Why Inflation Figures Are Deceptive Government Statistics

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Like many here at the Money Weekend office, you probably found it hard to believe that Australia’s core inflation was ‘only’ 1.8% for the year according to TD Securities, a company that compiles monthly inflation figures.

However there’s a big problem with these statistics. And that is the data is designed to show the lowest inflation number possible.

Just because the statisticians at TD securities tell you the price of things hasn’t risen much doesn’t mean it’s true.

Before we show you what we mean, let us assure you this isn’t only happening in Australia. One US group – Shadow Government Statistics (or Shadow Stats) – thinks inflation numbers are a joke. In fact, it thinks the whole purpose of reporting inflation figures has changed. Rather than being a measure of the cost of living, it’s about the US government reporting the lowest inflation number possible.

In this article, we’ll show you why you can’t trust these statistics, who you can trust, and how to minimise the impact inflation has on your purchasing power.

Inflation and Creative Government Accounting

Back when Alan Greenspan was at the centre of the universe – ahem, the US Federal Reserve Bank chairman – he was extremely critical of how the Consumer Price Index (CPI) overstated inflation. Greenspan’s argument was that if the cost of lamb rose too high, consumers would switch to buying a cheaper meat, like beef.

So Greenspan wanted to switch the consumer price index (CPI) from a fixed basket of goods to a substitution-based basket of goods. He basically created a CPI that opted for the cheaper item when two choices were possible.

But after a few years of using that method, inflation still wasn’t low enough for him. He had a better idea. And this is when ‘core’ inflation became mainstream.

Basically, core inflation only measures certain things. It includes housing costs, clothing, holiday and travel expenses, alcohol and tobacco.

And it’s all about making things look cheaper on paper. If you remove expensive items like food and energy costs, you’ve got the lower number of ‘core inflation’.

But the thing is, when the consumer price index was first developed, the idea was to measure the actual cost of living, not the lowest theoretical cost of living if you purchased certain items.

The developer of Shadow Government Statistics in America – John Williams – calculates US inflation using a fixed basket of goods. His method is more like the original method developed after World War II ended.

(Unfortunately we can’t find anyone who does the same in Australia.)

The numbers Williams produces differ drastically from what the US government is telling its citizens.

Williams estimates that actual US inflation is running at 11.5%. That’s four times what the Fed is telling people.

Actual US inflation vs. Official US inflation

Actual US inflation vs. Official US inflation


Source: Shadowstats.com


You can see the divergence between the official US Bureau of Labor Statistics (red line) and the Shadow Government Statistics (blue line).

In 1982, official inflation figures dropped after the substitution-based measurement system was introduced. And again, the divergence grew larger when core inflation was introduced in the mid nineties.

The problem is, the inflation data provided by the US government does not match the consumer experience. Consumers aren’t stupid. We can see the price of goods and services rising. We know how much things cost.

How to Protect Yourself From Inflation

Just remember, America isn’t unique in how it measures the cost of living.

Our government does the same here in Australia.

For the past decade we have used a substitution-based method. It’s also more common to see core inflation quoted in the media rather than headline inflation. Headline inflation includes food and energy costs, while core inflation doesn’t.

And even though you probably already know the inflation numbers are a furphy when they hit the nightly news, you think there’s not much you can do about it, right?


You can never really protect yourself from inflation – or government deception, but that’s another Money Weekend – but you can minimise its impact.

Basically, inflation eats into your purchasing power. As inflation rises, your purchasing power erodes. So if you want to ‘beat’ inflation, the aim of the game is to make a return on your money big enough to keep up with, or exceed the real rate of inflation.

It seems unfair. Making money to break even.

But if the ABS is right – and inflation is up 19% today from what it was in 2006 – it would mean that $1,000 in 2006 would buy roughly the same amount as $1190 would today. Put another way, $1000 from 2006 would only be worth $840 today.

It means a loaf of bread might have gone from $2.50 to $2.99… Or stamps from 50 cents to 60 cents…

So how can you limit the impact of inflation?

For now, the simplest option seems to be a good old-fashioned bank account.

Say you put $1000 in the bank back in 2006. For the past six years, the average Aussie bank deposit rate has been 4.53%. If you compounded that figure you would’ve earned $304.5 in interest payments on your $1000.

That means you would’ve managed to keep your cash from losing all its purchasing power ($190) and made a little extra ($114.50) along the way.

Not bad. You’ve basically broken even.

And then of course there’s gold…

We’ve written about gold many times here at Money Morning.

So we won’t go into the full argument here again.

Just consider this: in 2006 gold was selling for around AUD$800 an ounce. Last night it closed at AUD$1574. That’s a 96.75% increase in six years. An increase like that would have put you well in front of the inflation rate. (Although, you’d have a pretty hard time buying your groceries with shavings off your gold bullion bars.)

The point is, there’s no point hoarding your money under the mattress. When you’re only in cash, your buying power will rot away. Even if you stuff $1 million under there, in six years time it might only be worth $840,000. In 20 years’ time it might only be worth $10,000.

How would you get through retirement on the equivalent of $10,000 worth of buying power?

You need to do something to keep ahead of inflation. At worst, stick some cash in the bank. But if you want to do more than break even, you need to do more.

Slipstream Trader Murray Dawes has just released a new report with an idea in it we believe could help you keep well ahead of inflation over the next 12-18 months. Click here to download it instantly.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

Western governments have a fiscal crisis. From Japan to Europe to the United States, these governments spend more than they receive in taxes. So governments issue bonds – debt – to cover the shortfall. But someone has to want to buy the bond. Bonds pay a fixed return of interest. If inflation rises, like now, the real value of this interest falls. So does the principal value of the bond. This means less people want to buy bonds. This means governments find it harder to sell their debt.

But they still have to finance their spending. So they have two other choices. They can have their central bank print more money to buy bonds when no one else will. This runs the risk of many unintended consequences. Or they can raise taxes. It’s not hard to see that such is the state of government finances that both of these options are occurring and will continue to do so. Governments will also increasingly manipulate financial markets to make sure they have access to cheap financing. At the individual level, this has huge potential to destroy your wealth.

About Shae Russell

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a…

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