The chart is from
Shadow Stats. You can read on the home page how John Williams, a private consulting economist, out of necessity became a specialist in government economic reporting.
I got interested in Shadow Stats when I found that Williams chart more closely reflected reality for me and friends who ran small businesses that the government stats.
There are links to
various primers including the CPI, Unemployment, & GDP.
SS Primer on CPI
In addition to separating out the cost of food and energy from core inflation, there are several biases understating inflation that have been built into the CPI.
Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment in relation to inflation, and to be able to accurately measure how the standard of living one can afford on a given income stands in relation to inflation.
In the early 1990’s the ‘substitution effect’ was introduced as a result of the
Boskin Report which deemed the fixed basket of goods was irrelevant. For example if the price of steak went up ‘too much’ the price of hamburger, chicken, or Spam was substituted. The CPI morphed from the cost of maintaining a certain standard of living to the cost of maintaining a declining standard of living.
Information about using substitution is found
here (Boskin Commission Report). The example used is chicken vs beef.
The actual steak vs hamburger is found
here (Panel Sees a Corrected Price Index as Deficit-Cutter). In the same article you'll see references to substitution and quality change.
Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting which automatically gives a lower weighting to CPI components that are rising in price, and a higher weighting to those items dropping in price. Weighting works in conjunction with the substitution effect.
Hedonics is my personal favorite. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from modifications to those goods, e.g. if you pay more for gas because of federally mandated additives, the additional cost does not count toward the CPI because of your increased pleasure in breathing ‘cleaner air’.
A Hedonic Price Index for Airline Travel:
Re: Hedonics and Quality Adjustment - QUALITY ADJUSTMENT FOR GASOLINE
"A quality adjustment has been made to gasoline prices used in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent. In those areas required to sell the reformulated gasoline, virtually all of the January price quotes were for reformulated gasoline."
From the
1999 Economic Report of the President: " reason for the slowing of reported price indexes has been methodological changes to both the CPI and the indexes used in the national income accounts ".
Intervention analysis is an enhancement to seasonal analysis; it tones down severe upswings.
John Williams welcomes questions at his web site.