The government is manipulating the Consumer Price Index in an attempt to keep inflation low and save money, and that has major implications for retirees and some investors, several statisticians who analyze government data say.
They say that artificially low inflation measures rob millions of elderly and pensioners who rely on Social Security cost-of-living adjustments to maintain purchasing power.
Investors in inflation-linked bonds are also being shortchanged by a manipulated CPI, the critics say, and underreporting price rises also gives a misleading impression of real gross-domestic-product growth.
The CPI has been changed “very deliberately” over a number of years in order to lower inflation and hence cut payments to Social Security recipients, said economist John Williams, founder of American Business Analytics and Research LLC, who runs the website Shadow Government Statistics, which is devoted to scrutinizing government data.
Although the debate over CPI indexes isn't new, inflation data have gotten more attention lately as market observers debate whether the economy risks hyperinflation on the one hand, or deflation on the other.
From March through October, the most commonly used CPI index, known as the CPI-U, which tracks prices of all items purchased by urban consumers, has posted year-over-year declines.
The last time the government reported falling prices was 1955, according to the Bureau of Labor Statistics, which produces the CPI.
Mr. Williams contends that the current whiff of deflation is phony. His alternative index, which uses discontinued BLS methodologies, shows a 5% to 7% annual inflation rate since March.
Robert Arnott, chairman of Research Affiliates LLC, argues that the BLS distorted the index in August and September when it used car prices that were net of the Cash for Clunkers program.
That program gave qualifying automobile buyers up to $4,500 in rebates, which the BLS calculated as a price drop.
“That's pure fraud” in the CPI, Mr. Arnott said
But factoring in discounts on cars is “the standard method for estimating the transaction price,” Ken Stewart, a BLS economist, wrote in an e-mail.
The BLS also dismisses the other criticisms, contending that while the CPI isn't perfect, the methodologies under fire are in fact widely accepted by the statistics profession and have helped improve the CPI indexes.
How the CPI is measured, of course, is a big deal.
Last month, the government announced that for the first time in more than three decades, Social Security recipients and others receiving benefits won't get a cost-of-living adjustment next year.
Mr. Williams figures that Social Security beneficiaries were actually due for about a 2% raise.
The CPI index used by Social Security fell 2.3% in the third quarter, primarily due to a fall in energy prices, Mr. Stewart said. When that happens, benefits don't go down, he said.
Last year, Social Security recipients got a 5.8% increase after gas and food prices jumped, Mr. Stewart said.
Investors in Treasury inflation-protected securities and other inflation-linked bonds also rely on accurate CPI figures to preserve purchasing power.
A lower CPI figure “definitely has an impact” on investors, said Brad Daniel, founder of Daniel Wealth Advisors, who has clients invested in some CPI-linked certificates of deposit.