Update: Problems with Main US Inflation Accounting

Problems Found in US Inflation Accounting Contact: Dan Spillane DanSLegal at aol.com Citizens for Corporate Accountability 410 Denny Way #229 Seattle, WA 98122 [phone]

(Update 7, 01/15/04, clarifies comments.)

(SEATTLE) 01/06/04 - In a troubling sign that accounting problems have grown beyond corporate balance sheets, two of the main economic gauges used by Wall Street, banks, and in the calculation of Social Security payments have been found to contain serious problems. Also, a major "circular" cycle has been found within one of the gauges, which could have dire repercussions.

The problems were identified in the Consumer Price Index CPI, and Producer Price Index PPI, by examining contents of tables provided by the US Bureau of Labor Statistics(BLS), and comparing weightings for the most recent years against each other, and against independent statistics.

According to official BLS tables, in the energy category, several changes were put in to reduce energy cost weightings in the indices recently, including one which reduces importance of “housing fuels and utilities”in the overall CPI index by a whopping ten percent(1), and another which pushes winter energy cost calculations into summer(2). Also, in the housing category, the weighting of “hotels and motels” was increased (against the backdrop of post-Sept 11th falls in hotel costs), while at the same time, “housing at school” got less weighting. In the education category, the weighting of college, elementary tuition, and childcare was recently reduced.

Disturbingly, in the most recent table which rates relative importance of health insurance, cost is placed below other categories such as “Recreational Reading Materials”, “Pets”, and “Toys.” Health insurance accounting for the most recent table is off by a significant factor of fifteen--and is set to a level below that in 1995 (3).

Taken together, these problems shed light on why consumers and domestic businesses are under severe pressure, whereas multi-national companies--who operate largely overseas or outsource overseas--are reaping huge benefits(4). Considering corporations have recently engaged in widespread malfeasance--which has gone largely unpunished(and to the contrary, they seem to have benefited with recent tax breaks)--fundamental issues of justice are raised. Stated simply, the true picture in the US is an inflationary environment where Americans pay more and don't have jobs, but shoddy accounting for inflation makes these costs "disappear"--as far as banks, financial markets, and Social Security payments are concerned.

Moreover, the longer-term trend in some statistics shows changes that hide real costs which have increased--in contrast to reports recently from the administration claiming a healthy economy with low inflation. Retirees, for example, would have received smaller Social Security checks due to these "improved" CPI calculations, and many US banks may have made loans without properly accounting for risk related to consumer budgetary liabilities. The findings also extend those of a recent CNN article which didn't get much publicity.

Indeed, there is serious question as to how domestic companies can hire in the US under conditions of increasing cost. In fact, outsourcing abroad has exploded, according to several recent reports(5) (6). Ironically, persistent low interest rates may be hindering job gains.

Problems with the inflation figures can be attributed to several causes. First and foremost, in usage, they are commonly used as a basis for cost of living (for instance, by banks in lending)--even though they are not constructed as such, nor has anyone formally reviewed them for use in this context. Next, they trail the economy by several years. In fact, the current weightings are based on a very questionable period (1999-2000)--a period in which the economy was fully affected by corporate accounting problems. Finally, there is a recently-discovered circular problem related to over-lending for housing, which masks real costs--and has not been acknowledged by the Fed.

A source within the US Bureau explained shifts in the makeup of the indices are based on the result of paper surveys--but could provide no further details. No source of independent review for the BLS inflation statistics nor their weightings could be found. Examination of recent reports from the Federal Reserve show they failed to identify a recently discovered, pernicious circularity problem.

#####

Footnotes:

(1) ”Relative Importance” ”Housing Fuels and Utilities” et al, US Bureau of Labor Statistics table, www.bls.gov, entry CPI 4.934(2001) vs. 4.469(2002)-- representing a reduction of ten percent in the weighting, in the face of rising costs.

(2) 2003 Inflation Data Hacked ---------------------------- CHRISTMAS ENERGY COSTS MOVED TO SUMMER!

Seasonal weightings changed in producer price index in 2003 vs. 2002. It also looks like there is significant hacking starting in 2001 (what politics have changed since 2000?) Category WPS055 UTILITY NATURAL GAS

2002 WPS 0555 106.4 104.1 101.4 98.9 100.0 98.0 97.9 94.6 94.6 96.4 102.4 104.5 2003 WPS 0555 105.7 103.5 100.9 98.5 100.1 98.7 97.0 96.8 96.7 97.3 101.9 102.5 -.7 -.6 -.5 +.7 -.9 +2.2 +2.1 -.5 -2.0

Net change 2002 to 2003 (Cold months)Dec-Jan-Feb-Mar -4.3 weighting (Warm months)Jun-Jul-Aug-Sept +4.1 weighting --> Christmas in JULY

See graph where prices of natural gas are higher in general recently, and more so during cold months. In addition, it was recently reported that oil prices are at multi-decade highs (oil econ. alt. to nat gas).

