What Do The Independent Inflation Gauges Say?

Whenever the BLS posts their monthly CPI there’s always the same response from critics that the index is flawed.  That’s fine.  I think a healthy dose of skepticism regarding government data is perfectly good.  So let’s take a look at some independent gauges to see where prices are.

According to MIT’s Billion Prices Project inflation is running about 1.7% almost perfectly in-line with the BLS:

The ECRI’s Future Inflation Gauge is showing prices at a bit higher level.  The index was up to 104 from 98.9 last December.  That’s a 5.2% increase.  Not exactly in-line with the BLS data.

The Orcam Housing Adjusted Price Index was at 2.84% on the month.  That’s a bit higher than the BLS data, but not far off.

 Meanwhile, hourly earnings are near their lows at just 1.7%:

The ISM Manufacturing Survey showed a faster rise in prices to a level of 55.5 from 52.5.  But it’s important to note that this is a diffusion index so prices are relatively benign when kept in perspective.   

What about food prices?  According to the GAO food prices are actually deflating year over year at a rate of -0.7%.

What about global inflation?  They’re almost universally in a disinflation:


Even ShadowStats, who has been wrong about hyperinflation for 5 years running, is registering their ShadowStats Alternate index at just above 5%.  And that’s certain to be on the high end of the inflation readings which means, even in the worst case scenario, inflation is about 1.5% above its historical average.

I think it’s healthy to remain skeptical of the BLS data.  Their readings are definitely on the low end of the spectrum presented here.  But I think it’s also clear that they’re probably not far off from the true rates of inflation as most of these readings average out to something resembling the Orcam Housing Adjusted Price Index more than anything else.  All in all, the price data is fairly benign.  Certainly nothing worth panicking over.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. What you fail to mention, and it’s important, is the list of items/goods that the BLS either doesn’t even bother to take into account in tabulating its official inflation data, or that it tabulates in a very skewed & even tortured manner, using things such as the infamous Hedonic Quality Adjustment to CPI manipulation.

    Some of these things are that are treated in such a manner are things purchased on a daily or near-daily basis, and are quite inflexible as they are essential for modern living (e.g. energy, certain commodities, etc.), while others may not be purchased every day, but are also quite important and necessary (e.g. medical care).

    I know of few intelligent people who do NOT believe that the BLS massively understates the true rate of inflation by either excluding such things that I mentioned (the usual excuse given is that these things are “too volatile” to track and tabulate prices upon on a constant basis), or by torturing the tabulation of such things (i.e. Hedonic Quality Adjustment).

    What we have is inflation data that is a sham, as it excludes some goods/items from tabulation completely, manipulates price reporting of other goods via substitution dilution, and weighs the change in price of things that MAY be purchased once a year or even decade (i.e. a television of a vehicle) much more substantively than things that MUST be purchased on a daily or weekly basis (again, things such as commodities, which influence food prices, or oil, which influences gasoline prices as well as much more).

      • Actually, am I wrong in saying that you repeatedly implied (at least implied) that the BLS data on inflation is relatively close to real world inflation?

        • Do you think that the BLS is way off? I mean, even if you use the ShadowStats data the BLS isn’t exactly miles off. And the ShadowStats data is almost certainly wrong given the fact that this methodology has been leading to endless hyperinflation predictions for 5+ years….Personally, I am biased towards my own index at 2.84%….

          • Yes, I genuinely believe that the BLS methodology dramatically understates the true rate of inflation for the reasons I mentioned above, in addition to other factors that I didn’t mention (for the sake of brevity).

            Consider the consequences should the BLS understate the true rate of inflation by 0.5% annually, consistently, given the prominent role BLS inflation data is given and considering the fact that it is a benchmark that is targeted to do things such as formulate monetary policy.

            A “mere” 0.5% understatement of inflation annually will cause a “compounding” effect, and skew many things in massive fashion in just a few years.

            Your own estimation for the true rate of inflation, at least currently, represents a wider deviation from the official BLS inflation data than the 0.5% I speak of (and I’d argue and do argue that the actual deviation is even greater).

              • I’ve read their enumerated list justifying their methodology, but appreciate that cite/link as a refresher.

