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NEW YORK (CNNMoney.com) -- Americans are feeling a lot more economic
pain than the government's official statistics would lead you to
believe, according to a growing number of experts.

They argue that figures for unemployment and inflation are being
understated by the government.

Unemployment and inflation are typically added together to come up
with a so-called "Misery Index."

The "Misery Index" was often cited during periods of high unemployment
and inflation, such as the mid 1970s and late 1970s to early 1980s.

And some fear the economy may be approaching those levels again.

The official numbers produce a current Misery Index of only 8.9 -
inflation of 3.9% plus unemployment of 5%. That's not far from the
Misery Index's low of 6.1 seen in 1998.

But using the estimates on CPI and unemployment from economists
skeptical of the government numbers, the Misery Index is actually in
the teens. Some worry it could even approach the post-World War II
record of 20.6 in 1980.

"We're looking at government numbers that are really out of whack,"
said Kevin Phillips, author of the book "Bad Money."

No inflation if you don't eat or drive
According to the government's most recent Consumer Price Index, a key
inflation reading, consumer prices rose 3.9% in the 12 months ending
in April, down slightly from the 4% annual inflation rate in March
despite record gasoline prices.

But Phillips argues that consumer prices are probably up at least 5%
and perhaps more than 10%.

Part of the disconnect may be due to the fact that nondurable goods,
such as food and gasoline, makes up only 12% of CPI.

In addition, food and energy prices are eliminated from the so-called
core CPI, which many economists tend to focus more closely on because
they claim food and gas prices are volatile.

But food and energy costs are a very important part of household
budgets. And those prices have been skyrocketing: Gas prices were up
about 21% over the 12 months ending in April.

However, due to seasonal adjustments in the CPI, the government
reported that gas prices were down 2% in April, even though on a non-
adjusted basis, gas prices rose 5.6% from March.

And even that number may be too low. Measures of gasoline prices by
AAA and the Department of Energy suggested prices rose as much as 10%
in April.

Meanwhile, food prices rose 5.1% over the last 12 months, according to
the report. The nearly 1% one-month jump in food prices in April was
the biggest spike in 18 years.

To that end, nearly half of the respondents of a recent CNN/Opinion
Research Corp. poll said inflation was the biggest problem they face.

CPI missed the housing bubble...and bust
Another problem with the CPI figures, according to skeptics, is that
it doesn't accurately reflect what's going on in the housing market.
That's significant because the cost of buying a home has twice the
impact on CPI as does the prices of all nondurable goods combined.

The CPI showed only an 11% rise in home ownership costs from 2002
through 2006, a time that the National Association of Realtors
reported that existing home prices soared 34%.

The reason for the low CPI reading is because the CPI looks at
equivalent rents, rather than home prices. So inflation was
understated during this period, according to Phillips. He argues this
may have helped feed the housing boom since it kept mortgage rates
lower than they should have been.

Now that the housing boom has gone bust, the CPI appears to be missing
the declines in home prices as well; it estimates that the cost of
owning a home posted a 12-month increase of 2.6% in April.

But because the CPI figure was so far behind tracking the increase in
home values, the housing component of CPI still is leading to a lower
inflation reading than what it should be, Phillips said.

The inflation 'con job'
The unusual way that housing prices are estimated isn't the only
peculiarity of the CPI report. Over the past ten years, there have
been other changes in the calculations, particularly for big ticket
items.

Cuts to estimated prices for items like electronics and cars that are
thought to have improvements in quality year-after-year have lowered
the overall CPI. In addition, changes in the way certain products,
such as food, are tracked by the government, have also contributed to
lower readings than otherwise expected.

Bill Gross, the manager of Pimco Total Return, the nation's largest
bond fund, refers to the CPI as a "con job" that deliberately
understates the price pressures faced by Americans in order to keep
Social Security payments and other government costs pegged to the
index unduly low.

In a report about the CPI, he noted that some of the adjustments don't
accurately reflect how much consumers pay for goods. Pimco estimates
that the changes have shaved more than a percentage point off the CPI.

"Did your new model computer come with a 25% discount from last year's
price?" Gross wrote. "Probably not. What is likely is that you paid
about the same price for memory improvements you'll never use."

Another flaw with the CPI numbers is that the government now assumes
that higher prices for one item will lead consumers to buy more of a
substitution item. That may be true. But if people buy fewer steaks
and more hamburgers, for example, it's unrealistic to say that
inflation isn't a problem, skeptics maintain.

"The government can claim there's no inflation but all they're
measuring is a reduced standard of living," argues Peter Schiff,
president of Euro Pacific Capital, an investment firm specializing in
overseas investments.

With all this in mind, California economist John Williams argues that
CPI is understating inflation by at least 3 percentage points and
perhaps as much as 7 percentage points. So instead of an annual
inflation rate of 4%, the true number could be between 7% and 11%.

Unemployed, but not counted
Finally, there's the unemployment rate. It was at a relatively low 5%
in April. But according to Williams' Web site, ShadowStats.com, the
actual rate may be between 8% and 12% if you use a more accurate
reading of those out of work.

Even the government's own numbers show there are many unemployed
people not showing up in the unemployment rate. The official reading
does not include 4.8 million people who want to work but haven't found
a job, for example.

Many of these people are dropped from the official calculation because
they have become so discouraged from looking without success that they
haven't looked in the previous four weeks. Simply adding those people
to the number of unemployed takes the current unemployment rate to
7.8%.

The Bureau of Labor Statistics, which produces both the CPI and
unemployment readings, says changes in both measures were made to more
accurately reflect the real world. The BLS also says the changes have
resulted in changes of less than 1% for each measure.

Still, the Labor Department's own broadest measure of unemployment,
which includes as jobless those working part-time jobs because they
can't find full-time positions as well as some discouraged job
seekers, puts the unemployment rate at 9.2% in April, the highest
level for that reading in more than three years.

So if you take that number and add that to the 7% that Williams thinks
is a more likely annual inflation rate, you're looking at a "Misery
Index" of 16.2, much worse than the 8.9 you get from the official
numbers.

And while that may seem a bit high, it's probably a more accurate
gauge of how bad the economy is for many Americans.

First Published: May 13, 2008: 4:32 PM EDT

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