(3) Based on statistics from the American Medical Association, recent health insurance costs paid by the individual represent an amount approximately twenty times greater than that represented in the published CPI. Employer portions have a similar rise, but are not accounted for in the CPI. See AMA Report Approx. (2K premium / 40K income, US Census) = 5 percent, but BLS CPI says far less than 1 pct (.315 pct in 2002 CPI). This means there is a big black hole in the economy, esp. considering unemployed and retired must pay ENTIRE premium, which can increase weighting another factor of ten.

(4) See Fast Growth for Profits which shows a disproportionate benefit to corporations.

(5) Widespread. See Jobs To Move/Goldman Sachs

(6) Anecdotal. See Alcoa Cuts US Jobs Due to Inflation, published since the original date of this article.

Citizens For Corporate Accountability is a 'Think Tank' non-profit, dedicated to public interest and the detection of corruption which endangers the basics of democratic society. It was founded in 2003 by Dan Spillane. The first major issue identified by Mr. Spillane, Electronic Voting Reform, has gotten significant national media attention subsequent to Mr. Spillane raising concerns, first in the summer of 2002. It was recently revealed that significant problems exist nationwide. As a result, several new bills are pending for the 2004 Congress.

[necso]

1. Too true.

Both inflation and unemployment (particularly underemployment) are being seriously understated and then, ominously, these figures are being used as the basis for policy --- in addition to being used to lull the American people to sleep. Sooner or later there will a price to pay.

[papau]

2. The Bush fingerprints on the UE rate lie is obvious - but the inflation

changes appear to be an implementation of a 98 decision - or at least that is how Bush is covering his tracks.

Given no problems under Clinton with the Stats - I do believe that the inflation changes are also Bush driven.

The fake seasonal changes in UE are easy to point out to the media - but they usual go to a GOP type who says they are "reasonable" - and does not discuss how they were chosen BECAUSE of their effect in lowering the UE rate - so the media drops.

On inflation I would have thought that the prior indexes would have been restated - and I think they have - but you are saying that the basic weightings do not reflect real life - as in the cost of health care. While I agree, again the media will find some GOP type to say it is a reasonable "professional" estimate of the proper weightings, and the media will move on.

We need a clerk who worked on this stuff to come forward to discuss.

otherwise I do not think this has legs.

3. Bull poop

Read the part about the circular part of the index. The issue goes beyond Bush or Clinton.

If anyone paints this as an issue related to politics, I feel sorry for them.

[papau]

4. Dan - HELP!! - please - what circular part do you refer to?

The UE seasonal change change was politics -

I am not saying the inflation one is.

Indeed I can not prove that what we have is more than a disagreement as to weightings.

So -- - please - what is the error is the weightings -- and what is circular?

thanks,

:-)

6. The circular part(s)

Read the CNN article. If you don't understand, ask me again. The simple explanation is: due to a feedback loop in the CPI, housing, energy, service, and other prices skyrocket, but that perversely makes the index overall go flat. So then, the Fed says their is no inflation, so more housing loans get made.

So then that makes the index flatter! So then, the Fed says their is no inflation, etc. etc. All the while, future energy demand is getting built up while people borrow to buy more houses and SUVs. Check out the recent GDP figures, and you will see that most of the "recovery" is really sales of things like SUVs. (It was recently also reported that average mileage is at a 20-year plus low).

And then add in the problems I found with improper weightings.

SUCKING SOUND!

And now, the energy demand and service inflation is so high, it is driving jobs overseas.

Pernicious. The biggest problem I see is the trillions of dollars that are being loaned out with this cycle in place. I read through the Fed reports on mortgages, and nowhere do they mention this cycle.

[papau]

7. time to lock down a 30 year since the real rates may well be negative!

Thanks for the reply

I follow the reasoning - but this is something that the professionals reporting the CPI should have fixed.

[many a good man]

10. Pardon my ignorance...

but how can one take advantage of this cheap credit? I refinanced my house last year but would like to know how I can get some of this cheap money to put to use elsewhere. I'm looking at some land overseas but I'm not ready to buy just yet. It would be nice to lock in a nice low rate but it may a couple of years before I find the right piece of property. I feel pretty strongly that rates are only going to go up, perhaps dramatically, in the next 5-10 yrs.

