The great inflation cover-up

[tricky]

soo....

If the price of dinner is pinching us, why don't the CPI numbers acknowledge it?

By Elizabeth Spiers
(Fortune Magazine) -- My friend Dana, a former real estate investment banker who got out of investment banking comfortably before subprime mortgages hit the fan, has a personal inflation index. It's pegged entirely to the price of filet mignon at the Palm Too, his favorite steak house on the East Side of Manhattan. If the filet mignon is reasonable, all is right with the world. If it seems unduly expensive, Dana gets worried that inflation is spinning out of control. So a couple of months ago he returned from a month in Paris to find that the price of pricey steak had jumped to $38, up from $36. To hear him tell it, not since the Last Supper has an evening meal emanated so pervasive a sense of impending doom.
To be fair, Dana's professional background lends itself to price scrutiny of nearly everything, and being able to afford high-end steak at all puts you in that segment of the population that isn't relying on inflation-sensitive Social Security checks. But it's a little frightening when a guy who just spent several weeks spending euros (now 1.58 to the dollar and climbing) comes back to New York, switches to dollars, and finds himself "aghast" that everything's so expensive.
And Dana's not alone. A March CNN poll indicates that 91% of the population is concerned about inflation. I'd ask a member of the remaining 9% what they're thinking - and what levels of relative fiscal comfort allow one not to be concerned about inflation - but I'm entirely surrounded by 91-percenters. So how do we account for the discrepancy between the Federal Reserve's recent assurances that inflation is under control and the 91% of the population that's worried it isn't?
There are several possibilities: The first is that we're all paranoid. We simply need reassurance from the authorities: Inflation rates are fine, nothing to see here, move along quietly. The second is that the Fed's insistence on focusing on "core" inflation - a measure that strips energy and food from the consumer price index (CPI) because they're theoretically subject to short-term volatility - makes inflation seem smaller than it is, or than we feel it to be when our gallon of milk that was 12% cheaper last year gets swiped across the grocery store scanner, beeping ominously like a tiny alarm bell. (While core inflation was just 2.3% in February, the CPI was 4%.) The third and most disconcerting possibility is that the CPI systemically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. In the words of many a UFO spotter, it isn't paranoia if they're really out to get you.
The first possibility is not to be completely discounted. Thanks to financial paranoia, Bear Stearns (BSC, Fortune 500) found itself hemorrhaging cash a few weeks ago, prompting a rare but always terrifying run on the bank and the eventual sale of the firm at a price that led one anonymous observer to tape a $2 bill to the front door of Bear headquarters, a tongue-in-cheek bid for the remaining assets at a competitive rate. And while merely thinking that inflation is going up is unlikely to cause it to do so, there are certainly real-world consequences from misplaced anxieties. Consumer confidence is the first casualty. When they think their money's not going as far in the future, nervous consumers pull back spending.
But are nine out of ten of us really just paranoid? Or are we just irritated at the Fed's insistence that if we hold still, interest-rate cuts won't hurt a bit, when historical experience tells us the resulting inflation will hurt like hell? If we focus on core inflation, we're told, the underlying trends aren't so disturbing. Take energy and food out of the basket of goods used to calculate the CPI, which is what the Fed does when it reports the numbers to Congress, and things don't look so bad. Just look at the spot on the wall, says the Fed, and ignore the giant needle.
It's true that by focusing on core inflation we can detect certain underlying trends that may be masked by the price volatility of some of the goods in the CPI basket. Post-Katrina natural-gas spikes, for instance, would have distorted long-term CPI trends, even though they were event-related outliers. It makes sense to remove such rarities when looking for underlying patterns in the natural-gas market. But does that mean the entire energy category should be removed? Food and energy are more subject to short-term price fluctuations, but not taking them into consideration at all when thinking about underlying trends precludes the possibility of significant long-term changes that aren't consistent with long-term trend lines for core goods and services. The fact is, food and energy have been going up for quite a while. At what point does a consistent trend upward stop being "price volatility" and start being a material "trend upward"? And what if some of those trends - particularly in the energy sector - are irreversible?
As the usually grim-and-bearish Merrill Lynch (MER, Fortune 500) economist David Rosenberg noted recently to the firm's clients, we've seen similar sustained increases in food and energy before. In the mid-'70s. Just before the Big Recession. But they're not materially important, says the Fed. Pay no attention.
One of my favorite 91-percenters, Fusion IQ's Barry Ritholtz, puts it amusingly: "If you take everything out of the CPI basket that's going up in price, sure, you have no inflation!" Which is sort of like suggesting that if you take away insurgent fighting and the large U.S. military presence, there's no war in Iraq. Not that I want to give anyone in the Oval Office ideas for creative rhetorical devices.
But Ritholtz is more concerned about the third scenario, in which the CPI isn't accurate in the first place. And the difference between the second and third scenario is the difference between miserable and horrible. People like Ritholtz are thinking of the 1996 Boskin Commission, which was established to determine the accuracy of the CPI. The commission concluded that the CPI overstated inflation by 1.1%, and methodologies were adjusted to reflect that. Critics of the Boskin Commission suggest that the basis upon which the CPI was revised doesn't account for the way people actually purchase and consume products. The commission pointed to four biases inherent in the way the CPI was determined that supposedly contribute to overstatement - among them, a bias that doesn't take into account substitution of one good for another and a bias that fails to take into account increases in quality that are reflected in price increases.
But the Boskin critics note several reasonable exceptions to those biases. The Boskin Commission suggests that when customers substitute one good for another, the CPI should treat those goods equally. If Dana orders a hanger steak instead of his beloved filet mignon because the hanger steak is cheaper, Boskin argues that the hanger steak prices should be compared with previous filet mignon prices. It's all beef, right? But critics of the Boskin report point to areas where substitution is so price-driven that consumers are pushed out of the category altogether. What happens when the consumer gives up steak entirely and switches to chicken? (Or to use a scarier example, goes from some health insurance to no health insurance?)
Boskin also says that whatever you're paying in price increases is offset by the additional pleasure you get from better goods. To put it another way, you adjust for improvement in quality over time - a practice called hedonic pricing. So, for example, energy price increases due to federally mandated environmental measures are offset by how much we all sit around enjoying the cleaner environment. (And there's a lot of sitting, because it's not like we can afford to go anywhere anymore.) But, as critics note, quality increases over time are also a reflection of the fact that increased production typically means lower prices, thanks to economies of scale. This may be a matter of splitting methodological hairs, but if it isn't, aggressive estimates put the non-Boskinized actual inflation rate north of 7%. (The We're All Gonna Die estimate is more like 10%, but let's not push it.)
Lest you worry about your future purchasing power, rest assured that your $600 Bush-administered tax rebate will be in the mail shortly, at which point you may be able to afford filet mignon at the Palm. On the downside, it may cost $600 by the time you get that check.
Elizabeth Spiers is the founder of financial Web site dealbreaker.com. http://i.cnn.net/money/images/bug.gif

