Macro-Economic Outlook

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"Who should you believe on inflation, the government or the contrarian inflation consensus?"


Earlier this month, the Bureau of Labor Statistics (BLS) published the latest figures on its Consumer Price Index (CPI). With inflation exceeding estimates in August, the trailing 12-month CPI number rose to nearly 2%, or 1.94%. In stark contrast, the Contrarian Inflation Consensus (CIC) of the Devonshire Research Group (DRG) showed a rate of consumer inflation closer to 8%, or 7.89%.

Which number is closer to reality: the multi-million-dollar, heavily-filtered, government-controlled, black box version from the BLS or the rag-tag collection of dissident estimates from contrarian investors and skeptical economic analysts?

What is Inflation, Really?:

Earlier this year, DRG published a comprehensive report on the inflation controversy, Consensus of the Contrarians: The Alternative Macro Economic View (see DRG Inflation report). There, we argued that the U.S. government has a vested interest in suppressing reported rates of inflation: to lower cost-of-living adjustments on government programs like Social Security; to increase effective tax rates by reducing tax bracket adjustments; and to increase the perceived level of real economic growth. We recounted how the BLS has implemented numerous changes to the CPI since the mid-1990s. These changes have transformed BLS inflation reports and projected an image of low and stable inflation rates for over three decades.

In contrast to that rosy portrait, DRG outlined a contrarian argument, namely that consumer inflation was both more volatile than BLS reports and was rising at an annual rate closer to 8% than the 3% average of the CPI since the 1990s. If true, the implications for investors are profound.

The Contrarians:

In the interest of carrying forward this contrarian view, DRG will now publish monthly updates of the CIC we first outlined in April. In doing so, we are relying on three different sources, all of which reach different conclusions than the BLS.

1. The Chapwood Index. First published by Chapwood Investments LLC, the Chapwood Index is in many ways the most impressive alternative-inflation measure available. Chapwood collects price data from 50 cities across the country on a basket of 500 goods and services. Although less comprehensive than the current BLS data collection network, the Chapwood method measures inflation the old-fashioned way: no fancy “hedonic adjustment” models, no “Tornqvist method” application of geometric means, no substitution of chicken for steak, no replacement of major purchases with smoothed rental payments. Its price basket of 500 goods compares favorably to BLS sample sizes as recently as the 1970s, when the CPI was based on just 300 items. The Chapwood Index is published annually and consistently places consumer inflation above 10%, the most aggressive contrarian estimate. DRG uses historic relationships between Chapwood and BLS numbers to develop monthly updates to our CIC. In August, we estimate a Chapwood Index trailing 12-month inflation number of 10.42%

2. The Shadowstats Alternative CPI. Perhaps the most comprehensive alternative view of government economic statistics can be found in John Williams’ Shadow Government Statistics reports. Williams published a regular newsletter with a contrarian, and decidedly bearish, take on the economy. Williams applies his suite of proprietary alternative inflation measures--including an alternative CPI, GDP deflator and Producer Price Index—to a range of nominal output measures and argues that the real economy is performing far worse than the U.S. government suggests. He publishes his alternative CPI every month, making his analysis the most timely of our contrarians. For August, Williams’ trailing 12-month CPI estimate was 9.67%.

3. The Consumer Purchasing Power Index (CPPI). A less prominent but more transparent contrarian source for many years was the CPPI series. Shortly after our Consensus of the Contrarians report, the site went off-line when its publisher chose to retire. Since then, DRG has acquired the database, models and methods of including its CPPI model. The CPPI model resembles the Shadowstats Alternative CPI (and cites Williams as an inspiration), but differs in restricting bulk adjustments to clearly referenced external benchmarks while also offering its own substitute derivations for the CPI’s housing and medical inflation components. The CPPI is both more volatile than the other contrarian measures and less aggressive. Taking over the calculation duties, DRG pegs the trailing 12-month inflation for the CPPI in August to be 3.57%


The average of these three contrarian sources puts DRG’s Contrarian Inflation Consensus at 7.89% for August. This number is slightly down from the full year CIC number for 2016 of 8.08%, largely because the CPPI index is down due to a lower housing inflation adjustment. Both the Shadowstats and Chapwood indices are tracking higher in August based on the surge in the official CPI in recent months.

DRG plans to continue publishing monthly CIC estimates while also exploring the conceptual flaws in the BLS’ inflation measurements and providing a multi-faceted argument in favor of the contrarian viewpoint. Along the way, we look forward to helping investors absorb the many implications of this fundamental economic issue.


August 2017 Consumer Price Index:
The Official Report vs the Contrarians

Full year 2016
Official CPI: 1.26%
Chapwood Index (50 city average): 9.80%
Shadowstats-alternate CPI: 8.94%
CPPI: 5.50%
Contrarian average: 8.08%

August 2017
Official CPI: 1.94%
Chapwood Index- (50 city average est): 10.42%
Shadowstats-alternate CPI: 9.67%
CPPI: 3.58%
Contrarian average: 7.89%


Devonshire Research Group publishes a macro-economic investor newsletter containing a summary of its proprietary alternate and contrarian economic data. We examine core concepts affecting all investors, including inflation, sector rotation and machine learning strategies, global signals, and deep dives into broader bearish trends.

The research newsletter has a heavy emphasis on economic concepts and technology investment topics, given the team's interests, and the general lack of contrarian coverage.

The newsletter below is accessible to our subscribers at the time of publication, while the public distribution is delayed by one or two months.

For subscription information, please contact us.

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