The stupid, it burns!

Sadly, Congress and the White House seem incapable of agreeing on substantive measures to tackle the $10.4 trillion mountain of U.S. debt.

But there is one long-overdue piece of important business that can and should get done: The adoption of a more accurate gauge of U.S. inflation that would yield immediate savings and help put the economy on firmer ground. The fix has already been endorsed by lawmakers in both parties, the Obama administration, many economists and a series of bipartisan deficit-reduction panels. Best of all, it would help shore up Social Security. Trustees for the retirement fund on April 23 projected it would run dry in 2033, three years earlier than last year’s forecast.

It has been widely recognized for almost two decades that the current measure, the consumer price index, contains several biases that cause it to overstate inflation anywhere from 0.3 percentage point to 0.8 percentage point, depending on which expert you talk to. The miscalculation has damaging consequences for the U.S. economy. The CPI is the benchmark that determines cost-of-living adjustments for a wide range of government programs, including Social Security and federal employee pensions. It also is used to peg income-tax brackets, exemptions, deductions and credits.

What Bloomberg is talking about is the use of so-called "chained" CPI.

What could possibly be wrong with this little word -- "chained"?

If you've read Leverage you know that one of the big scams is that the so-called "CPI" (consumer price index), which is what the government calls "inflation", is intentionally misleading.

Among the intentional distortions are the use of "owners equivalent rent" instead of house prices; the rent for a given piece of property goes down during repressed interest rates, while housing bubbles are encouraged.  That is, it costs less to purchase for investment on a cash-flow basis during such a time, which tends to make prices go up -- but rents go down, since cash flow is how rents are balanced in the marketplace.  And housing is the largest single expense for most households.

In addition the percentage computations for CPI are set for a "median" household.  This grossly understates the impact of rising food and energy prices for those who have a less-than-median income, and overstates them for wealthy households.  For example, electricity is allegedly 2.894% (about 3%) of your budget.  It's less than that for me, and I live in Florida where AC use is rampant.  But for someone who has a $200/month power bill here and a $50,000 gross income, netting around $40,000, their power bill is some 6% of their net income, not 3%.

Food at home is allegedly 8.6% of spending.  For my household it's considerably less than that.  For a family of four who only makes $25,000 a year I challenge you to feed them for under $200/month.

Then there's "hedonic adjustment", which is part and parcel of "chained CPI."  Some of this is already in the CPI; you can no longer buy a tube television, for example, but the LCD display is some 40% "better" according to the BLS -- so the fact that it's 40% more expensive is not counted as "inflation."  Of course if your old TV breaks from your perspective you either pay 40% more or have no television at all.

Chained CPI is the extension of this distortion to all changes in purchasing habits that result from price changes and personal economic circumstance, removing that influence.  So as meat becomes too expensive for seniors and they "trade down" to dogfood, chained CPI would eliminate the price increase in meat from the computation by shifting the weighting to dogfood as behavior changes.

This is "hedonic adjustment" on steroids, and effectively allows the government to screw anyone who is impacted by actual price changes by counting their behavior change as a mitigating factor. 

The gall of such a proposal is extraordinary -- but not surprising given recent history.  It also belies the desperation of the government; the fact of the matter is that monetary inflation and personal income looks like this:

What's worse is that this income "growth" includes purely financial credit (e.g. credit default swap margin) that doesn't directly enter the chain of commerce.  If we remove that and re-base to account for income growth net of monetary inflation less financial credit we get this:

If you want to know why the government is so desperate to "rebase" CPI, it's found in that chart.  Put simply since 2000 you have been serially raped as a consumer in terms of actual spending power.  The common chestnut is that "rising asset prices are good", yet someone has to appear with money for you to sell to in order to realize that gain; until you sell the alleged "gain" is in fact fictitious as you can't spend a paper gain, only a realized one.

When government gets to the point that it starts counting dogfood as equivalent to steak in its statistical reports you know the end of the line -- the brick wall that we're hurtling toward -- has come within full view, and the closing rate toward that wall is very apparent.