                For the record, I think that the rate of inflation that you’ve approximated is leagues better than that which the BLS claims is accurate.

                For those who believe I’m closer to truth than not in stating that the BLS is dramatically understating the true rate of inflation via the use of a deeply flawed methodology for tabulating it, there’s a fair chance that the understatement will get far more severe if the “chained link” inflation methodology is adopted by the BLS, as many at the Federal Reserve, the BLS, and apparently, in Congress as well, are trying to implement.

                • I don’t think your skepticism is unfair or unwarranted. I appreciate a balanced view of things. I don’t think inflation is currently as high as some might have us believe, but I am also open to suggestions that it’s not as low as the BLS claims (as my own index would clearly show).

  2. Hi Cullen, just a couple things I’m wondering about…

    After a quick glance on the MIT project, the site says it covers 100% of the CPI (I’m not sure how much more it covers beyond that). It appears the main advantage of the MIT project is to see CPI-based inflation numbers on a daily basis, instead of monthly from the BLS. Is using the MIT number even a noteworthy in a discussion of true inflation rates against the CPI?

    Second, thank you for including the ShadowStats Alternative number of more than 5%. I think it is important to also include their 1980-basis inflation number, which looks to be around 9%.

    I think you see the comments on inflation numbers because the methodology in calculating inflation has changed over the decades.

    • I don’t agree with the BLS data. That’s why I use the housing adjusted price index which I calculate. I am not an apologist for the BLS and anyone reviewing the OHAPI can see that it’s been MUCH higher than the BLS data in the past. But it’s presently pretty benign. I don’t see the big fuss over inflation at present.

    • Shadowstats inflation data is pure fiction. Consider that one of their arguments for why CPI was massively understated in the early 2000′s was that it uses Owners Equivalent Rent instead of home prices. But then when home prices crashed and OER remained pretty stable, according to Shadowstats, CPI should have been massively overstating inflation. But guess what? Shadowstats STILL claimed that CPI was understated by just as much as it had been in prior years. Their data is completely bogus. Here are the charts that show this nonsense (http://www.shadowstats.com/alternate_data/inflation-charts). Note how the first chart with the alternative calculation pretty much just equals CPI + about 3% every year. There is no actual work being done to get those numbers; they are just made up.

      What one should see when replacing OER with home prices is exactly what Cullen’s third chart shows. That is the difference between an analyst who is interested in the truth (Cullen) and an ideological con man who will tell you the same story no matter what the facts (Shadowstats).

  3. So, we have contained inflation, record low interest rates and a trillion $ a year federal spending “stimulus.” What is keeping jobs (and new businesses) from being created?

    • So if you look at measures like capital investment, that seems to be one of the primary sources of slack. I suspect that speaks to a lack of confidence in AD over time. So, at some point, deficit created demand gets wiped out, households are re-leveraging but how far can that take us and then there’s the demographics issue. So, the 10 year outlook isn’t great, part of the reason we had this recession was the build up of excess capacity. We also continue to run outsized current account deficits (though better than 06, 07) – and as a general rule poor current account form tends to go hand in hand with poor employment (since you’re exhanging goods for labor). Buoyancy has a funny way of altering reality – so the big question now is whether we’re at that point.

    • what would drive job growth right now? Late 90′s…internet / telecom. 2000-2005…housing. 2013…??? Unless somebody invents a new industry, that can’t be off-shored or done by robots, I don’t see where the growth is coming from. You can print all the money you want but with no demand it’s pointless.

      Maybe the boomers will finally retire and demographics will sort this all out.

  4. One year stat is hard to judge on, but over a 10 year span, it’s easy to see who’s right. Regardless what inflation U.S. has, anyone who travels frequently to China can tell you that inflation in China was at least double (possible triple) of U.S. over the last 10 years. The price of breakfast Dim Sum has been up 300%, housing up 400%, nanny/general service cost up 400%, medical cost up 300% over the last 10 years in China. If U.S. has been running 6-8% annual inflation, China must at least has 20% inflation. This means that China’s economy has been running -5% annually for the last 10 years. If you use Japan as a mirror, compare food, gas, medical cost with U.S. over the 10 year span, you’ll get the same conclusion.

