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Sunday, May 31, 2009

How is the CPI Calculated?

The CPI is a commonly cited statistic. However, there's no public discourse about how it's actually calculated. I tried to find *THE EXACT CPI FORMULA*, and was unsuccessful.

There's a political incentive for the CPI to understate true inflation. For a better measure of inflation, look at M2, M3 (no longer published), or the price of gold.

If you believe "The CPI is an accurate measure of inflation!", then you're an idiot who believes all the pro-State propaganda you hear.

The CPI is reweighted quarterly or annually. (I'm not sure.) The weights are chosen in a manner to bias inflation downward. Things that rapidly rose in price are given less weight. Things that rise in price slowly are given more weight.

The weights are selected retrospectively. In January 2008, the bureaucrats who calculate CPI don't say "These will be the weights for 2008!" In January 2009, they look back at price data for 2008, and *THEN* choose the weights.

I couldn't find any public disclosure of the weights when I looked.

Also, CPI is calculated via a geometric mean instead of an arithmetic mean. If you know Math, then you'll know that the geometric mean is less than the arithmetic mean.

For example, the arithmetic mean of {1, 3, 9} is (1+3+9) / 3 = 4.33. The geometric mean is (cube root(1*3*9)) = 3. In this example, the arithmetic mean was 44% more than the geometric mean. The more dispersal in the data, the greater the discrepancy between arithmetic mean and geometric mean.

Money supply inflation does not lead to uniform price inflation. These tricks allow the CPI to understate true inflation.

For example, in one year, inflation might be high in California but low in New York. The next year, inflation might be high in New York but low in California. The geometric mean, plus reweighting, makes the CPI less than true inflation.

As another example, suppose chicken rises in price while the price of beef is flat in 2007. In 2008, the price of beef rises rapidly while the price of chicken is flat. In 2007, the weight of beef is increased. In 2008, the weight of chicken is increased. The weights are chosen after the previous year price data is disclosed, making the result biased.

The CPI is pure propaganda and should not be taken seriously. If you want a better measure of inflation, look at M2 or M3 or the price of gold.

These two webpages are a good source for historic gold prices.

Another measure is M2. The Federal Reserve publishes M2 statistics.

This page has "reconstructed M3". The Federal Reserve stopped publishing M3 a few years ago, so they could cover up how bad inflation actually is.

Anybody who says "The CPI is a fair and unbiased measure of inflation!" is pro-State trolling.


Sovereign said...

Unfortunately, the price of gold is also manipulated.

Cheapo Groovo said...

Another good site is Shadow Government Statistics

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