Is Official Inflation Data Fake?
- By Bilal Hafeez
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- 1 min read
‘If there’s no inflation, why are prices up so much?’ So reads a Time article from 2013. Today, this sentiment returns: ardent inflation bulls argue that official data underreports inflation. Accordingly, they see recent US CPI data showing headline inflation of 1.7% as wrong (Chart 1). But they see money supply measures, such as M2 (which has shot up 25%), as correctly showing inflation. Some have even constructed their own measures of ‘true’ inflation.
One example is Shadow Government Statistics (SGS), which keeps weights of the consumption basket fixed from 1980. By their measure, inflation currently runs close to 10% (Chart 2). Ironically, their measure has been stable since the global financial crisis despite central banks printing money, which counters the thesis of many inflation bulls.
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‘If there’s no inflation, why are prices up so much?’ So reads a Time article from 2013. Today, this sentiment returns: ardent inflation bulls argue that official data underreports inflation. Accordingly, they see recent US CPI data showing headline inflation of 1.7% as wrong (Chart 1). But they see money supply measures, such as M2 (which has shot up 25%), as correctly showing inflation. Some have even constructed their own measures of ‘true’ inflation.
One example is Shadow Government Statistics (SGS), which keeps weights of the consumption basket fixed from 1980. By their measure, inflation currently runs close to 10% (Chart 2). Ironically, their measure has been stable since the global financial crisis despite central banks printing money, which counters the thesis of many inflation bulls.
Moreover, if inflation has been as high as 10% over the past 20 years, that means prices doubled every seven to eight years. Yet, the retail price of a gallon of milk is currently around $3.40, and it was $3.35 a decade ago. Even property rents have not doubled. Zillow’s measure of like-for-like property rent reveals that over the past five years national rents increased around 3-4% per year, and that rate fell to 0% in 2020. Meanwhile, in so-called ‘hot property cities’ like New York or San Francisco, annual rent inflation rates were similar to national trends until last year, when these cities’ rents collapsed by 8% (Chart 3).
Another measure of ‘true’ inflation would be household expectations. The University of Michigan’s survey finds that households currently expect inflation to average around 2.7% over the next five years (Chart 4). This is higher than official CPI data, but not considerably. Moreover, it is currently lower than before the global financial crisis.
Finally, there is the Harvard Billion Prices Project, which, as its name suggests, takes almost every online price data to calculate alternative inflation data. Their data aligns with official US CPI data but is much higher for some emerging markets like Argentina (Charts 5 and 6).
On balance, little evidence exists that inflation is being underreported in developed countries like the US. If anything, there could be more of a case that inflation is overstated with the increasing consumption of digital goods, many of which are free at the point of use.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)