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[PETA]

dude... you're all over stating the obvious aren't you


the declining dollar results in higher prices for things like oil and then gasoline... that's inflation....

here's a historical index for inflation

http://www.inflationdata.com/Inflati...Inflation.aspx


you need to look at the 73-84 charts.... nearly 15% rate of inflation. You should check out the prime rate during that period. You should check out the unemployment rate during that period. I say that not to diminish the cooled off economy we have today... I mention it so you can have some perspective, so yo ucan understand today's economy in the context of an economy that really is fucked....

here's a chart for the prime rate: http://en.wikipedia.org/wiki/Image:F...fective%29.svg

[tricky]

Originally Posted by xian

dude... you're all over stating the obvious aren't you


the declining dollar results in higher prices for things like oil and then gasoline... that's inflation....

here's a historical index for inflation

http://www.inflationdata.com/Inflati...Inflation.aspx


you need to look at the 73-84 charts.... nearly 15% rate of inflation. You should check out the prime rate during that period. You should check out the unemployment rate during that period. I say that not to diminish the cooled off economy we have today... I mention it so you can have some perspective, so yo ucan understand today's economy in the context of an economy that really is fucked....

here's a chart for the prime rate: http://en.wikipedia.org/wiki/Image:F...fective%29.svg

you fail to mention that inflation was measured differently back then.....

Originally Posted by Washington's Great "No Inflation" Hoax

http://www.huffingtonpost.com/kevin-..._b_100719.html
Billionaire California bond manager Bill Gross calls it "a haute con job." Bloomberg News columnist John Wasik describes it as "a testament to the art of economic spin." More and more shoppers and consumer simply disbelieve it.

