Can you trust those government numbers?

Ever hear someone say, “You can't trust those government statistics”? When they say inflation is 1.6 percent, do you feel they might be fudging the numbers to bamboozle the masses? Many people, even the highly educated, feel there is a government conspiracy to doctor the numbers and make them look better or maybe just make us feel better. Investopedia, one of the more respected sites, has a particularly harsh view of these numbers.

Is that true, though? Is your government “cooking the books,” as it were? 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. The agency which gives us the CPI is the BLS (Bureau of Labor Statistics, an agency of the Department of Labor), which also happens to be the agency which compiles unemployment statistics. (At that, critics nod their heads sagely: “Hmmm … it figures.”)

Critics of the CPI seem to feel inflation statistics are always understated, pointing to some item which has gone up way more than 1.6 percent, or whatever number the BLS says it is. “Why, the price of beef at my supermarket (or home prices, or any other item) went up 20 percent last week. How can they say inflation only went up 1.6 percent?”

Impossibility

Indeed, how can they? Without using the National Security Agency, how can any government know how much you paid for your cheese this week? Not just you, but the other 300 million people in America? How do they figure the price of cheese if you had a coupon for 20 percent off, and the gal behind you had to pay full price? And what if cheese was on special this week? Is that inflation going down or something they should ignore? And what if you see that the price in your supermarket went up and you decided to switch to Costco or Walmart, subsequently paying less? Is that now deflation? How does a government tally all this information — assuming they could even get their hands on that many billions of transactions — and do it within a week of month's end?

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

The fact that 100 percent accuracy is impossible doesn't mean you can't get an idea by monitoring some transactions, however. As long as we understand that government statistics are approximations, we can still put them to good use.

Perception

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. If they put it in, 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 exactly 0.1 percent to your overall inflation — way less dramatic. Simple math.

When you're talking to a critic of “those rubber statistics,” you usually deal with two known traits of the human mind:

  1. The first is the tendency to listen to things that agree with our views and dismiss facts which run counter to our beliefs. “I've made up my mind. Don't confuse me with facts,” as the saying goes. The American Psychological Association published the results of an experiment in July, 2009, which confirmed this: People were twice as likely to select information that supported their own point of view as to consider an opposing idea, with two thirds going for supportive views as opposed to a third going the other way. Critics will criticize, even if the facts contradict them — but we are all guilty of this to one degree or another.
  2. The second is 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 steak, though, hit you in the eye and you grumbled all the way back home because you invited your friends over, promising to throw a few steaks 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 percent, you'd be likely to say, “Heck, yeah!” and give him an earful.

Let's take another item: gas prices. Let's say the price of gas went up 10 percent so that your monthly gas expense went from, say, $80 to $88. Annualized, that's $8 every month (or $96), which comes to 0.2 percent of your annual expenses. It gets even more complicated, though. What if Sally next door traded in her SUV for a Prius? Even though the gas price went up, her personal “gas inflation” went down, because she changed what she does.

Let's agree: It is tough to compare what you do with what Sally does, especially when you are trying to figure if prices went up, and by how much.

The Basket

Let's put the shoe on the other foot and say you're the government and your citizens want to know by how much prices went up or down. How do you measure that? Holly is a vegetarian, and I love a good ribeye. So, when the price of steak jumps for half the population, but leaves the more sensible half unaffected, how should the BLS calculate inflation?

Most governments solve this dilemma by picking a “basket” of representative purchases. It's like those mythical 2.3 children — nobody actually has 2.3 children, but that's what the average comes out to. Same with “the basket.” (The government is 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 — and the critics went ballistic. (They still haven't calmed down, actually.)

But what is the government supposed to do? Do you still buy film? No, times change, and the things people buy change too. Before, many people bought film and you had to include film in the basket so film price changes get accounted for. Now you have to take it out. We don't buy VCR's or record players anymore, either. 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 out of pocket. Should they factor that in? How? Or, how does the government keep track of cell phone companies introducing “family plans” or users who switch to Republic Wireless (like Holly did) and save themselves money? Is that deflation?

That's called the “hedonic” thing. You point at the price of that $1,500 big screen TV set you see at Best Buy. Wow, TVs have gotten expensive. But have they? The BLS says no, that's not inflation: “The cost of televisions didn't go up,” they say. “It's just you upgrading your 17-inch, old-school tube TV to a 40-inch HD flat screen.” Is that new baby on the wall more expensive than the old one Goodwill refused to accept? Of course it is. But 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. People keep upgrading their lifestyles (itself a whole series of topics, but let's leave that for another time) and when the BLS tunes those upgrades out, the critics howl like banshees.

