The rise of inflation conspiracy theories

I watched a “documentary” a few days ago called End of the Road: How Money Became Worthless. One statement in the documentary stuck in my mind:

The purchasing power of the average person has been deteriorating drastically. But in order to disguise this, governments have been skewing the figures in their reports to make it seem as if inflation is much lower than it really is.

This is just one of many examples of inflation conspiracy theories. They have been gaining popularity over the last few years, more so on the onset of Quantitative Easing during the 2008 financial crisis, and more recently during the COVID-19 pandemic.

The government, the theory goes, has many inflation-linked obligations and responsibilities like Treasury Inflation-Protected Securities (TIPS) and Inflation-Linked Bonds (ILBs). Thus, there’s an incentive to understate inflation figures.

ShadowStats, one company that recalculates inflation figures “the correct way”, claims inflation is actually at 13.5%. This is almost three times the official reported inflation of 5.4% (June 2021). Its author, Walter J. Williams, later admitted to adding an arbitrary constant to make inflation figures look higher than they really were! This is really obvious on their graph, as the two curves resemble the same shape:

But why does it sometimes seem like our personal experiences of inflation differ from official inflation figures?

Calculating inflation is not as easy as you think

It turns out that inflation is kind of hard to calculate. This is because inflation isn’t just about calculating how much prices have risen. It’s about calculating how much prices have risen for the same goods.

The thing is, the quality of goods improves over time.

Take a smartphone for example. The price of iPhones has generally risen over the past decade, but this is because they have become better over the last decade. Screens have become bigger, new features are added (3D Touch, Face ID, etc.), and demand for smartphones has generally increased. It’s clear that inflation is not the only factor that has caused the price of iPhones to rise.

The reverse is also true:

The prices of some goods may stay the same, yet their quality is deteriorating. For example, instead of a firm increasing prices in line with inflation, it may reduce the size or quantity of the good. This is called shrinkflation, and it makes inflation harder to measure.

Another reason inflation is hard to measure is because people’s spending habits differ. The prices of goods don’t rise in tandem – different prices rise at different rates. The price of tertiary education, for example, has risen at a higher rate than the price of new cars. So, technically, every person’s personal inflation rate will slightly differ from the official reported one.

So, if you decided to privately track inflation, while your figure might be close, it probably won’t be exactly the same as official figures. It will be close though – probably not the 13.5% reported by ShadowStats. The Billion Prices ProjectTemplate is one example of a private estimate of inflation. An initiative by MIT and Harvard, they collected prices from online retailers on a daily basis, measuring their change over time to come up with an inflation rate. Their inflation rates were roughly identical to official rates.

The difficulty in measuring inflation, and the differences in the inflation rate each of us experiences, may be some of the reasons why some people fall into the inflation conspiracy theory trap.