Edward Charles Ponzi Jr. on the Consumer Pain Index

This post is by reader Edward Charles Ponzi Jr.:

People seem to wish to track the quantity of little green pieces of paper required to buy consumer goods and services. While such an exercise might make the most sense if it tracked fixed things like: a loaf of bread, an 8 oz. steak, a gallon of gas, a pound plaster, an hour with a doctor or whatever – that is not how at least one measure — the CPI — works.

The point of this post is not to explain the CPI – which could easily be the topic of a lengthy book – but to question the legitimacy of the current index and bring up the implications of its possible errors.

Firstly, there is every motivation to make this number as low as possible. If the CPI were stated as 8%-10% at the end of this year — this would have tremendous implications for interest rates, cost-of-living adjustments, retirement calculations and countless other economic issues.

I wish to start by pointing everyone to a body of work developed by economist John Williams and his entity: Shadow Government Statistics.

— while I am subscriber to his service, there is much data available for free and some very expert writing about the CPI and related issues of statistical gimmicks and humbug.

I was particularly happy to come across his research as I had been struggling with cost containment of my own personal and small business expenses. I have outlined some of that data below:

Mr. Ponzi’s Household 1999-2006 (Hooverville Falls, VT)

Heating Oil———————Tripled
Village Taxes——————Doubled
German Car——————–Up 50%
Village House Prices———Doubled
Medical Insure—————–Tripled
Other Insure——————–Up 50%
Casual Labor ——————-Doubled

As you can see Mr. Bernanke’s household expenses must be far more stable or he could not possibly describe “inflation” in terms of 2-3%. What’s more, the growth of the money supply – something some of us actually associate with “inflation” — is up over 10%.

To see CPI measured by the folks at Shadow Government Statistics visit this page.

It seems that SGS and the BLS are not on the same page. Likewise there is a similar controversy in the UK where the Telegraph hired some smart economists to un-gimmick their similarly happy CPI number.

(Article link.)

Below is a little summary of data from the US and the UK regarding this issue:

US/BLS————————-Official CPI__~2.5%
UK/ONS————————Official CPI__~2.5%
UK/Capital Economics——Real CPI____~9%
US/Shadow Gov Stats——M3_________~11%
US/Shadow Gov Stats——Real CPI____~10%

Well! Now this makes more sense! Look! More money! Higher prices! Gee, NO WONDER the middle class is feeling strained. Look how much one’s income needs to increase to maintain a fixed standard of living. Double your income every seven years or grow some gills – because you are underwater. OK – I am sure some people have different cost and spending patterns that get them better looking results – but that does not change the basic issue of gross understatement of CPI.

So my question for the Angry Bears is as follows:

Let us say that the CPI – if honestly stated – is really around 10%.

Think about the implications of that — at many, many different levels of economic and financial planning. Some I stated earlier: interest rates, cost-of-living adjustments, retirement calculations – how about some others?


Edward Charles Ponzi Jr.
Hooverville Falls
The Republic of Vermont