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, with three garages, for $500,000. Is that inflation or an upgrade we buy ourselves? Where do you draw the line?

Let's say 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 and gas 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?

There are other tricky issues. 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 and retired folk howl in pain, while people in their forties are blissfully unaffected. Now, was that an inflationary event? It would seem so, but by how much? Whatever number the BLS computes, you can guarantee the AARP will throw a hissy fit about government fudging the numbers when the full cost of the Depends hike is not included.

Perspective

Can you see how difficult it is for anybody to arrive at a number that reflects the inflationary pain every person feels? It's not only difficult; it's impossible, especially when people keep changing what they're doing.

Just like that mythical 2.3 children statistic, you know the basket the government uses doesn't reflect what you, I, or any other person or family buys. Therefore, the inflation statistics 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, and the speed with which we want them, the best anyone can hope for is “a feel,” and transparency by those defining the numbers.

We have that.

So, next time you feel tempted to blast those boffins for “cooking the books,” stop and ask yourself: How can you do a better job? More tellingly, will Heather or Mike down the road agree with your number? Much better to focus on what you can do in the face of an economic landscape that changes every day.

And what is that, you say?

1. Keep track of your expenses. Some things “creep” on you. I don't know about you, but here in Denver all the trash companies find a way to agree on a fixed price. Still, every month the bill goes up with things like fuel surcharges until you threaten to cancel. Then they reset and the game starts all over. Same with phone and cable bills.

2. Keep your commitments as short as you can, and always keep an eye out for competitive deals.

3. Keep an eye out for specials. There's nothing like 20 percent off to help you beat inflation.

4. Make your own hedonic adjustments: Cut the cable cord, get a smaller car, vacation in cheaper spots. People here already have a pretty good idea how to trim expenses.

5. Gravitate to the impervious industries. Jobs or wages at utilities rarely get cut because they simply pass on their cost increases. There are many others. If you are able to get a job there, you're insulating yourself from the ravages of inflation. Not everybody can do it, but it's a consideration for the next time you consider making a change.

Whatever you do, don't raise your blood pressure blasting those government statistics. They're not perfect; nobody ever claimed they were. The odds are that any improvements will be shot down by just as many people. On the other hand, recognize that they do give us a fair idea of what's happening around us.

The bottom line is we have very little control over prices, unfortunately, and no amount of ranting will change them — or the government's estimate. It would be much better, instead, to focus our attention on what we can do about it.

More about...Economics

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
32 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Mike S
Mike S
5 years ago

This is an odd article. I suppose it could be summarized as, “Does the government doctor inflation numbers to make them look better than they are? We can’t really know, so just buy whatever you can still afford as things keep getting more expensive.” But the answer to the question is yes, the government does doctor their inflation numbers. The CPI basket is supposed to remain constant so that the index is consistent and comparable over time, but the BLS, upon discovering that the price of an item such as steak has risen too high or too quickly, substitutes steak… Read more »

Tim
Tim
5 years ago
Reply to  Mike S

No it doesn’t. It adds an arbitrary constant to the government’s CPI numbers, and its founder admits so:
http://econbrowser.com/archives/2008/10/shadowstats_res

The government’s CPI numbers are pretty darn accurate, according to everyone who actually studies this:
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/07/17/the-intellectual-cesspool-of-the-inflation-truthers/

Matt
Matt
5 years ago

I’d love to see the author (or anyone else for that matter) back this up with their own personal numbers. Maybe run a column on one of the GRS writers calculating their own personal inflation rate.

I know my personal inflation rate is much in excess of 1.6%, and I certainly don’t fall into any of the fallacies the author suggests.

Allyson
Allyson
5 years ago

Just wanted to say kudos to Mr. Cowie for another interesting and relevant article.

Adam
Adam
5 years ago

That was a lot of words just to say, “There is no such thing as ‘normal.’ My expenses are different that your expenses which are different that John’s expenses. The government has to find something that is representative of the country as a whole, but their numbers probably won’t exactly match even one household in the entire country.”

Adam
Adam
5 years ago

I don’t like the Unemployment statistics. Not because I think the numbers are manipulated (though I wouldn’t put it past them, perception means a lot to an economy), but because I think Unemployment just doesn’t have much value.

Work-force participation is a much better metric, in my opinion.

Tina
Tina
5 years ago
Reply to  Adam

I agree. The unemployment rate only counts “people actively looking for a job” and doesn’t count the ones who are sitting at home collecting welfare who aren’t looking for a job even though they should be.

