Shadow stats is John Williams subscription sight. His numbers come from a simple adjustment to the government figure. He doesn't actually go back and recompute the inflation rate using the old method. The validity of the adjustment he makes has been questioned. He has offered a defense of it on his site. Intuitively, it seems the actual inflation we experience in our everyday lives is greater than the official inflation rate, and it always seemed to me that the Shadowstats figure was closer to the actual inflation I personally was experiencing. http://www.shadowstats.com/ Williams has the current CPI at a touch over 4%, which seems about right to me. From the economists' viewpoint, there are arguments that can be made in favor of hedonics. They don't seem, however, to apply to real life on this planet as we know it. It doesn't take a rocket scientist to realize why the use of hedonics is so attractive to politicians; it hugely reduces entitlement payments that are indexed to inflation saving billions upon billions of dollars.That takes the pressure off politically unpopular calls for payroll tax increases. I prefer the old pre-1980s method of estimating the inflation rate. The new method essentially sweeps the inflation-created problem for entitlements under the rug and puts off the day of reckoning. We would be better off, in my opinion to make timely adjustments to entitlement contribution rates, but politics gets in the way. You can't get elected in this country by biting the hand that feeds you,i.e., cutting corporate welfare. Corporations fund political campaigns. And you can't get elected if you tell someone you're going to raise their payroll taxes. Hence hedonics, dreamed up by economists, came to the politicians' rescue. By underestimating the practical inflation rate you can, in effect, shave a little off of entitlements and transfer the proceeds, indirectly of course, to your big donors via 'enhanced', cost-plus government contracts, or special interest tax breaks. And the average guy on the street hasn't a clue. If we can ever change the way we fund political campaigns we might be able to solve this problem. An example of the impact of the new inflation numbers versus the old, one can look at college tuition. I did this awhile back for my local University and provided the data to them. We all know that nominal tuition at public universities has "skyrocketed", and yet the schools without huge endowments are squeezed. So something is not right here. I used BLS and Dept. of Education figures and State budgets to explore this phenomena in an attempt to understand it. If you use the governments mean inflation figure and compound its effect over time, you'll get a result that tells you nominal tuition has gone up much more than it should have. But if you alter that inflation rate to 5%, the mean Williams rate over that time, you come out right on the nose. If the 5% Williams figure is much nearer actual inflation experienced by universities than is the ~2% government figure, tuition in constant dollars hasn't gone up at all, its held steady! But universities are worse off today than they were 30 years ago, even after increases in tuition. How could that be? What I discovered is that, during that same 30 year period, public subsidies of higher education, in constant dollars (using the 5% figure), decreased on average by almost 30%! If that Williams inflation figure is real, than it would be no wonder that public universities are strapped for cash. The whole issue boils down to what inflation rate you use, and a 3% difference, when compounded over all those years makes a huge difference. I posted partial results of this study here on ET a couple years ago.
The cheating has been going on for years, fortunately for the Fed, it hasn't had a major impact on investors inflation expectations...investors have basically ignored the real rate of inflation. I don't know when it will happen, but one of these days, investors inflation expectations will change and rates will run up higher and faster than anyone expects.
When that happens, if it happens, it won't be good for anyone holding U.S. treasuries.* Those who loaned the money, pay the debt -- Lord Skidelsky [It's a 20th century phenomenon, Skidelski refers to.] Those lenders holding government debt in the Social Security Trust, i.e., virtually all of us, would be only partially protected.
According to MIT's Billion Prices Project, which is basically an automated site scraper, the prices for goods and services advertised online, and the change in those, i.e. inflation, is quite close to that reported by the government CPI. Two different methods in use by two different entities arriving at the same conclusion.
Icahn is a smart guy, a guy with very good advice in my opinion, but maybe not as smart as he should be. I chalk that up to him being to busy with his own investment world to peel back enough layers of complexity to get down to the roots of problems. He mentions too low rates leading up to the financial crisis. And that is correct in my view. However raising rates has many side effects. Some desirable and others not so. Certainly a modest hike in rates was long in order before the crisis. But a combination of a small hike in rates coupled with tightening of mortgage underwriting [that's where the Fed failed us badly] was what was really needed no later than 2005. Also, the Fed should have left raising the margin requirement on the Table instead of taking it off, as Greenspan did. These tools should be used in a coordinated way. In my personal opinion, the fundamental reason Bernanke was so much better than Greenspan as Fed Chairman, is that Bernanke knows well the difference between models and the real economy. If something was not working he was capable of rethinking the situation, whereas Greenspan was blinded by his ideology. He steadfastly believed that markets, if left alone, would correct excesses, more or less harmlessly, through market forces. He was horribly wrong! At least he has finally admitted some of his mistakes, but even there he's done a bad job of analyzing what went wrong. For example he has said that he was wrong to have thought that bankers would never act against their own self-interest. But at the time the bankers were getting rich securitizing and peddling junk mortgages as high quality CDOs it wasn't clear to them that they weren't acting in their best interests, and as a matter of fact it is still not clear. This statement by Greenspan stands as a confirmation of his belief in simple market equilibrium theory. Nixon appointed Greenspan to his Council of Economic Advisors as a payoff for working on his election campaign. At the time of this appointment Greenspan was a competent professional musician, he had attended Julliard, studied economics, and was a partner in a NY investment advisory firm. His competence to serve on Nixon's Council was highly suspect. He moved quickly to cover up his embarrassing, on-paper deficiencies by earning a Ph.D. moonlighting at NYU. His mentor at NYU would have no doubt been happy to have Greenspan as his graduate student, as being the mentor to a member of the President's Council would have looked impressive on his own Vita. The real culprit was Reagan, who appointed Greenspan as Fed chairman. Just another in what proved to be unfortunate Reagan decisions regarding the economy. Here is a link to the most charitable article I could find re Greenspan's Ph.D. dissertation. http://www.barrons.com/articles/SB120917419049046805?mod=mktw#articleTabs_article=1
Our gut feelings can easily be wrong. We have after all experienced a large decrease in gasoline prices. That could more than compensate for more modest increases elsewhere in the CPI. Do you know if the MIT results incorporate hedonics? If they do then that could be a source of disconnect between our everyday experience and official figures. When we are at Safeway or Best Buy, or shopping on Amazon, or sitting in the Doctors Office, hedonics is the furthest thing from our minds.
He's got it somewhat backwards. Low rates at your corner bank were the result of oceans of petrodollars chasing returns.