The politics of inflation measurement
Measurement of inflation is usually performed by government authorities—in the UK by the Office of National Statistics (ONS). The indices are normally created by supposedly independent statisticians. However inflation indices are key measures of the political performance of governments both internally and externally in comparison to other countries. Governments therefore have an incentive to portray their country’s inflation in the best possible light, usually taken to mean low but not negative. Moreover the lower the apparent inflation rate, the higher the growth of the economy appears to be, because inflation is deducted from the raw figures before GDP growth rates are calculated.
As the Economist recently noted: “Statistical offices vary in their ability … to resist political pressure” to manipulate both these key numbers (inflation and GDP). Therefore, when statistical authorities make changes to the system, especially ones that tend to result in lower levels of apparent inflation, there will always be calls of foul play, and often with some justification.
For example, most economists believe that the official rate of inflation in Argentina is now more than double that published by the government due to persistent changes . Economist John Williams set up a website called ShadowStats to not only chronicle such statistical adjustments in the US but also produce an alternative set of data (including inflation). His data suggest that had the US continued to use the same methods of CPI calculation employed in the 1980s, current inflation might be up to 8 per cent higher than officially reported.
Another alternative system to the US government stats was created by academics at MIT and is called the Billion Prices Project. Since 2008, they have been automatically collecting online prices every day from major retailers in the US. The inflation measure so created (now called the Price Stat Index) covers a wide variety of items, from food to clothing to electronics, furniture and energy . Although initially it seemed to follow the official stats quite well, in recent years it has been indicating that inflation may well be quite a lot higher than the official figures. For example at the beginning of 2014, Price Stats estimated inflation to be around 3 per cent, whilst the US government had a level of just half that, at 1.5 per cent*.
In the UK, there is evidence of similar adjustment of the reported inflation level, but the abuse is on a smaller scale. Measures such as RPI only slightly under-report its true level. CPI on the other hand has a number of issues – see here. It does markedly underestimate the true inflation level.
* In 2015 the difference reduced as inflation declined, as PriceStats is a leading indicator of inflation.