Why has the Bureau of Labor Statistics Remove Food and Energy Prices from the Consumer Price Index since 1980?

In 1980 the Bureau of Labor Statistics (BLS) removed food and energy from the Consumer Price Index (CPI). Why?

1980 was the presidential campaign that pitted Reagan against possibly our worse president in history, Jimmy Carter. Reagan came up with a clever little gimmick that probably won him the presidency. It was called the “misery index.” The misery index was created by economist Arthur Okun, and found by adding the unemployment rate to the inflation rate. Reagan used it with devastating results to win the 1980 election when in June of that year the index rose to 21.98%.

Jimmy Carter did not like how inflation as reported in the CPI was making him look bad, so he and the BLS changed the calculation in 1980 to exclude inelastic items

The two institutions that gain the most by changing the calculation is the Federal Reserve because they can hide inflation and of course whoever the incumbent president is. We have all noticed how out of touch with reality the CPI is. Anyone who remembers housing shooting up 80% in cost during the housing bubble. The CPI was reported to be 2% to 3% annually. All many a economist could do was scratch their head and wonder if housing was 35% to 45% of a persons budget why the 2% inflation rate? The inflation during the bubble of course extended to anything related to construction, building materials and labor.

And today we are looking at historic rises in food and energy cost and our official CPI is 2% once again. How can this be?

The answer is economist know goods and services are divided up into “elastic” items and “inelastic” items. Elasticity measures the responsiveness of a item to changes in price. If the price is increased and the sales, or total revenue, drops then the item is “elastic” or very responsive to changes in price. If the price of a item increases and the total revenue INCREASES then it is “inelastic.”

Economists know this and they know inelastic items are necessities like gasoline, bread, cigarettes, milk and sugar. Generally, things that come from the ground where production is fixed in the short term that require time, effort and a reallocation of resources to increase production at some future point in time. The classic example is oil. Production can be increased but it takes time, financing, overcoming government impediments, and so forth to increase production.

Ronald Reagan borrowed the “Misery Index” from economist Arthur Okun to effectively communicate the dire economic condition of the economy. In June 1980 the Misery Index, combining inflation and unemployment, was 21.98%.

Elastic items tend to be luxuries like premium books, DVD’s, premium name brand cereals, new automobiles, luxury food items like grapes and so forth. Items that people on a budget can put off buying indefinitely. Even lawyers and doctors will fall into this category if inflation gets bad enough.

When the Federal Reserve increases the money supply it creates inflation. In the last three years the monetary base has increased 198%. QE I, QE II and bailing out Freddie and Fannie combined with China not buying treasury securities. In the last four months the monetary base has increased 27.7%.

As a side note some would argue the discontinued series M-3 is a better measurement of inflation, and it is a good argument. Still with these bail outs and monetizing the debt I like looking at the monetary base numbers to get a true picture of the damage to our economy. Just my preference.

The point is no matter how you want to look at it the Federal Reserve is increasing the money supply at historic levels. This money generally takes three years to travel through various institutions that receive the money and have the ability to purchase goods and services at the old price levels before the inflation is reported.

When the BLS does not count the inelastic items in the CPI numbers this further distorts and underreports the CPI numbers in favor of the inflationist Federal Reserve, Federal Government and Wall Street banks in the political and financial loop of information as well as cash flow from the Federal Reserve both in overt TARP money as well as Federal Open Market Committee (FOMC) operations.

In street terms Washington, Wall Street and the Federal Reserve are in favor of inflation because it is free cash that the Fed creates where they get the first chance to buy assets at old price levels before the new cash works its way into the price levels. Of courser the people paying for this inflation are everyone not in the cash loop. Private citizens working for private companies not getting government cash, retirees, children dependent on welfare, and generally the weakest among us.

There is a reason the rich get richer and the reason is the Federal Reserve and the Federal Government. Fortune 500 companies LOVE big government because they are in the political and financial loop of newly created cash. And the BLS does the dirty work and covers up the scam by underreporting or not reporting inelastic items in their CPI reports.

Below are a list of elastic and inelastic items so you can see for yourself the absurdity of not reporting inelastic items (food and energy) in the CPI.

Gasoline -0.06% or a 10% increase in price causes a 0.6% decline in consumption. Did you get that? Increasing the price of gasoline by 10% causes a drop in consumption of less that 1%! So theoretically you could double the price of gas, as has happened under Obama, and consumption would only decline 6%. Can you see why the BLS does not want to include gasoline in its CPI numbers?

Water -0.38
Chicken -0.37
Cigarettes -0.25
Beer -0.23
Milk -0.04
Sugar -0.04
Bread -0.40

And now for comparison elastic items.

Premium hardcover books -4.00. A 10% increase in price will cause a 40% drop in sales!
DVD’s -3.10
Premium band name cereal -2.50
New automobiles -1.95
Luxury food items, grapes – 1.18
Private education -1.10
Restaurant meals -2.3
Fresh tomatoes -4.6

Are you getting the picture of why the CPI is so bogus? When inflation strikes the elastic items for sale do not have the ability to raise prices without a drastic loss of sales. They are more or less relegated to slower sales and lower profits until the economy picks back up again.

This distortion of the CPI is just plain unethical and immoral. It is just a flat out lie to the American people. The real inflation rate is 9.4% not 2% as reported. Fast approaching double digits.