The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. By choosing which items to include in this basket of goods and services, and which items to leave out of the basket, the Federal Reserve calculates inflation.
The Fed purposely does not include certain assets in their CPI basket. This seemingly lowers inflation, hiding the true number. Things like houses, stocks, bonds and life insurance are not included. The largest purchase for many people across the globe is a home. In 1983 the cost of buying a home was omitted from the CPI basket and replaced with the cost of renting. If you want to live your life without owning a home, than the inflation rate reported by the Fed might be a little closer to the truth.
But wait, there's more! The formula for calculating inflation has actually changed over the years to lower the true inflation number even further. Starting in 1980, the BLS (Bureau of Labor Statistics) changed the way it calculated inflation. They claimed this change was to account for the substitution of products, improvements in quality, and other things. The method for measuring inflation prior to 1980 was a COGI (Cost of Goods Index) and was pretty straight forward. The new method, a COLI (Cost of Living Index), used subjective abstractions to make inflation seem lower. For example, if a car goes from $30k to $60k, they can say it didn't increase in price because the quality of the newer model is twice as good. Using this logic, it's pretty obvious how easy it is to manipulate the math with completely subjective measures. In 1990 the BLS tweaked their methods again to lower the inflation number even more.
Here are two charts comparing different inflation methodologies. The first chart compares the pre-1980 methodology with the current one. The second chart compares the pre-1990 methodology with the current one.
Using the pre-1980 methodology, the current inflation rate should be above 10%. Compare that with the official number of roughly 2% and you can see how much this number is suppressed. Now, if we were to add the cost of housing back into the CPI basket, that 10% would go even higher. You might be asking yourself, "Why should I care. Does this really affect me?"
If we were still using the pre-1980 methodology, it would change a lot of things: Social Security payments would be much more than they are today because those payments are calculated based off of inflation. GDP would show we are in a deep recession instead of steady growth, reflecting how we all feel. Real wages would show they are going down dramatically instead of stagnating since 1980. Wages for government workers would be much higher than they are today because they are based off of inflation. Lastly, and most importantly, the same real wage would put you in a lower tax bracket increasing your take home pay in nominal terms.
It should be clear at this point why the government needs to keep their inflation number artificially low. This reduces their debt load and increases confidence by boosting headline GDP. They have every reason to manipulate the numbers. They have been lying to us for decades. Bitcoin was made for this very reason.
If you still don't understand what I'm saying, here it is explained over a nice Hip Hop beat.