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Are investors focusing on the right inflation numbers?

EDZ

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You should think about the reasonableness of the data before looking at it

Inflation has long been a big concern for investors, and figures from different organisations vary widely. Shadowstats.com is a data analysis website, providing users with alternative macroeconomic indicators different from us official statistics. Inflation indicator is one of the main concerns of Shadowstats.

Since the inflation index of Shadowstats is much higher than the official index of the United States, it is favored by investors of anti-inflation tools (gold and BTC).

However, if you actually adjust gold prices for the Shadowstats inflation index, you can see that gold has lost 90% of its value over the past 30 years. So is this proof that gold is not inflation proof or is Shadowstats wrong?

This article is written by Moneyness and discusses his views on Shadowstats inflation index based on the paper criticizing Shadowstats published by Ed Dolan, a senior researcher of Niskanen Center think tank. BlockBeats translated the text:

Last week, I wrote about Balaji Srinivasan's idea to create a decentralized version of The Billion Prices Project. This article made me rethink my question about alternative inflation indices.

The most notorious of the alternative inflation indices is ShadowStats, invented by John Williams and often cited by gold enthusiasts and bitcoin maximizers. As of August 2011, according to ShadowStats, us inflation was 13 per cent, while the official rate was 5 per cent, as the chart below shows.

The two figures are so far apart that one of them must have a problem.

I've always dreamed of writing a blog on ShadowStats, but never had the gumption or statistical ability. So I was pleased to see that economist Ed Dolan recently republished a paper from 2015blogArticle, in which he carefully reviews ShadowStats. It's a very good article, so I'm not going to write another one myself.

ShadowStats has attracted the derision of many economic commentators. What makes Dolan's post so impressive is the grace with which he dismisses the strengths of Williams's argument. In other words, he does not attempt to disprove ShadowStats in the form of a strawman argument, but rather an iron man argument. ("Scarecrow" and "Iron Man" analysis)

By all means, you must read this blog.

Mr Dolan saves his strongest criticism for last. When Dolan wrote this blog in 2015, the gap between the official and ShadowStats inflation rates was as high as 7% (see chart). Dolan found that much of this 7% difference could be attributed to a simple double-counting error by Williams. By correcting this double-counting error, the inflation value of ShadowStats is reduced. As a result, the gap between it and the official CPI is actually far less dire than the anti-fans imagine.

Dolan asked Williams to correct his double-counting error. But you can see why Williams might find this hard to do. He has been selling his data on a subscription basis for years. Admitting that his product was wrong might anger his customer base.

Another part of Dolan's blog post that I'd like to draw attention to is a series of simple cross-checks that he does to see whether the official inflation data or the ShadowStats data are more accurate. For example, taking grocery prices from a 1982 AD and forecasting them using two inflation indices, Dolan found that the official CPI was a better predictor of where modern grocery prices would end up.

It would be unfair to have only one set of cross-checks. That's why Dolan took the test, and every result is worth considering. ShadowStats data does not perform well. (for ShadowStats' numbers to look correct, you have to assume that the us economy has been in a great depression for the past two decades.)

To complete my blog post, I'm going to add one of my own research subjects to Dolan's cross-check list. Because this cross-check is aimed specifically at one of ShadowStats data's primary consumers: the gold fanatics.

If most gold investors think ShadowStats' numbers are correct, and they are, they must also accept that gold has fallen by 91% since January 1980 (see ShadowStats inflation-adjusted gold chart below). That means gold is a poor inflation hedge, and anyone buying gold for that reason is making a big mistake.

A more reasonable position is that the ShadowStats numbers are inherently wrong and that gold has actually been a good hedge against inflation since 1980. Using official inflation figures rather than ShadowStats, gold today is about the same as it was in 1980.

So don't panic, gold aficionados, gold isn't the problem. It is because ShadowStats is a rubbish measure of inflation.