Why is it that the federal government says the U.S. has virtually no inflation – less that 2 percent – but everything keeps getting more expensive, especially food and gasoline?

Today, gasoline is well above $3.00 a gallon. "Sticker shock" comes not just from the cost of buying a new car, but from the $50.00 or more it costs to fill up the gas tank, even if you don't own an SUV.

You're lucky if $100 buys two bags of groceries at the supermarket, even if you avoid the filet mignon.

Take a family of four to a movie theater to see a first-run film and it can cost $75 even in the Midwest. You will shell out somewhere between $6 and $9 just for one adult ticket, and you can end up spending somewhere between $65 to $75 total if all you do is spring for the luxury of popcorn and sodas.

Still, the U.S. Department of Labor's Bureau of Labor Statistics reported in August 2007 a remarkably low inflation rate of only 1.7 percent.

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Solving this riddle – that is, why everything costs so much when the government tells us inflation rates are low – is simple:

The Bureau of Labor Statistics lies.

Inflation numbers are intentionally manipulated to keep cost-of-living numbers low.

If the average chief executive officer cooked balance sheet numbers the way the U.S. Bureau of Labor Statistics calculates the Consumer Price Index, the CEO would be in jail, even without Sarbanes-Oxley reporting standards.

Why does the federal government lie about inflation?

Again, the direct answer is simple.

Telling the truth about inflation would require the Federal Reserve to raise interest rates and that would be bad for economic growth.

Besides, hundreds of billions of dollars in government entitlement payment outflows depend on the inflation number.

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For instance, federal law mandates that Social Security checks increase thanks to "cost-of-living adjustments," or COLAs, that are supposed to compensate for inflation.

So, higher inflation numbers cost the federal government millions more in increased Social Security payments.

But when the Bureau of Labor Statistics intentionally rigs the Consumer Price Index calculations to low-ball the inflation rate, Social Security entitlement payments are kept level.

As a result, retirees quietly lose billions of dollars that should have been paid out, had the cost of living numbers been reported honestly. But the government saves the expense.

How does the federal government manipulate inflation numbers?

The Consumer Price Index, or CPI, is the central statistic the federal government uses to calculate inflation.

The CPI is a complex government statistic that was introduced in the 1920s to track the market cost of a "basket of goods and services."

Beginning during the Carter administration, federal economists cleverly redefined the CPI, with the goal of removing from the index expensive items, including food and energy, that would push the CPI higher.

Today, the Federal Reserve when setting interest rates focuses on a variation of the CPI that measures "core inflation."

According to the Forbes "Investopedia," core inflation excludes items such as food and energy because food and energy "face volatile price movements."

In other words, since food and energy prices can spike upwards, as they have this year, the Bureau of Labor Statistics calculates "core inflation" without food and energy prices, under the rationale that food and energy price spikes are merely temporary price shocks that would distort the measurement of underlying long-term inflation.

To a family faced with paying rising food costs to feed the kids and skyrocketing gas costs just get to work, the definition of "core inflation" at 2 percent is a joke, not at all reflective of the increased dollars the family has to shovel out just to get by.

Even more disturbing, the Bureau of Labor Statistics' calculation of "core inflation" is not limited merely to throwing food and energy prices out of the CPI.

The price of any good or service in the CPI market basket prone to spiking can be thrown out, under the rationale that the items with the largest price changes reflect passing market disequilibrium that would distort the measurement of long-term trends.

When removing expensive items from the CPI market basket of goods and services was not enough to depress inflation numbers, the Bureau of Labor Statistics innovated even more, changing the "weighted factors" used in calculating CPI statistics, so the results end up under-reporting the true inflation people experience in everyday living.

Econometrician John Williams maintains a website and publishes a newsletter devoted to tracking federal government manipulations of economic statistics.

Williams estimates that current Social Security payments are roughly half of what they should be if the U.S. Bureau of Labor Statistics reported the Consumer Price Index honestly.

Many of the CPI manipulations were masterminded by Alan Greenspan, chairman of the Board of Governors of the Federal Reserve from 1987 under President Reagan to 2006 under President George W. Bush.

Williams points out that one of Greenspan's manipulations of the CPI involved the consideration that when steak got too expensive, the consumer would substitute hamburger for the steak. So, Greenspan argued, the inflation measure should reflect the costs of buying hamburger, not steak.

"Of course, replacing hamburger for steak in the calculations would reduce the inflation rate," Williams commented, "but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival."

"The old system told you how much you had to increase your income in order to keep buying steak," Williams noted. "The new system promised you hamburger, and then dog food, perhaps, after that."

Williams properly concluded that Greenspan's arguments violated the "intent and common usage of the inflation index."

"The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it," Williams wrote. "The CPI was one number that never was to be revised, given its widespread usage."

Williams calculates that the manipulations of the CPI index cause inflation to be under-reported by as much as 7 percent.

The results of this under-reporting are dramatic, with the compounding effect just since the early 1990s reducing annual cost-of-living adjustments in Social Security by more than a third.

Greenspan's recently released autobiographical book, "The Age of Turbulence," openly admits how political the calculation of inflation is.

He notes that Richard Nixon imposed wage-and-price controls in 1971, even though the rate of inflation then was less than 5 percent.

Greenspan argues that the 4.5 percent inflation we experienced for the half century since we abandoned the gold standard may become the norm for the future, with the unfortunate consequence that such a high rate means we will see our saved dollars lose half their purchasing power "in fifteen years or so."

At the height of the gold standard, between 1870 and 1913, just prior to World War I, the cost of living as calculated by the Federal Reserve Bank of New York rose only 0.2 percent annually, Greenspan notes.

The dilemma the Fed faces under our fiat currency system is that to keep inflation truly low, the Fed has to keep interest rates high.

"Yet to keep the inflation rate down to a gold standard level of under 1 percent, or even a less draconian 1 to 2 percent range," Greenspan wrote, "the Fed, given my scenario, would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the double-digit range not seen since the days of Paul Volcker."

High interest rates constrict the money supply, make borrowing difficult, and generally depress economic growth.

Greenspan's own solution was to keep interest rates artificially low, as low as the 1 percent interest rates Greenspan in 2003 aspired to hold that low for years – while simultaneously rigging the CPI numbers.

The Greenspan years can be characterized as a strategy of lying about inflation to avoid the adverse political consequences of being honest and facing the true cost-of-living music.

By lying about inflation, Greenspan justified 1 percent interest rates, which in 2003 were the lowest rates in 45 years, in a determined plan to keep the economy growing while he was at the helm.

But one result of the Greenspan liquidity party was to fuel real inflation.

So, when you wonder why food and gasoline cost so much when the government says inflation is low, just remember: You are being lied to – something we suspect you figured out long ago, just by going to the supermarket and the gas station.

Media wishing to interview the author of this article, please e-mail Tim Bueler.

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