Is Inflation Really 1.6%, or Is the BLS Getting Scammed on the CPI?Official government measures show that inflation, at 1.6% in January 2011, is still below the Federal Reserve's target of 2%. But consumer products companies are running into a problem: Their costs are rising faster than that, but they don't want to scare away consumers by raising prices. Considering that prices for many raw materials -- including cotton, corn and wheat -- are at or near record levels, consumer retailers are being forced to make some choices about how to keep their profit margins healthy.

One of the sneakiest of their options is to reduce how much product they put in a package, but keep the price the same. A bag of sugar costs the same, but quietly, they reduce the weight from five pounds to four. They put fewer potato chips into the same size bag, or add more air into cheese and ice cream. Consumers who might have paid $6 a pound for coffee now pay the same for three-quarters of a pound, reports the Spokesman Review.

In the case of coffee, that's a 33% price increase that manufacturers are probably hoping you won't notice. Is there any logical reason for you to pay 33% more for coffee? Well, the price of coffee has gone up even more by one measure -- according to Espresso Coffee Guide, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN has gone up 70% since the end of 2009. And Peet's Coffee & Tea (PEET) raised its prices in September to respond to a 35% rise in the price it pays for green coffee beans since the beginning of 2010.

But an analysis of a broader basket of consumer products suggests that coffee is among the most inflated items. A January study by Consumer Reports provides the following examples of reduced package sizes. Assuming the manufacturers are keeping prices the same, the following 10 examples represent an average price increase of 12.2%:

  • Tropicana orange juice +7.8% due to a reduction in the amount of product from 64 to 59 oz.;
  • Ivory dish detergent +20% from 30 to 24 oz.
  • Kraft American cheese +8.3% from 24 to 22 slices;
  • Kirkland Signature (Costco) paper towels +11.6% from 96.2 to 85 sq. ft.;
  • Haagen-Dazs ice cream +12.5% from 16 to 14 oz.;
  • Scott toilet tissue +9% from 115.2 to 104.8 sq. ft.;
  • Lanacane first aid spray +12.4% from 113 to 99 grams;
  • Chicken of the Sea salmon +13.3% from 3 to 2.6 oz.;
  • Classico pesto +19% from 10 to 8.1 oz.; and
  • Hebrew National franks +8.3% from 12 to 11 oz.

Are Companies Fooling the CPI?

January's inflation statistics do not reflect that 12.2% inflation. The core Consumer Price Index -- which excludes what are considered "volatile" food and energy prices -- increased just 0.2% according to the Labor Department. When you include food and energy -- which, after all, are things that consumers actually have to buy, the CPI was up 0.4%, 0.1% more than economists had expected -- and food and energy were responsible for more than two-thirds of the overall CPI rise.

But does the CPI reflect those stealth price increases? According to the Bureau of Labor Statistics, the answer is maybe. The BLS notes that it sends data collectors into stores every year and "if the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of ten when they previously were sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item."

It is possible that the BLS's national office makes adjustments to reflect smaller quantities. According to the BLS, "the recorded information is sent to the national office of BLS, where commodity specialists who have detailed knowledge about the particular goods or services priced review the data. These specialists check the data for accuracy and consistency and make any necessary corrections or adjustments, which can [include] an adjustment for a change in the size or quantity of a packaged item."

Given the huge difference between the small rises in the prices of food and energy reflected in the CPI and the much higher amounts that consumers are paying when you adjust for smaller package sizes, it looks like something is being lost in tracking the prices that consumers really pay.

And one thing seems clear -- with the median family income down 8.1% since 2000, consumers can ill-afford to get squeezed by this hidden inflation.


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frank1946

BLS CPI is tuned to meet the politics and budgets of the Quarter, most people wonder about the numbers and variances between reality and offical numbers, mostly because of the adjustments to the indexes ! In short, Governments tell
you what they think you SHOULD know, that's all !

March 05 2011 at 7:20 AM Report abuse rate up rate down Reply
muffin83e

Have you noticed the shrinking weight of product in cereal boxes and potato/dorito chip bags? Roughly 10% in the last year.

February 22 2011 at 11:19 AM Report abuse rate up rate down Reply
bggdg

A much more difficult challenge for the BLS than changes in quantity of a given item (which can be easily measured and therefore readily reflected in the data) are product changes that are not so readily measured. Think of the differing capabilities of todays PC or cell phones relative to those of past decades as an example. If the price of a PC remains unchanged, but it becomes twice as fast and supports twice as many applications, has the price really remained unchanged? Or has it declined? And if it's declined, by how much has it declined?

February 21 2011 at 12:13 PM Report abuse rate up rate down Reply
National

Finally a good article by Mr. Cohen. As a former Procter $ Gamble executive, we frequently reduced product quantities as a deliberate strategy to fool the public. See Ivory example in article above. We would take sheets off a roll or toilet paper or reduce the basis weight which no one can ascertain in a store. Then our competitors would follow suit with identicle moves. The Government and particularly this administration does not want to account for this form of inflation becuase the CPI is the basis for COLA increases in Social Security, Medicare, andpublic employee salaries....which they cannot afford... we are bankrupt !!! Can't kick the can down the road anymore without disaster. And Bernanke is totally in bed with this administration and cannot be believed. Now if Mr. Cohen would stop writing articles on the demise of gold which he has done 3 times in the last 14 months .... he would increase his credibliity.

