Yet another way the government hides inflation
As we continue to shell out for higher prices, the Bureau of Labor Statistics is working overtime to crank out its inflation-is-tame data, picking from an arsenal of abracadabra. An inflation-busting device known as "substitution" is particularly effective (though for premium-brand ice cream lovers, as you'll soon see, it may be totally unpalatable).
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The statistical minimization of inflation
I have long known that, in addition to hedonic adjustments (which I wrote about in "How the government manufactures low inflation"), government statisticians relied on "substitution." But until recently, I was unaware to what absurd degree. Their methodology is inaccurately labeled "geometric mean estimator," which it turns out is applied to about 61% of total CPI (consumer price index) spending. As my friend Joanie recently opined:
"Basically, this approach allows the BLS mathematicians to substitute lesser price items for those that might have had price increases. They assume, for example, that if tuna is pricey, you might just switch to cat food."
But don't trust us. Here, in the government's own words, is an example of the "geometric mean estimator" at work:
Substitution can take several forms corresponding to the types of item- and outlet-specific prices used to construct the basic indexes. . . . Thus, in response to an increase in the price charged by a store for a certain brand of ice cream, a consumer could respond by:
Redistributing purchases:
To another brand of ice cream whose price had not risen.
To a larger package of ice cream with a smaller price per ounce.
To ice cream at a different store where ice cream is on sale.
To a brand of frozen yogurt.
The consumer also could respond by postponing the ice cream purchase until a later date.
Finally, the consumer could substitute from the ice cream brand to a specific alternative dessert item, such as cupcakes or apples, which is another CPI category.
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