> Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported).
Inflation calculations (in the US) did not happen under Greenspan, or under any other Federal Reserve chair, because the calculations are not done by the Fed, but by the Bureau of Labour Statistics (BLS: https://www.bls.gov/cpi/).
The 1990s change to the CPI were done under the auspices of the US Senate Boskin Commission:
Your rent went up by 30%, groceries went up by 20%, but fuel went down by 10% and a new TV went down by 30%. Also people stopped buying steak because it went up 50% so we'll drop that from the basket. Let's see... if we run the numbers by dropping goods that are experiencing rapid inflation, and then weight things in a way that has no correlation with the increase in cost of living experienced by 99% of the population we get... oh look at that! 4.1%! Great news for the person who buys a new TV with their groceries every week!
> Your rent went up by 30%, groceries went up by 20%, but fuel went down by 10% and a new TV went down by 30%. Also people stopped buying steak because it went up 50% so we'll drop that from the basket.
Do you understand how StatCan calculates the CPI? What their methodology is?
The CPI you see in the headlines is made of of various components (Shelter, Food, Transportation, etc), the proportions of which are determined by spending surveys:
As people change their buying habits the items that are tracked also change to reflect what consumers are spending. Here are the items in each category:
Do you think the CPI should reflect reality—i.e., track what people actually buy—or be some arbitrary list of stuff that has no relevances to people's actually basket of goods (e.g., coal and lard were removed/replaced in 1956; 35mm film removed in 2013; video rental removed in 2015).
It should also be noted that the number reported in the headlines is the national average, while the prices can vary widely depending on your location. So in the report for February 2024, the national number was 2.8%, but Alberta had 4.2% while Manitoba had 0.9%:
StatCan has a "Personal Inflation Calculator" where you can enter your own numbers/budget and find a number that may be closer to what's happening around you:
Then tell the average Canadian to stop buying televisions so that it does not show in spending surveys. If people stop consuming televisions it will stop being part of the Consumer Price Index, QED.
Meanwhile Food is 11% of the CPI because that is on average what the average Canadian spends on their average basket of goods per the spending surveys that StatCan gets.
The OP and your reports agree: the Boskin committee changed the way inflation is calculated. The new way says there is less inflation than the old measure said.
So, if the new measure is actually wrong, then inflation is underreported now, when it used to be correctly reported before. The Boskin committee believes it was overreported before and it is now correctly reported.
You are absolutely correct that the BLS publishes CPI, but this still happened in the Greenspan era (and that's what I meant by "under Greenspan"). I remember reading (IIRC, in Bill Fleckenstein's book), that the Boskin commission was not free of interference and/or had an intent going in.
> One of the conclusions was (AIUI) that the CPI then-methodology actually resulted in numbers too high.
How is this any different from saying they changed the methodology to make the numbers look better? In my opinion the old methodology was better, but I realize this is a complex issue and there is no "correct" answer.
The way I read it, it’s actually the opposite of what you wrote. You suggested that the Fed relied on inflation numbers that it knew to be too low — i.e. that inflation was understated due to failure to account for substitution effects and the like. In fact, the Boskin commission concluded the opposite — i.e. that inflation figures were overstated in aggregate due to failure to account for things like quality changes and the substitution effect.
No, they suggested it now relies on inflation numbers that it knows to be too low. They said that inflation numbers used to be more realistic, but they have recently been lower than real inflation that consumers experience.
> How is this any different from saying they changed the methodology to make the numbers look better?
Define "better": is a higher CPI better, or is a lower CPI better?
Because the Boskin Commission found that the CPI numbers out of the BLS were too high and they changed the methodology to lower them after the Commission's report. Pre-Boskin CPI was being overstated.
A lower CPI is better for the government because it makes it look like inflation is a smaller problem than it is. So you're agreeing with me - they changed it to make the numbers look better.
I did answer the question - I said a lower CPI is better for the government because it makes it look like inflation isn't as bad as it is. Do you think it's better to report 5% inflation or 10% inflation? Regardless of what you report, the inflation is what it is. Modern politics is about pretending to solve problems, not actually solving them.
You sure are presumptuous. I don't think 0% is ideal. But for most of my life the US government has had an incentive to say inflation is lower than it is. And their methodology reflects their bias.
You really think it's a coincidence when inflation is peaking they change the formula and it just happens to be lower?
> […] they changed it to make the numbers look better.
They changed the number because the number was not modelling reality as accurately as it could have.
Perhaps actually read the Boskin Report:
> 5. Changes in the CPI have substantially overstated the actual rate of price inflation, by about 1.3 percentage points per annum prior to 1996 (the extra 0.2 percentage point is due to a problem called formula bias inadvertently introduced in 1978 and fixed this year). It is likely that a large bias also occurred looking back over at least the last couple of decades.
> 6. The upward bias creates in the federal budget an annual automatic real increase in indexed benefits and a real tax cut. CBO estimates that if the change in the CPI overstated the change in the cost of living by an average of 1.1 percentage points per year over the next decade, this bias would contribute about $148 billion to the deficit in 2006 and $691 billion to the national debt by then. The bias alone would be the fourth largest federal program, after social security, health care and defense. By 2008, these totals reach $202 billion and $1.07 trillion, respectively.
> 7. Some have suggested that different groups in the population are likely to experience faster or slower growth in their cost of living than recorded by changes in the CPI. We find no compelling evidence of this to date (in fact just the opposite) but further exploration of this issue is desirable.
Feel free to point out any errors in the methodology and logic that they used.
Here's a paper from 2006 to get you started:
> This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year. The paper summarizes the report's methods, findings, and recommendations, and then reviews the criticisms that appeared soon after the Report was issued. Post-Boskin changes in the CPI are summarized and assessed, as is recent research on related issues. The paper sharply distinguishes two questions. First, with what we know now, what should the Commission have concluded about CPI bias in 1995-96? Second, what is the bias now after the many improvements introduced into the CPI since the Commission's Report?
> About the first question, my own recent research on apparel and rental housing indicates a substantial downward bias in the CPI over much of the twentieth century, diminishing in size after 1985. Incorporating these findings into the Boskin matrix would reduce its 0.6 percent annual upward bias due to quality change and new products to a smaller 0.4 percent bias. However, this is more than offset by the stunning discrepancy over 2000-06 in the chain-weighted C-CPI-U compared to the traditional CPI-U, indicating that the Commission greatly understated the magnitude of upper-level substitution bias. This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent.
> Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher.
Inflation calculations (in the US) did not happen under Greenspan, or under any other Federal Reserve chair, because the calculations are not done by the Fed, but by the Bureau of Labour Statistics (BLS: https://www.bls.gov/cpi/).
The 1990s change to the CPI were done under the auspices of the US Senate Boskin Commission:
* https://en.wikipedia.org/wiki/Boskin_Commission
* https://www.ssa.gov/history/reports/boskinrpt.html
One of the conclusions was (AIUI) that the CPI then-methodology actually resulted in numbers too high.
This is true in many (most?) countries: e.g., in Canada CPI is calculated by StatCan and various types are used by the Bank of Canada (BoC):
* https://www.statcan.gc.ca/en/statistical-programs/document/2...
* https://www.bankofcanada.ca/rates/indicators/key-variables/k...
* https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=181002...