Since the process of adjustment began in the early 1980s, the officially-reported CPI-U number has diverged ever further from the underlying figure calculated on the traditional methodology. Fig. 4.2 gives an approximate idea of quite how distorted US inflation data seems to have become over three decades. Instead of the 3.2% number reported for 2011, for example real inflation was probably at least 7%. Worse still, the official numbers probably understate the sharp pick-up in inflation which America has been experiencing. A realistic appreciation of the inflationary threat would be almost certain to have forced very significant changes in monetary policy.
Taken in aggregate, the extent to which the loss of dollar purchasing power has been understated is almost certainly enormous. Between 1985 and 2011, official data shows that the dollar lost 53% of its value, but the decrease in purchasing power might stand at more like 75% on the basis of underlying data stripped of hedonics, substitution and geometric weighting.
The ramifications of understated inflation are huge. First, of course, and since pay deals often relate to reported CPI, wage rises for millions of Americans have been much smaller than they otherwise would have been. Small wonder, then, that millions of Americans feel much poorer than official figures tell them is the case. By the same token, those Americans in receipt of index-related pensions and benefits, too, have seen the real value of their incomes decline as a result of the severe (and cumulative) understatement of inflation. Read more >>
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