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August 19, 2011

Charting Inflation: BLS vs. Shadowstat (Guest Post)

By Doug Short

The August 2011 Consumer Price Index for Urban Consumers (CPI-U) released on Thursday puts the July year-over-year inflation rate at 3.63%, which is fractionally below the 3.96% average since the end of World War II.
For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components.

The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913 (BLS historic data). Our chart now shows inflation back to 1872 by adding Warren and Pearson's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

Click to View

Alternate Inflation Data

The ShadowStats Alternate annulized rate of inflation is 11.21%.
The chart below includes an alternate look at inflation without the calculation modifications the 1980s and 1990s.

On a personal note, the more I study inflation the more convinced I am that the BLS method of calculating inflation is sound. As a first-wave Boomer who raised a family during the double-digit inflation years of the 1970s and early 1980s, I see nothing today that is remotely like the inflation we endured at that time. 

Moreover, government policy, the Federal Funds Rate, interest rates in general and decades of major business decisions have been fundamentally driven by the official BLS inflation data, not the alternate CPI. For this reason I think it best to take the alternate inflation data as interesting but ultimately misguided statistic.

About Doug Short - Vice President of Research for Advisor Perspectives.  He holds a Ph.D. in English from Duke, and maintains a blog at dshort.com.  Doug's last name is not representative of his investment style.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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