Every day I see dozens of job postings from entry level to professional, plenty of jobs to go around in our area and could wipe out the unemployment rate. However, we will have to continue to pay for those who choose not to work and pay for their own lifestyle.

Neel Kumar
Neel Kumar
5 years ago
Reply to  Tina

Dear Tina, Many companies advertise for positions that they have absolutely ZERO intentions of filling. I have personally seen advertisement for openings that did not exist (I worked at the company at the time). Many firms are continually fishing for candidates to see what the competition is up to and what kind of compensation the candidates are demanding. One of my friends had a day-long interview where he had to solve this really complex problem. He managed to solve it and everyone congratulated him for the excellent work and he did not get an offer. About a year later he… Read more »

Dianecy
Dianecy
5 years ago

Wow. Things seem almost bipolar here at GRS lately. A good article, a total crap article, a really thought-provoking article. A little more consistency would be appreciated, but this pattern is at least an indication that you are trying, I hope.

Great explanation about how our government endeavors to measure the unmeasurable. Isn’t the point of developing one’s frugal chops to make these numbers as irrelevant as possible in our daily lives? Everything goes up over time. Stop complaining and get to learning as many work-arounds as possible.

Horatio
Horatio
5 years ago

Three points: 1.) The shadowstats site referenced above has an obvious flaw: The price to look at the data hasn’t changed in… how many years? (no inflation there!) 2.) There exists an independent (from the government) calculation of inflation. It’s called the “Billion Prices Project” and it’s run by MIT. The numbers largely agree with core inflation numbers calculated by BLS. 3.) The changing from steak to hamburger mentioned by Mike is an attempt to model the “average” consumer (the 2.3 children described in the article). When presented with a 300% increase in the price of steak, most people will… Read more »

Mike S
Mike S
5 years ago
Reply to  Horatio

Horatio is correct in point 3 regarding consumer behavior, but that ignores the purpose of the measurement. It’d be like a climate scientist saying, “Gosh, it’s warming up here, nobody wants to live in these temperatures; I’ll go a little further north to do my measurements. Hey, temperature is still averaging X, no global warming!” CPI is used to determine Social Security payouts and other benefits, so the government is deciding that since prices are going up, people on fixed incomes will purchase cheaper items, and thus they’ll calculate CPI on those items instead of the original items… and since… Read more »

SLCCOM
SLCCOM
5 years ago
Reply to  Mike S

Also known as “cooking the books.”

Mrs Random
Mrs Random
5 years ago

Good write up – thanks! Statistics are interesting, but it’s always good to remember that statistics mean nothing to the individual. Still they can be useful.

El Nerdo
El Nerdo
5 years ago

Loved the article. Doesn’t have all the answers to the universe but it makes me think about my own family’s inflation level.

Funny coincidence– I paid the 6-month car insurance premium yesterday, and I noticed it had gone up $7 from 6 months ago. I called to ask the agent why the price hike and she said it was just [inflation]. Ha! Ha ha ha! It was only a quarter of a percent point though.

Then she offered to automate the payments and I said NO WAY! I like to be aware of what I pay.

CCH
CCH
5 years ago

So if your argument is that the price of cheese changes frequently due to coupons, price specials, etc. then why not go to the dollar store and see how much cheese you can get for a dollar? Back in the mid 90s you could get 4 full size butterfingers from dollar general for a dollar. I’m not sure how many total ounces of butterfinger it was back then since I’m sure the size of the candy bar has decreased, but you could certainly compare today’s unit price per ounce of butterfinger with the unit price of old to get an… Read more »

Kasia
Kasia
5 years ago

I’m not a fan of government statistics or the media’s comments and articles on what’s going on in the financial world. A lot of it is blown out of proportion to get people’s attention. What I like about this post is that it advocates looking at yourself rather than the economy at large. I think that if we all looked after our own finances from the start of our working lives (avoided debt, saved, invested, paid for everything in cash, delayed gratification), whatever was happening in the world at large would have little impact on us. I think that’s the… Read more »

April
April
5 years ago

You didn’t bother to even look up the home prices in Levittown in 1954 vs today. You need to actually compare these things before you start spouting off bad data. If you use the inflation calculator you can see that the cost of the homes are almost double what they would be with inflation costs.

Ray
Ray
5 years ago

My issue with the article is that the point appears to be that if something is hard then you’ve no right to expect people to get it right, even if important things like cost of living increases depend on it. Furthermore you may not criticize unless you can do a better job. Getting inflation right matters and people have every right to insist they get it right. If the people currently working at it can’t get it right, well, there are plenty of smart folk on the unemployment lines who will give it a go.

