| | | Be Sensible About 'Alternate Inflation'
Sites like ShadowStats just don't make sense.
By Stan Veuger
Oct. 17, 2014 | 12:15 p.m. EDT
In 2007, President Barack Obama had been a U.S. senator for two years and was running for president. While campaigning in Iowa, he admitted: “I don’t pretend to know everything there is to know about agricultural issues." He then proceeded to ask the crowd, "Anybody gone into Whole Foods lately and see what they charge for arugula? I mean, they’re charging a lot of money for this stuff.”
And indeed, to many people, price increases are upsetting! Just yesterday things were so cheap, yet today everything just seems so expensive. We call this inflation or perceived inflation. Some people perceive more inflation than others, and that makes sense: We all consume different bundles of goods, and if you’re unlucky, the things you like grow more expensive. My colleague Tim Carney, for example, claims that the price of everything he wants to buy instantly escalates.
But some people overdo it. They have trouble abstracting from their grocery bills or they are trying to sell gold to unwitting senior citizens or they believe that Obama and the Federal Reserve must have debased the currency with all of their printing of the money. And they start believing that the government lies, that the Bureau of Labor Statistics sneakily manipulates inflation numbers. And they turn to websites like ShadowStats.com, where they see their suspicions confirmed. But are they right? Let’s go through it step by step.
[SEE: Political Cartoons on the Economy]
ShadowStats publishes “alternate” measures of inflation and pretends to do so by employing the methods the statistics bureau used to employ, that is, by ignoring the fact that we consume different goods and services now, and that an iPhone combines a broad variety of products that in 1980 were beyond the reach of kings and presidents. In particular, it claims to use the methods the bureau employed in 1980 and in 1990. It sounds like a challenge to reconstruct current-day inflation that way, but there is an easy fix for that. To construct the 1990-based alternate, it seems, one adds some 3.75 percentage points to the inflation rate. To construct the 1980-based alternate, it appears, one adds an increasing number to the inflation rate, where the number is more or less equal to the number of years that have passed since 1980, divided by 34. If that sounds arbitrary, it’s because it is.
[SEE: Deficit and Budget Cartoons]
But let’s think through the implications of these adjustments. If true inflation is higher than we think, it means that we can buy fewer things than we thought we could. If true inflation is higher than we think, a given increase in nominal gross domestic product translates into a smaller increase in real GDP than we thought. After all, nominal GDP just represents the sum of the prices of all of the goods we produce, while real GDP is the collection of goods and services that corresponds to this sum. How big are the changes implied by the ShadowStats adjustments to the inflation rate? I’ve helpfully calculated that and the results are shown in the graph below. The graph shows real GDP starting in 1980 as reported by the government and recalculated using the alternate inflation rates presented by ShadowStats. (Note that I'm using my best guess on the ShadowStats data, but their graphs are pretty clear as is the stark contrast illustrated.) The graph also shows that we are very poor. Using the 1980-based alternate inflation rate, for example, we are about half as rich now as we were around the time when then-Iraqi Leader Saddam Hussein invaded Kuwait – e.g., half the food, half the clothes, half the cards, half the cell phones, half the processing capacity, half the computer screen and half the floppy disks.
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