From John Mauldin's weekly newsletter, this is the simplest and easiest to understand explanation of exactly why the government's stated inflation numbers are bogus:
"The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, 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. The new system promised you hamburger, and then dog food, perhaps, after that.During the Clinton administration, there were all kinds of these types of "algorithms" put in place for measuring inflation. The goal, of course, being to reduce cost of living increases in entitlement programs. The result is that the Fed makes it's monetary decisions based on bogus numbers.
So there you have it.