Whenever I've had to borrow $, its always been for a specific thing. Is there a way I can borrow $ and use it on any thing I want without telling the banker my plans? My credit is great and our jobs are secure, house almost paid off, lots of equity and paper in the market. I'm getting leery of having so much invested in the market and would love to own some real estate to diversify. For example, can I get a loan and use it for any non-specific thing, e.g., buying gold or land? I'm not looking for advice, just whether this kind of thing is possible. Thanks.

[Frodo]

11. Yes, and No.

The purpose of the loan is important to your banker, not just as a (minor) determining factor in the credit decision ("minor" if it isn't being used as collateral - "major" if it is), but because the government requires us to report on certain types of lending. We need to track certain demographc information about you in any case, but some types of lending (real estate and business use for example) we are especially careful.

So you will ALWAYS be asked the purpose of the loan (and "NOYB" won't get you very far).

BUT. It depends a lot on the ammount involved. Nobody asks the purpose of the loan for a credit card. If the investment was less than 10-20-30k you might fit it on your cards - BUT that defeats your intention of getting favorable rates. A better option would be a home equity line... just tell them it's for "future use" or "investments" (always struck me as irrational to not care that someone was borrowing money to "gamble" in the markets, but there it is). If you have the equity and good credit, there should be no problem at all.

Of course, home equity lines tend to go up as rates rise in the market. So your best bet of locking in LOW rates is to refinance your house and take out all the equity. It may or may not be worth it depending on tons of factors.

If you don't have tone of equity in your house or other assets to borrow against ten you probably won't be able to accomplish what I think you are doing. If there is a bank out there that will loan out 100K (for instance) without knowing the purpose for the loan or having something MORE valuable as collateral... I want to know who they are so I can short their stock - they won't be in business very long.

Best of luck.

[many a good man]

12. Taking out all equity

Thanks for the info. I refi'd to lower my payments and shorten my term...but you're saying I could re-fi for my entire market value and the bank will cut me a check for all my equity as long as I'm still good for the new loan amount?

Wow. So that's what people have been doing...no wonder I see so many new SUVs around here!

[Frodo]

13. Well, you'd probably need a VERY good credit score... but "yes".

Cash out refi loans don't usually go up to 100% (and when they do, you pay a higher rate and need an excellent dreadit score).

But yes, you can do that. AND yes, that's where a large part of the spending is coming from. There's one couple we know who have refinanced five times over the last few years. Sometimes to lower the payment, but almost always to take out more equity. They both had debts after college, so it was mostly a good idea to put their debts at such a low rate. But some of it had to be new spending.

I guess it's a good thing everyone in the area had their home values go up so much over the last four years.

16. Off the top of my head 25k

I think the average amount people have been cashing out is around 25,000. Check the Fed report on my web site.

What's interesting is there is a contradiction. Wherease homes are now defined as apartments, which leads to a circular cycle in the CPI, the change was put in by Reagan in 1983 because the claim was that houses don't represent consumption.

Now, years later, with the house values inflated, people are indeed consuming them.

The Fed says never before have housing prices increased in this way at a time when the rest of the economy was down. And never before had at the same time people been cashing out like that.

15. "Professionals"???

That is what I thought when I started to find problems with Voting Systems Certification officials.

[papau]

5. Thanks for putting up the link to the CNN article that agrees with you

"The CPI is correct in measuring consumer prices. But it's not correct in measuring the cost of living."

http://money.cnn.com/2003/11/14/markets/inflation/

The Fed says it can't find much inflation anywhere. Consumers might argue otherwise. November 14, 2003: 2:30 PM EST
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - The Federal Reserve sees so little inflation in the economy that it's more worried about an "unwelcome fall" in inflation than an unwelcome rise.

<snip>The Commodity Research Board's index of commodity prices touched a new 6-1/2 year high Thursday. The industrial materials index administered by the Journal of Commerce and the Economic Cycle Research Institute is rising at a 33.7 percent annual clip. "The basic message is unambiguous -- you've got inflation," said Lakshman Achuthan, managing director of the Economic Cycle Research Institute.

