True Inflation Exceeds 7%

Inflation statistics given by the U.S. government show that the inflation rate is below 2%, but widely available data indicate otherwise.

U.S. inflation rate

If the economy were currently as strong as it was in 1985, the median worker would be making $120k per year (not $56k). A Stanford MBA graduate today earns roughly what the average Joe made 31 years ago. The difference is that the average Joe of 1985 didn’t spend $434,000 getting his job.

Government bureaucrats have their numbers, and suspicious minds have wildly different ones. Economists undoubtedly have explanations for the reported numbers. The velocity of money is lower, banks needed liquidity after the Great Recession, and quantitative easing was an important economic stimulus. All of these sound like reasonable explanations for driving inflation up, but none of these concepts rationalize decades of misrepresented statistics. Are economists having trouble going against the grain, or is there a deeper reason why inflation isn’t portrayed accurately?

Indeed there is a reason for the inaccuracy. Numerous government programs are tied to inflation. Allowing official inflation statistics to rise with actual inflation would raise government spending, and the cycle of printing money to cover spending would be self-defeating.

The CPI is tied to the incomes of about 80 million Americans, specifically: Social Security beneficiaries, food stamp recipients, military and federal Civil Service retirees and survivors, and children on school lunch programs. The higher the CPI, the more money the government needs to spend on these income payments to keep pace with the cost of living. ~ Perianne Boring

The government suppresses inflation statistics, not actual inflation, in an attempt to deal with a $20 trillion debt problem. Two years ago, Perianne Boring investigated the Bureau of Labor Statistics to see how exactly they calculate their consumer price index, which is used to gauge inflation.

The government has a few resources at its disposal to manipulate the CPI. First, the Bureau of Labor Statistics operates under a veil of secrecy. The raw data used to calculate the CPI is not available to the public. When I asked why, I was told “so companies can’t compare prices.” This makes very little sense because companies can easily compare prices with data openly available on the internet. It also makes it impossible to audit their findings. Additionally, over the past 30 years, the government has changed the way it calculates inflation more than 20 times. These ‘methodological improvements’ to the CPI are said to give a more accurate measure of consumer prices. However, these changes could also be a convenient way to include or exclude certain products that give favorably low results. ~ Perianne Boring

Despite years of misinformation, the American people haven’t been fooled. We have seen the reports of rising rent, rising healthcare costs, water shortages, and other expenses creeping up. The numbers don’t add up. How can inflation be so low while the prices of fundamental necessities keep rising? Alternative sources of inflationary data provide valuable insights.

Inflation in America’s largest cities courtesy of the Chapwood Index.

The Chapwood Index uses its own basket of goods to determine price increases across various metropolitan areas. “It exposes why middle-class Americans — salaried workers who are given routine pay hikes and retirees who depend on annual increases in their corporate pension and Social Security payments — can’t maintain their standard of living.” The index tracks prices changes for 500 goods used by many Americans. San Jose, CA had the highest 5-year average inflation at 13.2%. San Francisco, CA wasn’t far behind with 12.9% inflation. Out of the 50 cities tracked, not a single one had 5-year inflation below 7%.

The U.S. M2 money supply reached $13.1 trillion in October 2016.

The quantity of currency in circulation has a direct impact on prices of consumer goods. With relatively clear exponential growth, the M2 money supply provides a solid data source to determine annualized increases in currency, which ultimately contribute to higher prices. From 1975 to 2016, the M2 money supply increased from $998B to $13,140B, representing an average increase of 6.5% per year. Interestingly, M2’s rise is significantly larger than the 3.7% average annual inflation reported by the BLS over the same time period. The increase in M1 money is even more unsettling, averaging 8.2% over the last 20 years.

Part of the discrepancy may be due to a lack of methodological adjustment to modern lifestyles. People rent housing today much more often than they buy homes. Average rent has risen drastically. Degree inflation has led to an increasing level of costly post-secondary education required to get a middle-income job. Inadequate consideration has been given to the rising prices of organic foods, which were once commonplace and are now considered luxury foods. Back in the old days, organic food was simply called food. Furthermore, healthcare costs have risen dramatically, costing people more for less. In 1975, an average of $605 per person was spent on healthcare. In 2015, that amount grew to $9,990 per person, representing a 7.3% annual increase.

According to the fairy tale forged by federal statistics, inflation is right where it should be, and the economy has struggled on occasion, but overall it has continued to grow larger and stronger along with real GDP per capita. Federal Reserve economists often take credit for these “successes” and argue that policies like quantitative easing boosted economic growth, but they haven’t mentioned that the growth is outpaced by increases in the cost of living.

Real U.S. GDP per person has declined. Calculated using modest 6.5% inflation.

The true picture has been radically different. Through capital gains and capital income, only the uppermost elite have been able to quietly take advantage of the massive infusions of new currency. The Federal Reserve has been printing money at the overwhelming expense of ordinary Americans for years. Revising inflation statistics will not fix the underlying problems, but it will take off the veil of uncertainty about our country’s direction.

Humans, as exceptional as we are, are subject to the same ecological limitations as every other living organism on Earth. The first step to fixing the U.S. economy is recognizing that there has been a structural problem brewing for decades. The next step is embracing real solutions. When armed with knowledge, people have the power to make great change.