I can't speak to the validity of ShadowStats' calculations, but the BLS explanations show that they are not really measuring anything. They are making qualitative statements and couching it in quantitative terms to give the impression that they are taking measurements.
A price index would compare prices. It would seem that the BLS is trying to compare "satisfaction", which is fine, but it certainly shouldn't be used as a proxy for inflation in GDP calculations or cost-of-living adjustments.
The notion that they can confidently state how much "satisfaction" is inherent in a chocolate bar or hamburger or a microwave oven, and then report it in numbers precise to the hundredths is ludicrous at best. Dishonest would probably be a more accurate way to describe it, in my opinion.
Hi folks. I have been researching whether ShadowStats’s (SGS) Alternate Inflation Rate is more accurate than the CPI, and I’ve found several problems with SGS inflation. I’ve only found a few of these issues partially addressed in the public section of shadowstats.com. I sent these questions to SGS through their contact form but got no reply.
The site is http://www.shadowstats.com/alternate_data/inflation-charts
1) This blog post shows US house prices deflated by CPI-U-Research, which shows a clear housing bubble, and then prices deflated by SGS Alternate Inflation (probably 1980-based, although I’m not sure). With SGS inflation, the graph shows something ridiculous, not just no housing bubble, but real house prices declining by 60% from 1980 to 2010. Is there an error in this analysis?
http://blog.jparsons.net/2011/03/shadow-stats-debunked-part-i.html
If the analysis was absolutely right, then as the article says, “Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you're delusional.” The question is, is it correct?
2) I read this interesting article from BLS:
“Addressing misconceptions about the Consumer Price Index”
http://www.bls.gov/opub/mlr/2008/08/art1full.pdf
I’ve read these articles from SGS regarding thas BLS article:
http://www.shadowstats.com/article/special-comment
http://www.shadowstats.com/article/no-438-public-comment-on-inflation-me...
http://www.shadowstats.com/article/consumer_price_index
However, there are several points that make more sense in the BLS article:
2.a) Constant standard of living or constant satisfaction? The BLS report makes a point that is more convincing than SGS’ argument for a constant standard of living.
“Suppose that a person buys four candy bars each week: two chocolate bars and two peanut bars. The bars cost $1 each, so her total spending per week on candy bars is $4. Now suppose that, for some reason, the price of chocolate bars quadruples to $4, while peanut bars remain at $1. The goal of the CPI is to measure how much the consumer needs to spend each week to consider herself just as well off as she was before the price increase. A Laspeyres price index calculates the cost of the original purchase quantities: two candy bars of each type. Therefore, the answer according to the Laspeyres formula is that the consumer would need $10 to be as well off as before.”
“With $7, for example, our consumer could afford to buy seven peanut bars, one for every day of the week. Thus, $7 might be sufficient to make her as satisfied at the new prices of candy as she was with $4 at the old prices. Put another way, we can be confident that, for some consumers, the Laspeyres result of $10 would overstate the amount they need to maintain their original level of candy satisfaction.”
I don’t think anyone is going to consider buying dog food for himself just because hamburger prices are rising too fast, but if the price of steak is quintupled and the price of hamburger stays the same, many people will probably need less than 5x the money for steak in order to get the same satisfaction. For example, maybe some will prefer 50% more, buy hamburger and use the 50% extra in some other product to compensate for the satisfaction lost by not buying steak. Economic life is full of compromises and not many things are absolutely necessary at any price.
2.b) If the following is true (from the BLS article)…
“Finally, and most importantly, there is rigorous empirical evidence on the actual quantitative impact of the geometric mean formula, because the BLS has continued to calculate Laspeyres indexes for all CPI basic indexes on an experimental basis for comparison with the official index. These experimental indexes show that the geometric mean led to an overall decrease in CPI growth of about 0.28 percentage point per year over the period from December 1999 to December 2004,24”
… then the following cannot be true too (from one of the SGS articles)…
“Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology.”
http://www.shadowstats.com/article/consumer_price_index
2.c) Regarding hedonics, SGS’ arguments make sense, but the following paragraphs from the BLS article seem to imply that hedonics cannot be blamed much for that 7% discrepancy in inflation:
“Personal computers, microwave ovens, televisions, and other commodities for which hedonic models were more recently introduced have a combined weight of only about 1 percent in the CPI.
It is also important to emphasize that the BLS makes hedonic adjustments for declines, as well as improvements, in quality. The CPI price indexes for shelter include hedonic adjustments for the gradual aging of the rental housing units in the CPI sample, and those adjustments regularly increase the rate of change of the indexes by at least 0.2 percentage point per year.32 The hedonic adjustments in apparel have had both upward and downward impacts at different points in time and for different categories of clothing.33 As discussed in an article in the Monthly Labor Review,34 the BLS estimates that the hedonic quality adjustments introduced since 1998 have had an upward impact in five item categories and a downward impact in five. The overall impact of these newly introduced hedonic models has been quite modest and in an upward, not downward, direction”