Nor is it just wholesale prices that are moving higher. Take a look in the guts of the nation's key reading on inflation -- the consumer price index -- and you'll find that many of a typical household's big expenditures have risen markedly over the past year. <snip>

So what's keeping the reading on inflation low? Asilis thinks one big piece of the picture is housing. In computing the CPI, the Bureau of Labor Statistics assigns a 22.2 percent weighting -- the most of any item -- to something called "owners' equivalent rent of primary residence." Basically, it's an estimate of what homeowners might pay in rent if they rented their homes instead of owning them. To calculate this, the BLS looks at actual rents, compares them to owned residences and then uses that to calculate housing costs. The problem? The low-interest rate environment has meant that many people who might otherwise rent now own -- in fact, home ownership rates are at record highs. As a result, rents have come under pressure, and "owners' equivalent rent" has grown at just 2.1 percent over the past year -- less than the overall CPI and far lower than the costs for education, health care and so on.

You can catch the circularity here. Because the inflation reading is low, rates are low, which has upped home ownership, which has pressured rents, which has put a cap on "owners' equivalent rent," which has helped keep the inflation reading low. Etc. <snip>

Maybe more important, buying a new car simply doesn't constitute a regular expense like tuition, paying for electricity or putting gasoline into that car. (And some expenses don't even factor into the CPI -- like the trend of companies shifting a portion of benefit costs to employees.) <snip>

[Frodo]

8. The REAL question is:

If we know what has changed and aren't happy about it... recalculate using the old formula and advertise the "real" inflation rate.

What would the current inflation rate be?

14. Probably 5 percent inflation or greater, my guess.

If we went back to the way before Reagan started changing it in 1983.

[Frodo]

17. I/m afraid we need better than a "guess"

If we know what has changed in the formula and by how much we should be able to state what the "real" inflation rate is and be able to defend it.

Much of what I've seen of the errors/changes makes me think we're talking about 1.33% instead of 1.2% (i.e. not a change worth arguing about). I'm not sure why the people who orignially wrote the articles aren't telling us what the effect of the change IS.

18. Better estimate 3.5+ percent inflation quick 1983ish method

Going back to the pre-Reagan change, which accounted for housing increases as houses instead of apartments, you would have maybe a 9 percent increase in that component for housing for 2003, instead of 2.

Since raw housing is weighted at about 1/5, the contribution from housing alone would be 1/5 * 9pct(2003 rise)--or almost 200 pts (2 percent).

The current contribution relatively expressed is approximately 1/5 *2.1 or approx .4

Without doing other calculations, therefore, the core rate, which includes housing, would be 1.2 - .4 + 2 = 3.2 percent. Here I back out the old, and put in the new component.

But don't forget, there is the car bubble, which does a net subtraction from the core rate. The current contribution to core is

.082 * (-3.6)

about -.29 pts

BTW are cars really 'core' items? I'll just bet they cut out the car energy numbers from the 'core' number--does your car run without energy???

I am also really suspicious on how they get this number. It's possible, for example, that actual prices paid may be higher on cars. Anyway, let's just assume that is flat, and add back in the .29

So that comes to 3.49.

But now I would have to go in and correct the weightings for health insurance...

And then other weightings too. So I would say a good estimate is about 3.5 percent, minimum.

But it seems to me this focus on a core number, which includes cars and houses, and not the energy to run them, is a big big trap. If more than half the core number depends on energy from the non-core, and increases demand for it...well...BushCos wet dream.

So Ronnie provided well for Bushies with the 1983 change.People can borrow themselves into the hole for SUVS and huge houses, and all the while be oblivious to the hidden costs to them and profits to BushCo.

What scares me is all the debt that is being doled out. Credit is far easier now than it was pre 1983. There doesn't seem to be a risk premium.

So the real inflation is about triple what is being reported.

[Frodo]

19. OK. So the next question is..

... how many of these changes have been made in the last three years? And what was THAT effect?

The reason it's important is that we lauded Clinton's performance (with good reason) in the area of inflation. We can't claim that we need to use the "real" numbers now without adjusting the previous ones. Shrub is not being compared to absolute numbers (or he'd be in much better shape). He's being compared to Clinton (and to a lesser extent to his daddy). If the "correct" "real" numbers still bear the same relationship to the corrected figures of the previous twelve years that the modified ones do... what does that get us? (Other than a final debunking of the notion that "the CPI overestimates the rate of Inflation"???

[KoKo]

9. Thisis an excellent read.....or was for me. I hope anyone interested in

"Bushonomics" which is just a "rehash of the failed Supply Side Economics from Reagan's time....will read this.

"Fooled me Once..Fool me Twice......???????

that's what, imho, this Bushonomics is all about. Even Reagan figured out "Supply Side" didn't work and G.Stockman got the boot out the door.....

Sadly....we are in "Redux." They just couldn't believe that "it doesn't work." And they are DETERMINED! They will SHOW US!