Kiat
Kiat
5 years ago

I would say that the number is just a gauge, it cannot be 100% correct, but it is a good gauge to help us know more about the economy.

anon
anon
5 years ago

Nice article! After 3 semesters of stats/research methods, I still have a hard time explaining normal flaws in a dataset or methodology and why the subsequent stat is still useful and interesting. I’m going to forward this on. Thx!

Tina
Tina
5 years ago

Every time I see an article or statistics on how ACA has signifigantly lowered the amount of uninsured citizens in certain states, it really bugs me because it isn’t because more people are paying for the insurance they now receive, it is because Medicaid was expanded in those states showing lower uninsured people. This leaves the ones who are working, paying for their health insurance on their own and paying taxes to foot the bill for those who don’t.

The government is so full of lies that they will spin it which ever way looks better.

nicoleandmaggie
nicoleandmaggie
5 years ago
Reply to  Tina

… so is Fox News…

Many of those people (the adults, at least) who have Medicaid now in the expansion states are also working. They just don’t work for jobs that offer health insurance as a benefit (and often couldn’t afford it if it were).

Fred
Fred
5 years ago

The important takeaway from this article is that you have to create your own inflation rate. As an example, a few years ago, I was paying $90 a month for cable TV, even though I didn’t find that much worth watching. I called the cable company and asked what their absolute lowest rate was to keep cable and they said $18 per month, so I switched to the lowest rate with the fewest channels. So I’ve saved a few thousand dollars since then ($72 x 12 months x 4 years), and I don’t miss any of the channels I no… Read more »

SLCCOM
SLCCOM
5 years ago

Well, no, the important take-away is that the government IS cooking the books to keep down COL increases for Social Security recipients. Seniors have lost 30% of purchasing power since about 2000.

And if you don’t think they are going to continue to do that when YOU are depending on those increases, you aren’t nearly as smart as you think you are.

Tim
Tim
5 years ago
Reply to  SLCCOM

Please share one iota of evidence that the government is cooking the books.

Guest
Guest
5 years ago

I realize this comment will probably never be read as there have been many more posts since this but I do have a few comments I wanted to make. I appreciate Cowie’s perspective on the difficulty of getting-this-“right.” He is quite correct that it is a very difficult process and no matter how hard anyone tries there will always be room for differing interpretations. It is apparent most people have strong options on this topic and I think most of us sense that it effects are pocketbooks and our emotions on a very visceral level. I believe one of the… Read more »

Tim
Tim
5 years ago
Reply to  Guest

The biggest problem is ignorance and misinformation. Now, I’m going to shamelessly use your strategy of capitalizing key thoughts:
THE BLS DOES NOT SUBSTITUTE HAMBURGER FOR STEAK WHEN THE PRICE OF STEAK GOES UP.
http://www.bls.gov/cpi/cpiqa.htm#Question_3

The BLS already takes into account your issues with the CPI.

Guest
Guest
5 years ago
Reply to  Tim

lol, wow I have to say I am surprise to see you still monitoring this thread. Thank you for your reply. Second, thank you for citation on the steak/hamburger reference. I was not aware they were in different categories and therefore could not be substitutes. As you stated pure uninformed ignorance on my part. Third, I am glad you liked the capitalization of main points! Finally, I am left unsure if you believe I made a point or not. You definitely pointed out my error but seemed to by-pass my thesis. Are you sitting at your computer deploring the ignorance… Read more »

Tim
Tim
5 years ago
Reply to  Guest

No problem. I’m happy to respond to points made by people actually willing to listen and learn. You’re not a conspiracy theorist, you’re actually interested in answers. To address your question, I guess I’m not sure I understand your thesis. The unemployment reported by the BLS most often is U-3, which is the percentage of those looking for work who do not have a job. It’s a pretty straightforward definition that makes sense to most people and captures most of what people mean (for example, you wouldn’t want to count retirees, children, or those parents who stay at home by… Read more »

SLCCOM
SLCCOM
5 years ago
Reply to  Guest

But what about the discouraged workers who quit working? Are they counted anywhere? Is there any attempt to do that?

Tim
Tim
5 years ago
Reply to  Guest

Yes! Discouraged workers is a category, and they’re included in U-4, U-5, and U-6 in the link.

William @ Drop Dead Money
William @ Drop Dead Money
5 years ago
Reply to  Guest

And the labor participation rate. Then there’s the BLS’s JOLTS database, which measures job opportunities, layoffs and “quits” (people leaving voluntarily). There’s isn’t one number that measures people who gave up, but there are several others to give you an idea…

shares