12/15/10 Baltimore, Maryland – Consumer prices rose 0.1% in November…and less than a percent over the past year. If you strip out food and energy – which government number crunchers do, because those prices are allegedly “volatile” – you still get a 0.1% increase.
That’s the “core” CPI, and that’s what the monetary mandarins at the Federal Reserve care about when drafting plans to buy Treasuries, control interest rates, goose employment numbers, order pizza, drink wine, play Xbox 360 or any of the myriad other things they do during their FOMC meetings.
As a group, they can’t be pleased with the number. Over the last year, despite trillions of dollars in government stimulus and quantitative easing, core CPI has risen a scant 0.8% – far below the Fed’s “sweet spot” of 1.6-2.0%.
But whom are we kidding? Even the “headline” figure, the one including food and energy, is suspect.
Our friends at Casey Research put out this chart a couple months ago. The column in the far right – CPI-U – is actually lower now than it was then, all those other columns notwithstanding:
How does the government pull this off? We ask constant readers to indulge our newer ones as we revisit three of the most common tools the statisticians use…
- Substitution. If steak becomes more expensive, and you buy hamburger instead, then the Bureau of Labor Statistics reasons your cost of beef has stayed the same – no inflation!
- Hedonics. If the 2011 model of a car costs more than the 2010 model, but it also comes with more standard equipment, the BLS reasons you’re still getting the same value for your money – no inflation!
- Geometric weighting. Nothing fancy here: If the price of something goes up, the BLS simply makes it count for less in the CPI relative to everything else. If the price comes down, it counts for more. Voila!
These changes started with the last round of Social Security “reform” under the auspices of Alan Greenspan in the early ’80s. The idea was that if CPI were lower, Uncle Sam could pay out less in Social Security benefits.
You can see the end result over time maintained by our friend John Williams of Shadow Government Statistics. Mr. Williams calculates economic numbers the way they did back in the Carter era. The “official” CPI number is in red. The shadow stat is in blue:
In the meantime, the Federal Reserve statement issued after yesterday’s meeting amounted to, “steady as she goes” on the ill-fated QE2. The Fed, looking at current “official” CPI numbers, sees “deflation”…
And so the plan to goose the system with $875 billion in Treasury purchases that started last month will continue to at least double the official rate from whence it sat while they were kibitzing over bagels before the meeting began yesterday morning.
Sooner or later, reality is going to catch up to the gamed statistics. Indeed, “an inflationary outbreak is very likely,” says Chris Mayer, editor of Mayer’s Special Situations.
History is on our side.
“The dollar has done nothing more reliably than lose its value over time,” Chris points out. “I think the future will be no different. People who worry about deflation – that, somehow, the dollars in our pocket will actually buy more in the years ahead, not less – will not only be wrong. They will be broke.
“Writer Jason Zweig points out that ‘Since 1960, 69% of the world’s market-oriented economies have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of an investor’s purchasing power.’
“That is why I believe that being prepared for inflation is the most important investment decision we have to face in the coming decade. If you aren’t prepared, then the consequence is a mean hit to your wealth.”
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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When they use CPI, all they measure is aggregate spending. There’s only so much money to be spent, and they measure how it is spent, with changes in relative preference, but they lose the information represented by cost as the deciding factor. Inflation can’t be reliably calculated based on price surveys. Only money supply is a reliable indicator.
The state of New Jersey knowingly published fraudulent financial statements in order to attract bond investors. Normally when we catch one of you producing misleading information in order to attract investment dollars (remember Enron, WorldCom, or Bernie Madoff?) we destroy them. You gratefully reward us with even more dependence and trust. This time, it was one of our own ripping you off. What did we at the Federal Securities and Exchange Commission (SEC) do to the State of New Jersey? NOTHING. We did nothing on your behalf. Not one person was indicted or even subject to disciplinary action by the SEC or the State of New Jersey.
http://youareproperty.blogspot.com/2010/08/lie-to-us-go-to-jail-we-lie-to.html
Only you people are foolish enough to trust us at the government.
Well, I for one am a big fan of substitution. As prices rise to infinity, I will buy nothing and simply die a sad lonely death knowing that it is for the greater good of Wall Street.
Quote: “Only you people are foolish enough to trust us at the government.”
Who’s “you”, I haven’t trusted the U.S. government since the Kennedy assassination.
Wikipedia, “the meaning of wealth is context-dependent and there is no universally agreed upon definition.” A lot of people spend all their time worrying and trying to protect their concept of wealth. In fact that is all they think of. A good way to waste a life.