THE only thing worse than having to pay so much for gasoline and heating oil is having the government pretend that prices haven’t gone up very much.
Washington, in fact, is using a statistical trick that even some of its own economists can’t explain. It’s called “intervention analysis” – if you care to look it up – and it makes much of the increase drivers are seeing at the pump disappear.
Explaining intervention analysis is a little like describing heart surgery without using diagrams or medical terms. Or sex without using dirty words.
But this is the bottom line: If something unusual, like a war, happens that causes the cost of oil to rise, the government simply takes it out of the calculation for the consumer price index. And that’s before making its normal seasonal adjustments.
In other words, Washington adjusts its energy cost figures for unusual occurrences before it again adjusts them for seasonal quirks. Alice didn’t have to do this many contortions to get into Wonderland.
Grit your teeth for a minute and I’ll give you the description that comes directly from the Bureau of Labor Statistics. (This is for my readers who are Wall Street/economist types and who like their facts dry and boring.)
“Intervention analysis seasonal adjustment allows nonseasonal economic phenomena, such as outliers (described as an ‘extreme value’) and level shifts (a price change caused by an oil embargo, for instance) to be factored out of indexes before calculation of seasonal adjustment factors,” the government explains, not doing a very good job of it.
Let me take a crack at it: You may have to pay more for a gallon of gasoline because of the fear of an Iraqi war, but the government doesn’t have to count the extra cost in its inflation statistics.
Why should you care if Washington fudges its numbers?
For one thing, I would like to stop looking for gas stations at which prices have only gone up about 6 percent between December and January. That’s the increase Washington recorded, even though I have personally found that a gallon of regular is up at least twice that much.
Here are some other reasons to care.
By keeping inflation artificially low, Washington can pretend that the economy is doing a lot better than it really is. And if economic policy makers believe this fallacy, they may take actions that hurt rather than help the nation.
Even more important, many retirement benefits, including Social Security, are tied to the level of consumer inflation. Cheat on the consumer price index – as Washington is doing – and you cheat retirees.
In fact, the current stat-shifting could turn out to be the biggest fleecing of the American public ever recorded. But since Washington is “intervening” in the numbers in such an official and incomprehensible manner, nobody has yet caught on.
I’ve mentioned in previous columns other ways in which inflation is understated. For instance, the government reduces inflation by figuring people will automatically shift to cheaper products – hamburger instead of steak – if prices go up. The same trick is accomplished by contending that prices are actually down on some products simply because the technology improves – the more bang-for-your-buck theory.
So what’s really going on with energy prices and inflation?
Just last week the government issued two contradictory reports. Prices at the wholesale level rose by 1.6 percent between December and January because of energy prices, the biggest gain since 1990. If this continued, prices would be up a frightening 19 percent in 12 months.
Yet the consumer price index rose just 0.3 percent in the same period of time, or at just a 3.6 percent annual. After all the sleight of hand mentioned above, the government said energy prices rose just 4 percent for the month.
How much have energy prices really risen?
The Energy Department – which should know about these things – says gasoline prices are up 48.2 percent over the past year. But the price increase used for the CPI calculations is just 29.3 percent.
And gasoline prices rose 7 percent between early December and late January. And they are up another 13 percent since late January. Natural gas prices, meanwhile, are at their highest level in 25 months.
If you are a driver, that’s why you are hurting a lot more than Washington is letting on. And if you are on Social Security, that’s how you are being cheated.