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Standard and SGS Alternate CPI Measures [1]

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Date: 2025-03

Reporting/Market Focus from the October 2005 Edition of the SGS Newsletter

PART ONE OF SGS STANDARD CPI - ALTERNATE

CPI MEASURE, AND SGS BASE CPI-U - ALTERNATE CORE CPI MEASURE

This month’s "Reporting Focus" deals with two alternate measures to popularly followed CPI reporting. First is the SGS Standard CPI, which will offer regular monthly reporting of consumer inflation. Price changes and weightings have been stripped of the growth-dampening methodological alterations of the last thirty years, and underlying monthly prices are sourced, wherever possible, from sources independent of the U.S. Departments of Commerce and Labor.

The second measure, the SGS Base CPI-U is just a simple counterpoint to the inflation measure most popular with financial-market hucksters: the Core CPI.

SGS Standard CPI — As announced in early-June, Shadow Government Statistics is developing an alternate, monthly consumer price index, that will be published on a regular basis, starting this quarter. A full methodology and current and reconstructed historical data will be published in next month’s "Reporting Focus."

The new index will be called the SGS Standard CPI, with its index numbers set — not subject to revision — and usable in calculations in the same manner as the official CPI. The Standard CPI index construction calculations will be fully transparent and replicable, based on publicly available data, not on massaged surveying by the Bureau of Labor Statistics, or over-modeled and over-theorized price levels. A history going back to 1975 will be reconstructed, with a bridge to pre-1975 CPI reporting. Data will not be seasonally adjusted, so monthly reported inflation rates will be annual, year-to-year inflation rates.

SGS does not have the resources to survey prices of thousands of items nationwide four times a month, as the BLS does. That is not necessary, since a statistically meaningful inflation rate can be produced by a much smaller sampling of appropriate commodities, and SGS is using such simplified sampling of commodities in its index. Statistical significance of the approach will be addressed in the methodology.

By stripping current CPI reporting of all the methodological shenanigans of the last three decades that were aimed at artificially reducing reported inflation, one might expect that the resulting series would match the proposed SGS Standard CPI fairly closely. While the patterns of annual growth tend to match reasonably well, annual inflation rates appears to trend somewhat higher for the SGS Standard series than the cleansed CPI series, as had been suggested by some subscribers. The reasons for this will be discussed next month, but the differences appear to be tied largely to BLS misestimates of the impact of some of its methodological changes over time.

Based on detailed BLS estimates of the impact of its methodological changes over time, published in the Monthly Labor Review, June 1999 ("Consumer Price Index research series using current methods, 1978-98," by Kenneth J. Stewart and Stephen B. Reed), SGS has reworked the CPI-U series to remove the impact of the various methodological changes. The following two graphs show the results of that analysis.

The first graph shows the level of the CPI with December 1977 = 100. The middle line is the official CPI-U. The bottom line is the version of the CPI-U published by Messrs Stewart and Reed that estimates what the historical CPI-U would look like if all present-day methodologies were carried back in time and the CPI were restated.

The top line is the SGS reversal of the process, backing out the estimated impact on the CPI of all the methodological changes. The accelerating pattern of growth in the top line is due to the removed effects having cumulative impact moving forward in time.

We have labeled the cleansed CPI of the top line as "SGS CPI-Standard," as it approximates what the SGS Standard CPI will show, but we are not ready this month to publish the final SGS results. As indicated earlier, the SGS Standard CPI annual inflation tends to show somewhat stronger annual inflation than does the cleansed CPI series.

The second graph shows the year-end annual inflation rate for the official CPI-U and for the cleansed SGS CPI-Standard series. At present, SGS CPI-Standard annual inflation is running about 3.7 percentage points on top of the annual CPI-U inflation rate. As a point of interest for those following annual cost-of-living adjustments (COLA) for social security recipients, annual inflation, net of methodological changes has been running above five percent since 1992, while CPI-U inflation and COLA adjustments generally have been running below three percent.

SGS Base CPI-U — Thanks to the suggestion of a subscriber, Shadow Government Statistics is pleased to add a new inflation measure to regular reporting, as a counterpoint to the popularly hyped "Core Inflation Rate." The SGS Base CPI-U measure is entirely separate from the SGS Standard CPI and is calculated using BLS data.

The Core CPI-U measures inflation net of price changes in food and energy. Its use over extended periods of time is nonsensical, because food and energy are basic necessities of life.

The SGS Base CPI-U measures inflation net of price changes in computers, recreation and new autos (weighting shifted to used autos), commodities where the inflation accounting is heavily gimmicked and commodities that most consumers could live without for six months or a year, if they had to. The index leaves intact the necessities of food and energy.

------------------------------------------------------------ Comparative Annual Inflation Rates for August 2005 ———————————————————— CPI-U/SGS Core CPI-U/SGS Estimating Entity Standard CPI Base CPI-U ———————————————————— Bureau of Labor Statistics 3.6%(1) 2.1%(2) Shadow Government Statistics 7.3%(3) SGS/BLS 4.2%(4) ———————————————————— (1) Year-to-year change in unadjusted CPI-U. (2) Year-to-year change in unadjusted CPI-U, ex food and energy. (3) Approximation of SGS Standard CPI, using CPI-U cleansed of BLS methodological "improvements" of the last 30 years. (4) Year-to-year change in unadjusted CPI-U, ex computers, new autos and recreation, based on BLS reporting. ————————————————————

As always, your comments and suggestions are invited.

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[1] Url: https://www.shadowstats.com/article/cpi-measures

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