The article provides some evidence that this is not a short run phenomenon, nor a phenomenon limited to the US. A similar gap is present among Swedes in 1977, and persisted in the US from 1987-2000.
The difference between core CPI and exponentially smoothed CPI (which removes volatility but includes long term changes in food and fuel) is negligable:
http://www.newyorkfed.org/research/staff_reports/sr236.pdf
There may be gaming in CPI, but excluding volatile components is not it.
Another way to see it: CPI and Core CPI track each other pretty closely, and until recently Core CPI was actually higher than CPI: http://research.stlouisfed.org/fredgraph.png?g=cMs
Check out http://www.shadowstats.com/: "One of my early clients was a large manufacturer of commercial airplanes, who had developed an econometric model for predicting revenue passenger miles. The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working, and they asked me if I could fix it. I realized the GNP numbers were faulty, corrected them for my client (official reporting was similarly revised a couple of years later) and the model worked again, at least for a while, until GNP methodological changes eventually made the underlying data worthless. "
Most of the "tricks" proposed by conspiracy theorists for tweaking CPI only work once or twice.
What this study showed is that perceived inflation is real and doesn't jive with the numbers that the economists produce. Who is right? A 500 person sample will be good to predict the sentiment of the US as a whole. Gallup says that they only need 1,000 people to get +-4% so this is reasonable.
Ask yourself, which is more likely? The entirety of the US population doesn't understand how prices affect them day-to-day. Or that some economists have devised a moderately useful but not flawless metric?
Price formation comes from the relative values that every human being places on the marginal unit of a good. Prices are an emergent property of people interacting chaotically in a marketplace. To suggest that literally EVERYONE's ability to sense the change in price over time you also need to throw out the very people that set the prices to begin with.
EDIT: Link to gallup http://www.gallup.com/poll/101872/how-does-gallup-polling-wo...
Or, more precisely, the US population does not accurately remember prices from years ago. I definitely couldn't tell you how much milk cost in 2005.
Do you actually believe this?
It's not that the BLS covered anything up, but rather than the CPI is a flawed metric and it's continual revisions always go in the favor of the central bank.
When the dot com bubble burst we had the first ever recession where housing starts and car sales didn't decline. Doesn't that seem strange to you? That smells fishy to me.
I'm not saying that the BLS are a bunch of evil geniuses who through brilliance and skull-duggery keep us all in the dark. I think it's much more plausible that a few key people jigger things to do political favors to others and it makes the CPI look lower than it should.
It's the interaction of everyone in a marketplace that sets prices to begin with. Without people, you can't have prices that are meaningful. So if you want to say that people aren't competent to understand inflation, then it seems to me that you also have to say that people aren't competent to set prices. Since the latter is not true (by definition), I'd suggest that the former doesn't hold either.
1) The link explicitly claims that hamburger was not substituted for steak (and the shadowstats link does not contradict this, only claims that it was proposed). So why are you claiming that Greenspan did perform this substitution?
2) I don't find their explanation laughable at all; I find it entirely plausible. And, without having read all of the shadowstats site (only about half of the article on the CPI), I found it ... long on wild claims, short on methodology or references.
With this in mind, I'd be curious to hear a clarification of what you meant, and why you believe it.
Using a geometric average implies that the basket of goods selected CHANGES depending on the change in prices. So in 1950 when a ribeye was cheap, 1lb of it was included in the basket of goods. Now that it's more expensive, only 0.5lbs of it are included in the basket.
This is a made up example. Prices are not correct. Just for illustration. 1950: hamburger - $0.50/lb ribeye - $2/lb arithmetic mean: (2 + 0.5) / 2 = $1.25 geometric mean: sqrt(20.5) = $1.00
2012: hamburger: $3/lb ribeye: $18/lb arithmetic mean: (3 + 18)/2 = $10.50 geometric mean: sqrt(318) = $7.34
Arithmetic inflation: 10.50/1.25 = 8.4 Geometric inflation: 7.34/1 = 7.3
The geometric mean has two wonderful properties: 1. It makes the average price lower by adjusting the quantities included based on their relative prices 2. It makes the inflation over time seem lower as well
I'm not saying that this is some giant conspiracy by "the man" to "keep us down" but I would argue that it's intellectually dishonest.
In order for the CPI to be useful to make comparisons from one year to another the quantities of goods in the basket have to remain constant. Since the geometric mean effectively varies the quantity in the basket (relative to arithmetic) I would argue that it robs the CPI of any power to provide real comparisons.
If we did this correctly, inflation would likely be drastically lower. The biggest driver of inflation is health care, and 1970's health care is pretty cheap.
In fact, CPI only measures instantaneous inflation - the inflation rate of today's basket of goods. It is fundamentally incorrect to treat chained CPI as inflation, particularly over long periods.
If you actually want to measure inflation between two endpoints, you'll actually need a formula which depends on the starting year - i.e., you'll have CPI1970 which will be fundamentally different from CPI1990 or CPI2012.
How come some economists can say that the system they are studying is "wrong" relative to their models and be taken seriously? If your model doesn't line up with the data, it's wrong!