Monday, March 28, 2011

Shadow Stats debunked, part I

As a follow-up to last week's post on the subject, here are U.S. housing prices discounted by the "untrustworthy" U.S. government measure of inflation (the CPI-U-Research Series, to be specific). Note the fairly obvious housing bubble that begins to form in 1998.

I have reproduced Shadow Stats' proprietary annual inflation numbers. Here's what historical housing prices look like when discounted by the Shadow Stats SGS Alternate measure of inflation:

When housing prices outpace inflation, real (i.e. inflation-adjusted) home prices rise. When inflation outpaces housing prices, real home prices fall. Shadow Stats claims some pretty high inflation numbers, so it's hard for housing prices to keep up—even in good times. That's why we see the long-term decline in real housing prices shown in the second graph.

Now you can believe there was a housing bubble, or you can believe that Shadow Stats is trustworthy, but if you believe both you're delusional.

Update: For more on this topic, see Shadow Stats debunked, part II.


  1. What is the problem with Shadow Stats?  He is merely using the same accounting as the federal government used to use before they started trying to fudge the numbers. Today we have an inflation index that takes into account neither energy or food priced, among other things.  

    How can the official CPI be an accurate gauge of inflation when it does not take into account two of the most necessary household costs, both of which have gone up significantly in the last ten years?

  2. This is part of the problem with the Shadow Stats cult. They don't even know the basic facts about inflation. THE CPI DOES COUNT FOOD AND ENERGY.

    The myth that the CPI doesn't track food and energy comes from the fact that the BLS reports many different sub-versions of the CPI. There is the CPI less food and energy, often called "core CPI". There is also CPI less shelter, which I have long used in my housing graphs. However, headline CPI, the version reported in the press and easily available on the BLS website, DOES COUNT FOOD AND ENERGY!

    If you're going to defend Shadow Stats, at least defend it using facts, not myths.

  3. You are making a fundamental assumption which is incorrect, and this accounts for the inconsistency. Inflation HAS run much higher than government statisticians admit. The numbers being put out by Shadowstats are correct about that. But, the CPI is the consumer price index, and it is mostly composed of a basket of goods and housing, although it is a part of the picture, is not the focus.

    The prices for goods and services HAVE outpaced the housing bubble. Shadowstats is correct. What HAS NOT outpaced either what we pay for our groceries and/or what we pay for our houses is our income. Government statisticians have incorrectly measured income for some time. Houses even more out of whack with our incomes than government statistics would otherwise indicate, because income is overstated.

    The price of things like car rentals, however, has gone up faster than housing.  I paid $120 per week in Denver on a business trip back in 2000 for an economy car. Now, I am forced to pay $240 or so, which is more than double, far faster than Denver's housing boom ever inflated prices. Cookies, bread, meat, clams, lobsters, etc. have gone up even faster, and we see this everyday in our grocery shopping.  For example, cookies I once bought for 99 cents at Walmart, just 4 years ago, are not $1.89 at Walmart, again, faster than the increase in housing costs ever inflated.

    That is the reason you don't see the housing bubble in a chart, using the "inflation adjusted" numbers of shadowstats. But, if you used his income numbers as your housing deflation statistic, you would clearly see a bubble in both housing and in the cost of consumer and producer goods and services. The problem with the latter is that the increase in costs for everything else is no bubble. It is structural, and arises out of the decreasing role of the people of the USA in the world economy.

  4.  Who ever said that the CPI doesn't count food and energy????  Of course it does. The error you are making is in using any CPI, whether it is the "true CPI" as calculated by shadowstats, or the bogus one calculated by the government, to "deflate" your housing index. The official CPI counts food and energy,  but adds statistical gimmickry such as artificial weightings that change from year to year dependent upon how quickly the prices of particular goods change, hedonic substitution to alter the real world prices, etc.  Taken together, these techniques result in a worthless CPI.  That is why Williams removes the gimmickry from his shadowstats CPI.  His CPI is the same one the USA used in 1980.  Nothing amazing or brilliant there. He uses the BLS basic data also. Just doesn't manipulate it the way the BLS statisticians do. No one would ever begin to argue that the double-digit CPI increases we had in the 1970s were not valid.  That period is well accepted as the so-called "Great Inflation". But, for some reason, you find it impossible to accept that we are now experiencing 10.2% inflation, when measured in the identical manner as back then.  We are now in another Great Inflation period, masked by statistical gimmickry of the government.

    I am sure you meant to be fair and balances, but your chart and reasoning are in error. The error arises out of the fact that you are using a CPI to deflate the price of housing and then, when you see the chart showing that the general inflation rate during the early 2000s was as high or higher than housing inflation (as per shadowstats) you are using that fact to say that his work is "debunked". That could not be further from the truth.

    The CPI is irrelevant to the housing bubble. That is true no matter what CPI you choose to use. The bubble happened not because houses were going up at a different rate than other goods and services. In fact, as proven by Williams use of the 1980 formula, they were going up at an equal or slower than most goods and services. That is certainly true of the goods I buy, including my business car rentals, and business expenses in general, for example. The housing bust happened simply because incomes is not keeping up with the inflated cost of housing.  That insured an eventual bust.

    The bottom line is that people cannot stop buying food no matter how high it goes, and no matter whether you measure the increase by the shadowstats CPI or the government CPI. They CAN and are defaulting on their home loans.  Commodities and the cost of all goods and services have been going up faster than housing since year 2001, when the Federal Reserve began rapidly expanding the money supply.  That is what your chart comparison is showing. I know you had the best of intentions, but you have NOT "debunked" shadowstats.  In fact, you may just have proven his point.

  5. MIT's analysis is interesting but the previous poster is correct in that ShadowStats uses the original formula from the BLS for calculating CPI, core-CPI is a lie and is usually the one used for headlines on CNN about inflation. 

    You also have completely glossed over the redefinition of GDP that happened in the 90's under Clinton, that added all government spending to the GDP calculation with further skews inflation calculations by changing the definition of baseline  growth.

    At best you are no more accurate or inaccurate than shadowstats and your dismissal of other peoples opinions puts you squarely in the camp of a denier for the Fed!

  6. Anyone who is still convinced that Shadow Stats inflation numbers are the "true" numbers, then please list some major ticket items that have gone up as much as Shadow Stats claims over the past 20 years.  I think Shadow Stats is claiming 4-500% inflation since the early 90s.  So something that cost $1 back then should cost $5-6 now (since most Americans are mathematically illiterate, I'm sure many people don't understand how that could be, so I'll give you a hint: 100% inflation = 2X the price).  I honestly can't think of anything that has gone up that much let alone the average of EVERYTHING.  You'd have to be a moron to believe Shadow Stats.

  7. The national average of regular gasoline was $1.79/gallon when President Obama was inaugurated in January of 2009. Now, the national average price is close to $3.60/gallon (100% inflation). That alone has had a huge effect of raising the price of food. That is why the politicians/government want to exclude energy and food from the CPI. Inflation makes their policies and decisions look like they are a failure in the eye of the public!!!!!!! Guilty as charged!!!!!!!

  8. Yeah, and if you believe the government stats on inflation, you obviously have not had to try to live on a fixed income in the last five years...

    Progressives have been cooking the books on inflation numbers even worse than their unemployment numbers!

    A more accurate apples to apples unemployment number that reflects what the unemployment numbers would really be if we calculated them the same way they did prior to 1994 (Bill Clinton's magic numbers shell game changed the methodology)