US Labor Day Inflation: Why Government Statistics Should NOT be Trusted

Last weekend I wrote

I am not a fan of statistics, especially growth statistics popularly known as Gross Domestic Product (GDP). Such statistics attempts to quantify people’s actions by homogenizing disparate or heterogeneous individuals into aggregates. Think of it, if I value beer and you don’t share my values, then how can such values be “aggregated”. People’s values are in essence subjective therefore non-quantifiable.

And through accounting entries, the simplification process involves the isolation of interrelated variables and the impression to its audiences of the supposed constancy of people’s actions.

The important point is that individuals have different choices shaped by values, preferences and importantly social, political, market and even environmental conditions affecting these. In short, individual choices CHANGE across time. I may want ice cream this moment, later beer and pizza. Tomorrow I may want salad, fish and juice. My friends may treat me to a steak dinner. A strong typhoon may compel me to just consume canned goods and so forth.

These changes cannot be captured by statistics.

The same applies to statistics on price inflation

Austrian economist Dr. Richard Ebeling at the EPIC Times explains why government statistics have been incompatible with reality

First the construction of the US Consumer Price Index  (CPI) [bold mine]

How do the government statisticians construct the CPI? Month-by-month, the BLS tracks the purchases of 6,100 households across the country, which are taken to be “representative” of the approximately 320 million people living in the United States. The statisticians then construct a representative “basket” of goods reflecting the relative amounts of various consumer items these 6,100 households regularly purchase based on a survey of their buying patterns. They record changes in the prices of these goods in 24,000 retail outlets out of the estimated 3.6 million retail establishments across the whole country.

And this is, then, taken to be a fair and reasonable estimate – to the decimal point! – about the cost of living and the rate of price inflation for all the people of the United States.

Due to the costs of doing detailed consumer surveys and the desire to have an unchanging benchmark for comparison, this consumer basket of goods is only significantly revised about every ten years or so.

This means that over the intervening time it is assumed that consumers continue to buy the same goods and in the same relative amounts, even though in the real world new goods come on the market, other older goods are no longer sold, the quality of many goods are improved over the years, and changes in relative prices often result in people modifying their buying patterns.

Why there is no “average”

The fact is there is no “average” American family. The individuals in each household (moms and dads, sons and daughters, and sometimes grandparents or aunts and uncles) all have their own unique tastes and preferences. This means that your household basket of goods is different in various ways from mine, and our respective baskets are different from everyone else’s.

Some of us are avid book readers, and others just relax in front of the television. There are those who spend money on regularly going to live sports events, others go out every weekend to the movies and dinner, while some save their money for an exotic vacation.

A sizable minority of Americans still smoke, while others are devoted to health foods and herbal remedies. Some of us are lucky to be “fit-as-a-fiddle,” while others unfortunately may have chronic illnesses. There are about 320 million people in the United States, and that’s how diverse are our tastes, circumstances and buying patterns.

This means that when there is price inflation those rising prices impact on each of us in different ways….

The Consumer Price Index is an artificial statistical creation from an arithmetic adding, summing and averaging of thousands of individual prices, a statistical composite that only exists in the statistician’s calculations.

Why individuals actions depart from statistics

It is the individual goods in the subcategories of goods that we the buying public actually confront and pay when we shop as individuals in the market place. It is these individual prices for the tens of thousands of actual goods and services we find and decide between when we enter the retail places of business in our daily lives. And these monetary expenses determines for each of us, as individuals and particular households, the discovered change in the cost-of-living and the degree of price inflation we each experience.

The vegetarian male who is single without children, and never buys any types of meat, has a very different type of consumer basket of goods than the married male-female couple who have meat on the table every night and shop regularly for clothes and shoes for themselves and their growing kids.

It is the diversity of our individual consumer preferences, choices and decisions about which goods and services to buy now and over time under constantly changing market conditions that determines how each of us are influenced by changes in prices, and therefore how and by what degree price inflation or price deflation may affect each of us.

And it is government’s manipulation of money supply directly (unsterilized open market operations) and indirectly (through loanable funds in the banking system) that are key determinants in the distortion of pricing system and causing imbalances in the allocation of resources across markets and the production process. This can partly be seen in the money supply growth.

Nevertheless, here is the US Overall CPI as of July 201

Here is the Core Inflation rate (ex-food and energy) over the same period

Meanwhile here is the US Labor Day inflation

From CNN (hat tip Bob Wenzel)

Hamburger 10.3%

Steak 9%

Pork Chops +10.4%

Hotdogs 6.9%

Chicken 3%

Cheese 7.1%

Beer .4%

Soda –.4%

Two worlds apart.