The subject of this scorn is the federal government's vaunted Consumer Price Index or CPI. Americans are now beginning to understand that this indicator has its own share of gimmicks not unlike a sub-prime mortgage or the six pages of fine print that accompanies your credit card agreement.

Some of these CPI ingredients -- product substitution weightings, "hedonics" (price reductions for added product quality or satisfaction), and use of owner's equivalent rent (instead of home ownership costs) -- have a comic aspect suitable to mockery by Bill Maher, Stephen Colbert or Jon Stewart. But in a larger sense, they're not remotely funny. That's because the federal minimalization and misrepresentation of inflation, pursued statistically over the last 25 years, has been the main buttress of Washington's over-favorable and self-serving portraiture of the U.S. economy.

Distortions aplenty have followed. Some of the most pernicious include the shortchanging of federal pension and Social Security obligations and cost of living increases, a parallel shortchanging of cost-of-living increases in wage contracts tied to the federal CPI, the suppression of equitable interest payments on bank accounts and certificates of deposit, and the camouflaging of weak U.S. economic growth through inadequate adjustments for inflation. The benefits to the executive branch in Washington jump out -- huge annual federal savings on Social Security and pension outlays, as well as on the amount of interest paid on the federal government's multi-trillion-dollar debt. Some $250 billion a year could be involved.

If many individuals are losers, many businesses and financial institutions have been winners. Minimal cost-of-living increases favor corporations, while low interest rates make money cheaper to the financial sector. In particular, the gargantuan $10 trillion increase in financial-sector debt since 1994 could become unmanageable if mounting inflation forced borrowing costs up to 8% or 9%. And it is axiomatic regarding equities that when rates rise in the bond market, that competition usually undercuts stock market values.

In short, there have been three big gainers from understatement of U.S. inflation: the federal government, wage-paying businesses and the institutions and markets of the swollen U.S. financial sector. But skeptics have a weighty counter: Okay, it's easy to understand how they all might profit from understating inflation. But if the understatement is patently false, how can they hope to get away with it?

In fact, the belief by many conservative U.S. economists that inflation is under control, despite global indications to the contrary (including soaring commodity and energy prices), has a major ideological component -- their fidelity to monetarist economic principles (that only money supply expansion can create inflation) and to the Efficient Markets Hypothesis (that markets process all available information, so that if inflation were serious, markets would have reacted already). As late as January, monetarists on the Federal Reserve Board, notably Chairman Ben Bernanke and colleague Frederic Mishkin, believed in the new-version CPI and argued that U.S. inflationary expectations were safely "anchored."

Financial economists and money managers generally agree. A late April survey of 120 U.S. institutional money managers by Barron's, the financial weekly, found that on average, they predicted a CPI inflation rate of 2.72% in December 2008 and just 2.79% in December 2009. Elsewhere in the world, central bankers and politicians are worrying about another wave of commodity inflation akin to that in the 1970s, but U.S. money managers take comfort in the Efficient Market Hypothesis and in the wisdom and sanctity of the CPI.

Critics, by contrast, smell a potential disaster. Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.

California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be in the 10 percent range. My own analysis, set out in much more detail in an article in the May issue of Harper's, comports with that of the cynical foreign investors.

Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.

In theory, a vigilant Congress might want to hold hearings, but in practice I suspect not. Democratic presidents (notably Bill Clinton) have been involved in the numbers game along with Republican administrations. Neither party has clean hands. Far more likely that any serious investigation will be mounted clandestinely by central banks or sovereign wealth funds in places like China, Singapore and Saudi Arabia as part of their ongoing study of just how much longer they can continue to support a deteriorating U.S. dollar. It is not a happy prospect.

Kevin Phillips's new book Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism was published by Viking in April. His article on untrustworthy government statistics ("Numbers Racket") appears in the May issue of Harper's.

[J. Fees]

yeah i think 3.50 gas makes inflation a no brainer. if my earnings represented this inflation, i would be making about a 1000 a gig.

[PETA]

Originally Posted by tricky

you fail to mention that inflation was measured differently back then.....

First, I was pointing out that you're pointing out the obvious. Yes, there's inflation going on. Do you really think no one noticed the price of gasoline going up? Their grocery bills going up? Increased prices is inflation Aaron.

