“Fake news” is a matter of opinion. Fake data is a matter of fact.
by John Ward
In this, Part Two of the Slog’s series on how and why “official” statistics can no longer be trusted, we look at how inflation has been consistently and deliberately under-reported since the early 1980s….with the twin aims of suppressing wage demands and cutting welfare benefits.
There are at least two enormous holes in the official measures of inflation used in the developed world. First, since the sales of public housing, deregulation of education and dilution of the public health services, costs that my parents’ generation never faced have gone through the roof. Poorly controlled mortgage leveraging, huge increases in the buy-to-rent sector, private health cover and a growing pool of private school users have all caused the monthly outgoings of middle class family rearers to explode.
Yet few if any UK, US or eurozone government measures have adapted to the sea-change. In the US, healthcare outgoings are under-represented by 50%. In the UK, further education fees alone are still based on ludicrously outdated estimates, and the rental cost calculations use formulae suggesting that the analysts involved have warped back to 1981.
So it’s hardly surprising that less “official” measures tell a very different story. Thus, according to the Burrito index, over the last 16 years real prices have risen 160%…an non-compounded average of 10% per annum, roughly six times the G7 average.
Top end middle-class wage inflation (again, dubiously measured on many bases) has reflected those pressures to some extent, but the great majority of white and blue collar workers – recorded even officially as having lost 35% of spending power since 1990 – have almost certainly fallen behind in real wage terms by something closer to 60%.
Secondly, the inroads made by banking, technology in general and the internet in particular have changed everything in terms of the services available, and how we choose (aka need) to spend our money.
The real cost of hitech for example – renewal of hardware, downloading of apps and repair kits, upgrading of mobile phones, mobile contracts, fixed line services, routers and so forth – is not factored in. I have struggled over the last few weeks to find any real signs that “online inflation” is being measured in any real sense at all.
Today, over 35% of UK households regularly pay for the provision of TV programming via satellite and cable on top of the TV licence fee. The children in these households download at a phenomenal rate, further bumping up the cost of entertainment. None of this is measured beyond vague and often arcane estimates.
Financialisation of our everyday lives is apparent to the older generation via lost expenditure on interest rates during the 10 years of Zirp we’ve all been handed, erosion of currencies thanks to QE purchases, and pension increases held back by the very under-reporting of inflation I’m writing about here. (The UK government has decided to move from a passive to active policy of crushing pensioners by simply telling WASPI female victims to wait for up to six years for pensions they were promised at birth in 1953).
Some time around the beginning of the 1980s, as neoliberal economics began to grab the imagination of government accountants and greedy managers, the process of turning real inflation reporting into carefully created fiction began. This is no conspiracy theory: awareness was (at long last) rising among the élites that welfare promises made in 1947 could not be sustained beyond 1997. The demographic timebomb had been miscalculated by bureaucrats and ignored by vote-centric politicians.
The US property boom in the 1980s offers one of the earliest examples of bent data. In 1983, the BLS suddenly decided to stop measuring house price and mortgage repayments, and instead invented a calculation based on what homeowners would charge themselves in rent. You may wonder what the point of that was, as indeed do I.
Bizarrely, at the very moment our lives were about to undergo the personal computer and TV channel explosion, those “auditing” inflation chose to ignore or tinker around at the edges of a “shopping basket” that soon became either a recyclable bag or a van delivery to the home. A postal service that handled letters became a privatised collection of sectors delivering Amazon packages: but in Washington and Whitehall – to the joy of those on Wall Street – only lip-service was paid to the revolution taking place.
Those in the political, bureaucratic and academic bubble haven’t just ignored the changes: they have over-complicated (sometimes naively, but always to the citizens’ disadvantage) the definitions of even those sectors of purchase not affected by the sea-change in how we consume. Thirty or more years on, CPI in 2017 is divorced from physical cost realities; instead of being a consistent measure of fixed items – updated but still recognisable and comparable – it has chopped and changed what was, and ignores huge expanses of what is.
Predictably, this has involved the introduction of various models. One particularly silly one is the hedonic quality model that adjusts cost increases downwards to take into account ill-justified quality improvements by the manufacturers. This is insane: a product costs what it costs, regardless of performance. “Ideas” like this one have made measuring motor vehicle inflation a nonsense.
By the turn of the century, Fed Chairman Alan Greenspan was talking openly about “correcting the CPI definitions in order to try and reduce the deficit and the cost of welfare programmes”.
It isn’t just that sovereign governments need to depress inflation rates in order to cut their real expenditure: it’s also that the unhealthy presence of aggressive business lobbying (and political donations) in our ‘democratic’ systems has gradually “bought” the data reporting to keep wages depressed. In the mid 1990s, BLS commissioner Katherine Abraham reported that senior politician Newt Gingrich asked her to change the formulation of her statistics, “and if you can see your way clear to doing these things, we might have more money for BLS programmes”.
When a consortium shorting the US housing market in 2008 asked Standard & Poors why the collapse in mortgage provision wasn’t being reflected in the valuation of property investment packages, they were told “because if we don’t do what the banking firms want, another ratings agency will, and we lose the business”.
“Keep the masses happy” has been very much the order of the day. This led to another ludicrous approach in the US, the “substitution” calculation. In the mid 1990s, steak prices began to race ahead. Rather than factor this in, the Fed substituted chicken and hamburger as the measurement, the “rationale” being that average families would stop buying steak. A central bank was choosing to predict consumer behaviour and measure that, rather than measure the inflation. (Chicken prices were falling, so hey presto – no meat inflation).
In 1997 in the US, a methodological change at the Bureau of Economic Analysis depressed the real cost increase of visiting GPs, and at the same time understated cost rises for the Federal Government in support for public hospitals. Result: health inflation and the deficit both under-reported.
Other concepts like “Geometric weighting” and auto emission changes were used – along with suitable fiscobabble – to place more emphasis on discount retailing, but none at all on the increased cost of lead-free petrol. None of it was remotely relevant to the precise empirical measurement of the cost of living: on the contrary, it ignored the effect of higher prices on daily purchases. It understated inflation.
I could continue like this forever. The bottom line is that several distinguished commentators have calculated in recent years that the cumulative effect of under-reported inflation has been to cut US social security cheques by half in value.
Three years ago, the UK Think Tank New Economics Foundation (NEF) showed that the true impact of inflation on the poorest 50% in Britain had been woefully understated by official measures. It highlighted an eye-popping 15% real drop in spending power by the bottom half from over one year beginning late in 2012. The NEF report stated:
“A key difference is that poorer households spend proportionately more on essential goods and services – housing, food and utilities – than the richest. Because CPI is based on average for everyone, it ignores this effect. And with the prices of essentials rising so much in recent years, with food up 46% and gas and electricity 73% since 2005, this income effect matters.”
It described the British CPI as “fundamentally flawed and no longer fit for purpose”. The Treasury declined to comment.
In March this year, UK-based economics blogger notayesman showed how the same idiotic ‘rental equivalence’ measure is also, spookily, employed for the British CPI’s domestic costs measure:
‘ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property….So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?’
There is a simple Keynesian truth to which I still cling: while the rich amass assets, the poor acquire debt.
Understating the rate of inflation over long periods not only “saves” the Government money and allows its globalist pimps to make more: it also artificially narrows the recorded gap between rich and poor.
Put together, the entirety of the process maintains the Sleeple of the Sheeple.
One second after Mammon is introduced to the objective measurement of social wellbeing, the task becomes subjective deception. Clinton, Blair, Brown, Obama and Hollande have been every bit as complicit in this as Greenspan, Bush, Diamond, Yellen, Draghi and Cohn.