    • What you’re failing to mention is that wages in China over the same 10-year period that you’re referencing are “up” 10x, or stated alternatively, 1000%.

    • Not necessarily. Joe will reduce his prices to sell more widgets, but at a certain point, he would stop building widgets rather than sell them at a loss.
      On the other hand, some businesses seem to be able to raise their prices constantly — health care, perhaps because we a) can’t do without it, and b) it is subsidized; or something like cable TV, maybe because people are giving up other parts of their entertainment budget to spend more at home.

    • Yeah, I’m sure all the gold bugs and central banks purchasing gold and repatriating gold in record numbers care about the printed inflation rate. ;)

  5. Yeah, I think that’s a lot of it! Things in the world are hard to understand and scary, and then you see that guy on the soap-box affirming your anxiety, and fanning the flames, telling you everything is going to hell, that the politicians have no idea or are in on it… the bankers, everything is a big scam, or else we’re steering into the flames out of ignorance, greed, and stupidity… when suddenly he holds up that gold coin… it’s so simple, so pure! Of course, that’s what REAL money is… what it’s always been. It has great appeal, so you buy into it… and then it get WAY tougher to change you mind… you desperately look for evidence that you were right to do what you did w/ your gold purchase.

  6. Cullen,

    This debate will NEVER be resolved, because there is not a single person in the country who experiences the inflation as the BLS, Shadowstats, you, or anyone else calculates it.

    I’ve requested before and will again now, please break out inflation stats using generic life style categories. It would be easy, and far more realistic than anything currently used, and people would readily be able to see what their personal inflation experience by identifying with the appropriate demographic group. For starters…..

    1. College age; include inflation for school costs, rent, food, energy, clothing, health care, tech gadgets.

    2. Post college, still single; drop education and add transportation and insurance.

    3. Married, no kids, still renting; no change.

    4. Married with kids and own home; add back education, replace rent cost with home cost.

    5. Married, kids grown; remove education.

    6. Retired, home paid for; remove home cost.

    7. Retired in assisted living; add assisted living cost.

    Every cost category is easy to calculate when looked at individually. Then its a matter of adding the appropriate cost components. It would also be easy to weight the inflation(s) based on the percent of income(or total expense?) each group spends on each component.

    My cynical view is that our official agencies will never provide accurate data that we each personally experience because of the backlash it would cause. They are politically motivated to keep the details as obscure and confusing as possible. krb

    • … if we’re all always buying everything electronically, then why can’t we have an app behind the scenes that keeps track of our own personal rate of inflation?

      • The bank should offer that service. Maybe they already do and I just wasn’t paying attention!

          • Great, thanks! I’ll check that out. Do you use it? Do you like it? Are you sure it’s not just a front for a gang of Belorussian Hackers, who will use all that info to clean you out some day? Ha!

    • Then for a national consumer inflation rate, we just average everybody’s personal rates together (assuming we’d all be willing to share all of our personal data! Ha!)

    • What matters for the political economy is the real inflation adjusted for changes in income for each major group of voters in each state. In other words – true purchasing power. For instance, groups spending all their income on necessities, regular purchases, and credit card interest will experience a different inflation than groups that have enough income for luxuries.

  7. Intentionally or unintentionally by BLS, but I am losing money because of this, since I hold plenty of I-bonds & TIPS.
    Even under-reporting inflation by some small number, like lets say 0.3%, allows government to pay me much less on its obligations.

    • See my comment above.

      “Consider the consequences should the BLS understate the true rate of inflation by 0.5% annually, consistently, given the prominent role BLS inflation data is given and considering the fact that it is a benchmark that is targeted to do things such as formulate monetary policy.

      A “mere” 0.5% understatement of inflation annually will cause a “compounding” effect, and skew many things in massive fashion in just a few years.”

  8. Cullen – Thank you. This is why PragCap is my first click through every day: a variety of data – including the OHAPI [which I have liked since before it was even called that (econo-hipster?)] with pretty objective commentary on a timely topic.

  9. Cullem, I’m seriously disappointed and way more that every single one of my posts about CPI were deleted.

    I didn’t even post about the major shortcomings in BPP.

    And only one was about my CPPI.