February 21 2011 at 10:26 AM Report abuse rate up rate down Reply
1 reply to National's comment
bggdg

Had you risen to P&G janitor, you'd have known the BLS spends consideable esources on the integrity of the data, including quanities.

February 21 2011 at 12:08 PM Report abuse rate up rate down Reply
wtffinance@yahoo.com

That's the second great article on inflation I read this week. You hit the nail on the head when you took a look at serving size as price inflation is not limited to price increases per item but also to a reduction in size/weight of such purchase.

Here's another article that takes a look at how accurate the CPI really is and why it understates inflation. People need to learn about this.

http://www.wtffinance.com/2011/02/don%E2%80%99t-be-fooled-by-official-inflation-numbers-and-anticipated-future-inflation/

February 20 2011 at 4:48 PM Report abuse +1 rate up rate down Reply
1 reply to wtffinance@yahoo.com's comment
bggdg

Why did the chart from Shadow showing annualized inflation under the differing methods only go through 2008? My guess is that the pre 1983 inflation formula which relied much more heavily on housing sales prices wold have shown significant DEFLATION over the last three years. After all, housing repesents 40% of the CPI index and housing sales prices have been declining rapidly so it would almost have to have a negative impact on the overall index.

February 21 2011 at 2:14 PM Report abuse rate up rate down Reply
hensela1dc

Yes my house has recognized the inflation lie a long time ago. Lets face it in todays computerized world big business has the tools necessary to steal every increase in wages the middle class thinks they have been making via cost of living models. Eventually there will be no discretionary money as they will raise prices till it takes every dime of the average house hold income for just the basic necessities. The trick for big business is to make sure they don't do it to quickly or more of Wisconsin demonstration will sweep the country. Look at repossessions. Why not just take them all at once? They want you to think it because of the cause to banks. Wrong. If that many people were thrown out on the streets all at once there would be riots but when its one friend this month and another 2 months later and another 3 months latter it is not as dramatic. Sneaking one over on you they are!

February 20 2011 at 9:38 AM Report abuse +1 rate up rate down Reply
2 replies to hensela1dc's comment
licwinko

hey, they haven't mentioned my oscar mayer bacon went from $2.99 two years ago and now is $6.19, how about a gallon of milk, ever noticed that had doubled also, where do these people come from, oh and yeah, the other week i bought a box of entenmann's crumb donuts always around #3.00 i was shocked when they were $4.99, can't buy them anymore either!

February 20 2011 at 5:40 AM Report abuse +2 rate up rate down Reply
Dennis

Things have been suspect with the Consumer Price Index (CPI)since I began watching it back in the 1980's, and its gotten crazier each year as the government and more bargaining units use it for raise/benefit calculations. And why is volitale "food and energy" prices removed from the equation when it accounts for atleast 50% of my living expenses. The CPI has become so convoluted that it is a JOKE!

February 20 2011 at 1:16 AM Report abuse +3 rate up rate down Reply
1 reply to Dennis's comment
Trevor

Food and energy are NOT removed from the main CPI calculation. The BLS provides an ADJUNCT calculation that removes food and energy as a piece of ADDITIONAL information. The reason they do so can readily be observed by looking at long term comparisons of both the main CPI and the core CPI. Over longer periods of time, the two of these track very closesly. But since food and energy are so volatile, there can be bigger differences in short horizons. As a result, a single month could appear as inflation has risen or dropped dramatically, only to discover those volatile components had produced a false reading when reversing themselves the following month. Of course, there are periods of time when the core index is of a lesser use. When the movement of those volatile components is not fluctuating both upward and downward, but instead consistently moving in the same direction, the rationale for "smoothing out" makes less sense. Of course, the Fed is aware of all this as well.

February 20 2011 at 9:18 AM Report abuse rate up rate down Reply
schaferkkk

I don't know what " Numnbers " game the BLS is playing . I am educated as an Engr., so I am good with Math, etc.

Starting 4/1/2011, I will be paying 14% more for my healthcare coverage. That is simply 14% higher than last year. And since I am disabled, I have not had an increase in my basic Disability based payment since it started, and I will NOT have in increase in the future. That is just the way those contracts are written. But , you know what............I thanks GOD every day for what I do have

February 19 2011 at 5:10 PM Report abuse rate up rate down Reply
Michael

this is nothing new this been going on for the past 3 years you pay the same and get less If we all stop buyine these products that we do not need to survie then thy be force to go back to the old way of doing things. Second there is inflation there if you pay more ot you pay the same for less that means more trips to the stores which mean more gas being use and more momey being spent

February 19 2011 at 2:10 PM Report abuse rate up rate down Reply