Comparing apples with oranges: why reported US inflation is false; actual inflation being much higher

The last time the price of bananas shot up in Australia due to a cyclone which destroyed banana plantations in Queensland, the CPI shot up dramatically since bananas constitute a specified component of the basket of goods used in Australia to report on inflation. I recall thinking about the question of substitution (people switch to other fruits) but realised after some though that it was best that government bureaucrats (Australian Bureau of Statistics) use a FIXED basket of goods. If such a basket has to be changed, it must be changed very carefully, based on a firm methodology and survey.

In this manner, CPI in Australia is comparable across the years. One is, broadly speaking, comparing apples with apples, not apples with oranges.

But USA seems to have dramatically changed its CPI methodology over the years, so that if steak is outpriced, then chicken is used to calculate the price of meat. In that process there is no fixed basket of goods, making a mockery of the concept of CPI, and indeed, making CPI a tool of politics. See details here.

Actual inflation in USA

if calculated using the methodology of the 1980s, America’s inflation is around 10 per cent pear year. If the methodology of the 1990s is used, then its inflation is around 5 per cent. But it is definitely not 1.5 per cent.

Also read this article that shows how significantly real prices have changed.

CONCLUSION

This indicates that US has likely been in recession all the way over the past few years since nominal GDP is being deflated incorrectly. This also shows that the idea that the massive pumping of money by the Fed has had no inflationary effect, is incorrect.