Inflation Data Manipulated

I have a healthy and, on occasion, slightly paranoid mistrust of governments. One particular concern is the calculation of the consumer price index (CPI) which is commonly used a proxy for the general rate of inflation of consumer prices. My personal experience is that the official CPI figures understate the true rate of inflation. Some more evidence to support my personal experience can be found in the most recent adjustments.

Consumers' spending changes over time. This is due to a number of reasons, including the introduction of new consumer products ( iPods and digital cameras are two recent examples of new consumer goods) and changes in the relative prices of other goods (as examples, people now spend relatively more on insurance and health care). The government recognises this and updates both the components of the CPI index and the relative weightings of those components every five years. Almost without exception every re-weighting results in a downward adjustment in the CPI index.

The most recent re-weighting took place in 2006. Needless to say, the effect of the reweighting was to reduce the level of increase in the CPI index. One the more interesting changes was in the basket of miscellaneous goods and services where the weighting given to jewelery was reduced by nearly 80%. If this is right it means that Hong Kong people spent only a fifth as much of the their incomes on jewelry as they did five years ago. This is not credible. Five years ago Hong Kong was in the depths of the Asian economic crisis. Many retail shops were closing down. Real incomes were falling (in spite of deflation). Unemployment and personal bankruptcies were rising towards record levels. In 2006, Hong Kong was (and still is) experiencing an economic boom. The adjustment essentially says that Hong Kong consumers spent five times as much of their discretionary expenditure on a luxury good like jewelry during a severe recession as they did during an economic boom.

That is simply not a credible position for the government to take.