Free Market Central Interview: Scary Stock Market Sell-Off Could Mean This Man Is RIGHT About Inflation [LISTEN]

Free Market Central

Rising fears of inflation are said to be a factor behind the stock market-sell off that caused the Dow on Monday to plunge more than 1,100 points, the biggest one-day drop in its history. This analysis should come as no surprise to John Williams, whose ShadowStats alternative economic indicators are featured on our home page. In this Free Market Central Interview, Williams explained that the government has long been gaming the numbers. He believes that the annual rate of inflation is far higher than the 2 percent rate officially reported. And it's likely to get worse.

Your ShadowStats website with its alternative economic indicators has a dedicated following among libertarians and others. What got you into the business of compiling these statistics?

I was a consulting economist for more than 30 years. Initially I began forecasting near-term economic activity and interest rates.  Over the years, the federal government redefined and gimmicked headline inflation and economic data, including employment and unemployment.  Their more-positive redefined numbers varied increasingly from underlying reality. My clients increasingly were interested in measures of real world activity.  

So what do your numbers tell us?

First, inflation is a great deal higher than the government is reporting.  Second, recent inflation activity has been driven primarily by volatile gasoline prices, not by an overheating economy.  Third, the economy is not recovering as advertised.  The massive inflation threat indeed is monetary, and will be seen increasingly over time as the global markets dump the dollar, tied to the weak economy and long-term uncontained budget deficits.  A hyperinflation is inevitable unless the government can contain its long-term unfunded liabilities.

The government insists annual inflation is around 2%. You say the real number is closer to 10 percent.

It was 10.0% in September, 9.8% in October and 9.9% in November 2017, as measured year-to-year.  It varies monthly with the government's reporting.  It is a corrective estimate built on top of the government's reporting, which was 2.2% in November 2017.

Why does the government so dramatically understate the numbers?
The government's [intent] was to minimize headline inflation reporting, to help reduce budget deficits.  The two areas of benefit commonly cited were (1) reducing cost of living adjustments for Social Security payments, and (2) boosting tax payers into higher tax brackets (based on inflation-adjusted income levels).  This was a way of cutting benefits or increasing taxes without anyone in Congress actually having to make politically-difficult votes in those areas.

When did the U.S. start altering its methodology?

The changes began in the early-1980s and have continued to date under all the related Administrations and Congresses, up to and including the current tax bill.

How has the method of measurement changed?

Consumer inflation was [traditionally] measured in terms of the annual change in the cost of living, that is the cost of maintaining a constant standard of living.  The same basket of goods would be priced year after year, with the annual cost difference being the rate of inflation.

In the 1980s the U.S. government began making "hedonic quality adjustments" that reduced the headline pace of inflation. It was based on a computerized assessment of “better quality” that generally was not recognized by consumers. Inflation-adjusted goods no longer reflected out-of-pocket costs.

In the 1990s the government redefined inflation to be substitution-based, not based on a fixed basket of goods.  When steak went up sharply in price, the government wanted to shift the weighting in food from steak more to lower-priced chicken or hamburger, which lowered the headline inflation rate. The problem is that having to buy chicken instead of steak, because steak was too expensive, no longer reflected maintaining a constant standard of living.  

My inflation measure is as close as I can come to the traditional measure.

Are there certain goods/services that more strongly influence the perception of inflation? For example, food. According to the Economist’s Big Mac Index, the average price of a Big Mac was $3.57 in 2008. It’s now $5.28.  

Sure. Inflation perceptions always reflect common experience.  Most people will recognize if they are getting by on the same money for the same, common out-of-pocket goods and services as before—or not.  

Why hasn't there been more widespread questioning of the government’s numbers? 

[The redefinition of inflation] in the mid-1990s was highly publicized. It was backed by Alan Greenspan, Newt Gingrich and others.  It received positive play in the popular press as a "better CPI." Any squawk by the public was muted.  Some minimal protestations were offered as a new, fully substitution-based CPI was just formally adopted in the new tax bill, to accelerate taxpayers being boosted to higher tax brackets.  The "tax hike that keeps on taking" was a description I recently heard.  The popular press rarely picks up on the problem.

That's remarkable. Perhaps the Internet and the availability of more information on sites like yours will increase public pressure for a more honest accounting. Thank you for taking the time to talk with us today.






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The Fed vs. the Middle Class

With interest rates flattened [by the Federal Reserve], government zeroes out the future. Abandoned were 80 percent of private defined-benefit pension plans. Public plans faced a similar evisceration in the future. With no acknowledgement, the U.S. government had casually dispossessed the American middle class of its retirement assets and pushed millions of Americans into acute dependency on government programs. ... Government dependency negated the American dream.

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Shadow Stats Snapshot

FreeMarket Central

ShadowStats alternate economic indicators are based on the methodology of noted economist John Williams, specialist in government economic reporting.

  • Unemployment:
    FreeMarket Central BLS: 4.05%
    FreeMarket Central Shadow Stats: 21.5%
  • Inflation:
    FreeMarket Central June Year-to-Year: 2.87% (CPI-U*)
    FreeMarket Central Shadow Stats: 9.9%

*[cpi-u is the Bureau of Labor Statistics inflation rate for all urban consumers]