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BLS Responds to Criticisms of CPI

Posted by: Michael Mandel on September 04

The BLS has just published its response to its critics, especially John Williams at Shadow Government Statistics. The BLS writes:

One widely cited alternative index is based on an estimate that changes to the CPI since 1983 have lowered its growth rate by at least 7 percentage points per year. The use of the geometric mean alone is stated to have lowered the CPI growth rate by 3 percentage points, and other BLS changes, such as the use of hedonic models and OER, supposedlyhave lowered the growth rate by an additional 4 percentage points.

Each of these estimates of the impact of BLS changes is inconsistent with the empirical evidence. As noted earlier, the BLS has computed indexes showing that the use of the geometric mean formula has reduced the growth rate of the geometric mean of the CPI by only -0.28 percentage point per year, not 3 percentage points. Also discussed earlier, BLS analyses have shown that if the implementation of hedonic adjustment models since 1999 has had any net downward effect, it is very small.

I looked at the Williams site, and I honestly have no idea where he gets his numbers. Can anyone enlighten me?

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Reader Comments


September 5, 2008 04:23 AM


I do not have a paid subscription to the site so I do not have all the specific technical details.
Subscribers can get all the data samples they need and the specifics about the calculation applied to it.
You can find an interesting primer here:

I'm sure Williams will be happy to asnwer to all of your questions..send him an e-mail.

An other good source of information about inflation distortion is here:

In the search box just type, cpi, hedonics, inflation, distortion, etc..
Many articles written by economists with specific examples.

Some other food for thought:

An old article on Bloomberg by John Wasik

Search for hedonics, CPI and inflation at Nouriel Roubini's RGE Monitor (

In that site, look at here: and click on the "PPI Hedonic Adjustments" blog entry.

Chapter 2 of Bill Fleckenstein book "Greenspan's Bubbles" is dedicated to inflation number official "massaging" and the Boskin Commission with specific examples.

Let's have a quick look to some of them

1) Switch of the period-to-period CPI calculation from arithmetic to geometric.

Let's say the price of an item rises from $100 to $161 over 5 years.
The annualized rise, the geometrical calculation is 10% a year. The change each year, the arithmetic calculation is a little more than 12% (61 divided by 5). Over 2% difference right there...

2) Hedonic adjustment

Accordingly with the Leuthold Group, a Minneapolis investment research firm, between 1979 and 2004 the average price for a new car in the US increased from $6,847 to $27.940, a 308% increase.
The BLS calculation for the consumer price index only comes to 71% increase for autos over the same period...I guess we lost 237% along the way...

Let's have a look at the devastating effects that hedonics has on GDP calculation:
In the computer equipment & software sector, where obsolescence rate is very high, hedonics adjustment "magic" goes wild.
In 1998 95.1 billion was actually spent on business computers but the BLS hedonic "massaging" concluded that the figure was 351.8....that trick alone increased real GDP by over 2%...
In Q4 2000 118.2 billion (annualized) were spent on the same items...hedonics "processing" again et voila', we have 329 billion annualized.
So the "real" dollars spent were 2.8 times higher than the nominal dollars (you know, the ones we need to carry in our wallets to buy real stuff...)
So the difference was 210.8 billion, 2% of GDP in that year...not exactly a statistical insignificance as the BLS want us to believe...
Actually, in that quarter these "statistical" (we should say nonexistent) dollars made up a total of 25% of GDP growth.
As Dr. Kurt Richebacher said: "This statistically created "production" is nobody's expenses and nobody's revenue"

Finally, as Jim D mentioned, there is the econbrowser blog, (, with many interesting posts by competent economists and the vast majority of them believe that the inflation official figures are vastly understated.
In that blog there is an interesting reply to one of the blog author's post about debunking shadowstats says:

"Shadowstats gets credibility in that their model reproduces the BLS numbers prior to the changes, and in that the numbers they claim for now seem much more in keeping with people are experiencing. Can I confirm the model from my desk - no, but neither can I judge the BLS'.
Using the BLS as the source to judge Shadowstats criticisms of the BLS is silly."

