While the U.S. government, and the (supposed) journalists (Denis Kneale keeps spouting that there's no inflation) on CNBC continue to report that inflation is low and contained, don't tell that to the American people. They know better!
How is it that there can be such a disconnect between the low inflation that the U.S. government reports, and what the American people are experiencing whenever they buy gasoline, groceries, cars, appliances, insurance, technology, etc.? Even computers, which the government tells us continue to drop in price, are in fact, costing the same or more. I have purchased 3 laptop PCs in the past 5 years, and they all cost about the same price. However, the government says that the price of PCs is falling because each succeeding laptop has better features, and thus, more computer power. But the price is about the same! PC prices haven't fallen!
Changes to inflation calculation methodology
Historically, the U.S. government used to report the consumer price index by taking a large basket of commonly-purchased products, both physical products, services, financial products, etc., and they would simply calculate the increase in prices each month from one year to the next. However, Mr. Greenspan, together with the Clinton Administration, decided to change the way the government calculates inflation. Now, they assume that if steak costs more this year than it did last, Americans will buy hamburger instead, substituting the product they purchased last year for a cheaper one this year. Thus, since hamburger costs less, prices for steak didn't go up, they went DOWN! So if the cost of hamburger goes up this year, does the government expect Americans next year to buy dog food instead?
However, Merrill Lynch continues to report inflation the traditional way. Last month (Nov 07), the Merrill Lynch Inflation Index was reported last week at 7% year-to-date! Others, who also calculate inflation the same way the U.S. government used to report it, also calculate inflation this year between 7% and 11%. Yet the U.S. government continues to mislead the American people by under-reporting the true inflation rate. One can only wonder, "Why?"!
Today, import prices were reported by the U.S. government. Month-over-month import prices rose 2.7%. That's just for ONE MONTH! The year-over-year import price inflation was 11%! Shall I repeat that? That's 11% import price inflation for one year!
"Headline" vs. "Core" Inflation
Furthermore, since the Fed only considers what the government terms "core inflation", and ignores "headline inflation" (which includes food and fuel) in considering whether to lower interest rates and increase the money supply, the cost of energy (gasoline) and food (groceries) is ignored. They say that these two items tend to fluctuate from month to month, and thus, they ignore them. Have they never heard of averaging? (We technical analysts using moving averages constantly. They are a valuable tool!) But they choose to simply ignore fuel and food prices instead. Why? Can you think of two items that Americans pay more for than fuel and food? I can only think of one: their mortgages. But guess what else the U.S. government ignores in calculating inflation. You guessed it -- the cost of a mortgage or house.
Interestingly, however, when the U.S. government reported retail sales figures for October, they DID include fuel and food costs in reporting that retail sales were UP by a healthy amount. They used this figure to suggest that the U.S. consumer is still robustly spending money. Thus, while they refuse to consider fuel and food in calculating the inflation rate that they look at in deciding monetary policy, they do count them in calculating and reporting robust growth in retail sales. This is significant because the ONLY retail sales outlets that showed increases during October were gas stations and grocery stores -- fuel and food! Sounds suspicious, huh?
The Fed ignores what is called "headline" inflation when it makes monetary policy, and only looks at "core inflation" (taking out food and energy), as I explained above. However, as Americans are forced to pay more and more for the items (food, energy) that the Fed ignores, they have less money in their pockets to pay for discretionary items. Discretionary items are the items in "core inflation" that the Fed does consider in making monetary policy. This, by nature, suppresses prices for these "core" items; since Americans have less money in their bank accounts for purchasing these discretionary items, the demand for these items goes down, prices are suppressed, and hence -- voila -- the government reports that inflation is going DOWN!
I am NOT suggesting any kind of conspiracy or intentional under-reporting of inflation by the U.S. government. I am simply saying that it occurs. It's possible that this under-reporting is simply due to bad judgment in the methodology selected. But who really knows?
Quite frankly, whether or not the conspiracy theorists are right, or whether this under-reporting of inflation is simply due to bad methodology, is irrelevant. The fact remains that the U.S. government under-reports the real inflation rate! And that's all that ultimately matters!
Reasons why the government might WANT to under-report inflation
Some reasons for this baked-in-the-cake under-reporting of inflation may include the following:
- Millions of Social Security recipients' annual payment increases are tied to the inflation rate. The higher that the government reports inflation, the more it must pay these people in their annual cost-of-living increases. This only exacerbates the problem of the lingering Social Security insolvency crisis.
- Congress can continue to spend more than the U.S. government takes in, thus allowing the Fed to simply print (or in our day, just add zeros in a computer) more fiat money. This, in turn, allows the U.S. government to simply spend more and inflate its way out of its spendthrift ways. This is known as the hidden inflation tax; its hidden because the American people are unaware that their own Congress is taxing away their wealth through inflation and continued profligate spending.
- The banking sector, and particularly the investment banks, hedge funds, and financial sector, receive most of the new fiat moneys created by the Fed. They continue to prosper as long as the stock market perennially goes just one direction -- UP! Thus, they lobby and pressure the Fed to continue to create excessive liquidity and credit, and increase the money supply. The financial sector is the primary beneficiary of the increasing money supply, and of higher inflation. These endless bubbles create horrible turmoil as they build and then pop! This creates a false sense of prosperity -- fools gold, if you will -- but the financial sector continues to create more and more hedge fund and investment bank billionaires, while the American people are generally clueless why their economic prospects continue to sink into the swamp of inflation.
Inflation in other countries
I find it also interesting that all governments of all the major economies around the world are reporting higher and higher inflation, thus justifying that their central banks' threats to raise interest rates to control it, while the U.S. government continues to suggest that inflation is low. China, the entirety of Europe, Australia, and the United Kingdom are all reporting increasing inflation. Meanwhile, the U.S. Dollar is continuing to decline against all other major currencies among industrialized nations. How can it be that our currency is losing value month after month, while other countries' currencies are increasing in value, and yet we are the only country that reports low inflation month in and month out? Sounds odd, if not suspicious! No?
