Inflation Perceptions vs. Statistical Orthodoxy

Nellie Oster gets things precisely backwards when she writes:

Though U.S. inflation has been firming recently—the core consumer price index (CPI) rose in April for a third month in a row—prices likely aren’t rising as much as you may believe.

Why? It turns out that people commonly perceive inflation as greater than it actually is. In a telephone survey conducted in the late 1990s and early 2000s, researchers from the Federal Reserve Bank of Cleveland asked 20,000 participants to state at what rate they thought prices had risen over the previous 12 months. Inflation as measured by the CPI during the period of the study was 2.7 percent, yet respondents thought it was roughly 6 percent.

The gap between inflation perception and reality can have significant implications for one’s purchasing decisions, and for investing as well.

Her narrative is the reverse of what it should be.  Instead of saying “It turns out that people commonly perceive inflation as greater than it actually is,” the truth is that people’s perception of inflation is a far better indicator of the way things “actually” are than government created statistics.  The government has long underreported the rising costs of things, as it gives them reason to continue to expand the supply of money in the economy.

However, the lesson here is that our era is one in which government statistics are supposed to act as the authority over one’s personal experiences in the market place and in the actual activity of drawing up one’s monthly budget.  It may appear that you are spending more on beef this year compared to previous years, but doggone it the government says it ain’t so!

The Bureau of Labor Statistics; wherein the Holy Writ of Statistics are Professionally Inspired

The gap is not between inflation perception and government-defined reality; but rather, the gap is between reality and government-concocted and carefully-crafted data points.  Moreover, the CPI itself is actually completely incapable of tracking the effects of inflation (remember, inflation is the expansion of the supply of money, which results in the rise in prices) because, by its nature, it does not consider the prices of those things which are most affected by the Fed’s monetary expansion.  Not only does the CPI exclude food and oil, but it also refuses to consider the staggering prices throughout the equity markets, the bond market, and even real estate.  The inflation goes there, precisely where the CPI ignores.  The CPI is a complete failure in accomplishing what it’s proponents want it to.

Oster claims that people miscalculate inflation because they are looking at things through the perspective of their own purchasing habits, rather than through the “basket of goods” chosen by the Bureau of Labor Statistics: “the consumption basket that applies to each individual may vary from the official ones, particularly with regards to how much is spent on each consumption item.”  But why is it that the BLS’s basket of goods gets to be the objective standard that defines the reality of the effects of inflation.  It would actually make more sense if the goods that people actually purchased were the object of study.  The idea of “official” baskets carrying more weight in the measure of the effects of inflation is silly. It is the creation of a gap between reality (what people actually buy) and mathematical lab science.

Of course, government generated statistics is vitally important to those who want to control the economy.  Those socialist central planners who think, falsely, that they can manage an economy are in desperate need of such data.  In fact, socialist ideals were the foundational cause of the drive for statistics.  As Zachary Karabell wrote in his fantastic look at the history of “economic indicators:”

The notion that a professionally run government could maximize a society’s output and stability through the application of scientific principles had widespread appeal, but almost every country lacked one key element: information. Yes, as we saw, governments had long been keeping track of trade and agriculture— the two traditional sources of wealth and power. But scientific management of society required data, and there, most societies and most governments were largely in the dark. As of the middle of the nineteenth century, almost every metric we now take as a given— from health statistics to economic data— simply did not exist.

In the United States, the birth of economic statistics was part of an overall movement toward social and political reform. The drive to create these statistics was fueled in part by a rising national suspicion that large companies, monopolies, railroads, and banks were reaping disproportionate rewards and thereby robbing the common man of his hard-earned gains. In Europe, a similar sensibility led to an efflorescence of Socialist movements, not to mention the birth of Communism. In the United States, it led to the birth of unions. Unions, in turn, believed that labor was being deprived of its rightful share of prosperity, but they couldn’t prove that. Hence the attempt to measure just what was going on in order to add weight to the widespread sense that many were suffering unnecessary hardship.

Karabell, Zachary (2014-02-11). The Leading Indicators: A Short History of the Numbers That Rule Our World (pp. 28-29). Simon & Schuster. Kindle Edition.

I’ll end with Murray Rothbard on government statistics, who largely observed the same; namely, that governments needs statistics because without them, not only are they blind in trying to control their socialist economy, but also because they need a rationale to convince the people that what they are doing is right:

Ours is truly an Age of Statistics. In a country and an era that worships statistical data as super “scientific,” as offering us the keys to all knowledge, a vast supply of data of all shapes and sizes pours forth upon us. Mostly, it pours forth from government.


Bureaucrats as well as statist reformers, however, are in a completely different state of affairs. They are decidedly outside the market. Therefore, in order to get “into” the situation that they are trying to plan and reform, they must obtain knowledge that is not personal, day-to-day experience; the only form that such knowledge can take is statistics.

Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy.


Certainly, only by statistics, can the federal government make even a fitful attempt to plan, regulate, control, or reform various industries — or impose central planning and socialization on the entire economic system. If the government received no railroad statistics, for example, how in the world could it even start to regulate railroad rates, finances, and other affairs? How could the government impose price controls if it didn’t even know what goods have been sold on the market, and what prices were prevailing? Statistics, to repeat, are the eyes and ears of the interventionists: of the intellectual reformer, the politician, and the government bureaucrat. Cut off those eyes and ears, destroy those crucial guidelines to knowledge, and the whole threat of government intervention is almost completely eliminated.