If BLS really thinks that all these methodology "upgrades" have a negligible effects on what the real figures should be, they are seriously in denial....

Keith G

September 5, 2008 10:39 AM

What incentive would the BLS have to deliberately mislead the business sector, academia, and the public?

Why does all the criticism of the CPI come from the periphery? Why aren't the brightest minds in our best universities clamoring for a correction? What about our best economist in industry? Would it be possible for all to be in on the 'conspiracy'?

The assertion that the CPI is woefully off and that things are really much worse than 'The Government' is telling us is a an assertion that should be thrown into the trash-bin of conspiracy theories already proved bunk. This can be placed next to 'the world is really flat', 'we really did not go to the moon', 'the government caused 9-11', and the rest.

Besides, the assertion that inflation is really running at 8%-12% year-over-year does not square with anyone's own personal finances. Over the past ten years my house payment has not changed, my car payments (all 60 month) have gone up by 30% (that's 3% per year)with 10-times the features, my energy costs have gone up by 6% per year, my food has gone up by 4% per year, and all my other purchases (computers, furniture, cell-phones, services...) have stayed the same even though the features and quality have improved. All weighted correctly I've seen 2% to 2.5% year-over-year inflation.

Those who are honest with themselves will find that IF their purchases doubled in the past ten years it is because they bought a much bigger house, nicer car, more plasma TV's, more vacations,.... However, apples-to-apples the current CPI is not off by much if it is off at all.

The folks selling this stuff are trying to make a name for themselves and create a brand image so they can 'create' a career. It is all fear-mongering -- do I hear DOW5000?


September 5, 2008 11:47 AM


What incentives the government has??
Let's see...COLA adjustments for entitlements programs and public sector wages for a starter....we are not talking about pocket change here....

How much was your required down payment on your 60 months car financing 10 years ago compared to today??
I do not really care how many more features the new cars have..I cannot opt out of it..I'm forced to pay...

The criticism to government statistics come only from the "periphery"??

Walter "John" Williams is a consultant for Fortune 500 firms and and Edward Tuck Scholar...

What about Nouriel Roubini?? Kurt Richebacher?? Several prominent economists of the Austrian School??
Marc Faber?? Even George Soros mentioned several times the grossly understated inflation...

You know, all of them conspiracy nutjobs..

Numbers don't lie....

Jim D

September 6, 2008 10:14 AM

"What incentive would the BLS have to deliberately mislead the business sector, academia, and the public? "

Each nudge, each adjustment upward, is a relatively small thing. In other areas of the government, this happens all the time.

But this is statistics, not the parks budget, and in this case, the changes are additive.

So, over time, the CPI slowly drifts down. The GDP slowly drifts up. Unemployment drifts down...

Until finally, they become so disconnected from reality that they become the subject of public mockery.

These changes were made by both Democratic and Republican administrations, so this isn't a partisan thing.

The stats are a joke, and the blogosphere isn't going to let this one go, I suspect, until there's some actual reform.

"However, apples-to-apples the current CPI is not off by much if it is off at all. "

Houses went up by how much? Healthcare, how much? Food? Gas?

TVs are the same price, but more features - does that really make them cheaper? Even if they last half as long?


If you're going to make statements like this address hedonic adjustments and the OER. Address exclusion of discouraged workers. The great thing about the data is that they don't just lie, they TELL you how they lie.

Ron Mepwith

September 7, 2008 09:56 PM

The government of the U.S. has lost all credibility. No rational person believes the economic figures the government puts out. No rational person believes the lies put out by the military about it's "victories." No one believes what Bush or Cheney say.
Polls show this when people are asked whom they trust. The government is addicted to falsehood and cheating.


October 27, 2008 10:43 AM

"Let's say the price of an item rises from $100 to $161 over 5 years.
The annualized rise, the geometrical calculation is 10% a year. The change each year, the arithmetic calculation is a little more than 12% (61 divided by 5). Over 2% difference right there..."

Uh....NO. This is simple mathematics, inflation is a compounding item. You cannot just take the gain divided by the number of years.

Use excel and the FV or RATE function. This has nothing to do with using "the geometric mean" your math is simply wrong.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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