Do You Believe in the Consumer Price Index?

Do you trust our government to tell us the truth? My answer is no, never. Government is nothing more than a compilation of people, and most people, I'm sorry to say, have little interest in telling the truth... especially from a position of power.

This is why I am wary of government statistics. For example, when the unemployment rate drops from 8.3% to 8.2%, I don't believe more people are working. Maybe that .1% differential got discouraged and stopped looking for work. Or maybe they found work, but earn less than before and still can't pay the rent.

John Williams has devoted his website, www.shadowstats.com, to exposing the inaccuracies of government statistics. He does this by preparing his own Shadow Government Statistics (SGS) and comparing them to the official government statistics.

For example, Mr. Williams writes the following about inflation:

The CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990. The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.

The obvious question is why the government would want to distort CPI statistics. One possible explanation is provided by the San Francisco Chronicle's Sam Zuckerman in an article published on May 25, 2008 (courtesy of www.shadowstats.com):

By lowering the official inflation rate, such changes promised to reduce the annual cost-of-living adjustments for Social Security and other federal programs.

One method of lowering the official inflation rate is by using geometric weighting instead of arithmetic weighting. According to Mr. Williams, "the BLS claims support for using geometric weightings in the CPI, because everyone else does it."

However, the federal government is not without its supporters. For example, yesterday Joe Weisenthal of Business Insider wrote that "US economic data is the world's gold standard."

This is what Mr. Weisenthal had to say about the above controversy:

The most popular realm is in the area of inflation: Tons of people think the government purposely distorts inflation data to make it seem cooler than it is. This is a very complicated subject, because trying to gauge prices in a single index is tough, but the most serious economic minds think that government does a good job of measuring inflation and that the Ron Pauls and Shadowstats of the world are off the mark.

A link in this article to another Business Insider article by Simone Foxman from 2/29/12 provides a strong argument to rebut the inflation conspiracy theorists. Ms. Foxman argues that:

the consumer price index is meant to measure the effect prices have on a consumer's utility, not on what they can actually buy.

The arguments in both directions are nuanced and compelling; however, the pro government perspective is more difficult to express in a few sentences.

What do you think? Are the statistics for inflation, unemployment, etc. accurate and reliable?