The cost of televisions didn’t go up, it’s just you upgrading your 17 inch tube TV to a 40 inch HD flatscreen.” Is that inflation? You know it’s not — it’s you upgrading your lifestyle. So the BLS tries its best to adjust the upgrades people give themselves out of the inflation number.

Take housing. Sixty years ago, people lined up around the block to buy Levittown houses. They were so hot, the builder made the cover of Time magazine. Well, a Levittown house was just over 900 square feet and had one bathroom, no basement and no garage. That was normal housing, desirable housing even. Today people buy 4,000 sq. ft. McMansions for $400,000. Is that inflation? Or an upgrade we buy ourselves?

Let’s say that you joined the mighty throng of cord cutters and decided you’re no longer going to get cable. You just saved more than $50 per month. Now, did your inflation go down for that month? Or, what if people switch from gas-guzzling Suburbans to Priuses? Did the price of cars go down? No, but people are spending less on cars… and on gas, tires and other related expenses. How should the government keep track of all of that?

Certain things affect some groups more than others. Let’s say Kimberly-Clark decides their executives aren’t making enough millions already, so they raise the prices of Huggies and Depends. Young parents are retired folk howl in pain, while people in their forties are blissfully unaware… and unaffected. Now, was that an inflationary event? If so, by, how much? Whatever number the BLS computes, you can guarantee the AARP and the mommy bloggers will have a mouthful to say about government fudging the numbers when the full cost of the Depends/Huggies hike is not included.


Can you see how difficult it is for anybody to arrive at a number that reflects the “real” pain people feel? It’s not difficult; it’s impossible, especially when people keep changing what they’re doing. Just like that 2.3 children statistic, you know the inflation number the government provides won’t match the reality of any individual or family.

Given the complexity of the numbers, and the speed at which they change, the best anyone can hope for is “a feel,” and transparency by those defining the numbers.

We have that.

So, next time you hear someone blasting those boffins for “cooking the books,” stop and ask yourself: can they do a better job? More tellingly, will Heather down the road agree with the number they come up with? Much better to focus on what you can do in the face of an economic landscape that changes every day.

There’s no fudging the savings Grant and his team can get you on auto and home insurance. To find out, just pick up the phone and give them a call. Go on, get some deflation in your life!



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