I certainly didn't look at the methodology of every (any) historical reading.... however, many historical data tables do not simply look at what rate was reported at date X and then plot the points. What they do is take a calculation method and then apply it to the same data across the field for the relevant time period. So, while I didn't mention it... it could well not matter one bit. It might. Why don't you look into it? At any rate, whatever calculation method you'd like to use.... nearly 15% is not in the same ballpark... not even the same game as what we have today.

[tricky]

Originally Posted by xian

First, I was pointing out that you're pointing out the obvious. Yes, there's inflation going on. Do you really think no one noticed the price of gasoline going up? Their grocery bills going up? Increased prices is inflation Aaron.

I certainly didn't look at the methodology of every (any) historical reading.... however, many historical data tables do not simply look at what rate was reported at date X and then plot the points. What they do is take a calculation method and then apply it to the same data across the field for the relevant time period. So, while I didn't mention it... it could well not matter one bit. It might. Why don't you look into it? At any rate, whatever calculation method you'd like to use.... nearly 15% is not in the same ballpark... not even the same game as what we have today.

Obviously, I know my eggs and milk are more fucking expensive than last year or 10 years ago. The fact is the benchmarks used to measure inflation are being manipulated to change the figures. The fact that a figure of 2.6% is being used versus 6-9% is bullshit, and the economy would be performing differently if the correct figures were being used. Easy money for the subprime mess wouldn't have been so easy if interest rates were higher due to "true" inflation. And yes, it does matter, a lot. I did look into it, posted it, then you ignored it, again.

fuck

Critics, by contrast, smell a potential disaster. Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.
Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.

[PETA]

Originally Posted by tricky

The fact that a figure of 2.6% is being used versus 6-9% is bullshit, and the economy would be performing differently if the correct figures were being used.

That's like saying your cock would be longer if measured in centimeters rather than inches.

Originally Posted by tricky

Easy money for the subprime mess wouldn't have been so easy if interest rates were higher due to "true" inflation. And yes, it does matter, a lot. I did look into it, posted it, then you ignored it, again.

Aaron... our economy isn't as strong as it was a few years ago but I'm telling you, you have no clue what bad is if you didn't experience Carter through Reagan's first term.... that was a fucked economy. Ours is just currently ill.... rather than on deaths door.

About 1% of mortgages are in default. Many as a result of stupidity and many as a result of lender fraud few out of plain bad luck. Easy money in subprime is not the reason our economy is struggling.

[tricky]

Originally Posted by xian

That's like saying your cock would be longer if measured in centimeters rather than inches.



Aaron... our economy isn't as strong as it was a few years ago but I'm telling you, you have no clue what bad is if you didn't experience Carter through Reagan's first term.... that was a fucked economy. Ours is just currently ill.... rather than on deaths door.

About 1% of mortgages are in default. Many as a result of stupidity and many as a result of lender fraud few out of plain bad luck. Easy money in subprime is not the reason our economy is struggling.

Your cock measuring is wrong. My cock would be the same length, regardless of the measurements. The meter was the same length in 1975 as it is now. apples...oranges Can you wrap your head around this concept that distinctly different benchmarks were used?

Apparently you don't care that the economy is measured correctly, and are simply content thinking that an "ill economy" is somehow much better than the fucked economy of the 70's. You can bemoan how bad it was back then, but the fact is that its really damn shitty now. Is it wrong to strive for better? It's been like this for years, and it's only because of the vast increases in food/oil that people have really started to bitch. Add stagnant wages to that and it's a disaster.

[PETA]

Originally Posted by tricky

Apparently you don't care that the economy is measured correctly,

whether A's measure or B's measure is the correct measure the economy is the economy... your dick didn't get any bigger (or smaller) by changing the unit of measurement. It is enough to know that its limping right now. Specific numbers do not have any specific impact on me - nor you. Or, did you get magicly transformed into a penguin at a certain rate of inflation? Nor can I control any of it. Nor can you.

Originally Posted by tricky

and are simply content thinking that an "ill economy" is somehow much better than the fucked economy of the 70's. You can bemoan how bad it was back then, but the fact is that its really damn shitty now. Is it wrong to strive for better? It's been like this for years, and it's only because of the vast increases in food/oil that people have really started to bitch. Add to that stagnant wages and it's a disaster.

I'm not bemoaning anything. I'm dogging you for bemoaning Aaron

Of course we should strive for better but we should have a better notion of what that means. Compared to the late 70s through early 80s... today is much better. Guess what? It'll get even more better... always does.

[Ash]

Everyone panic!

[PETA]

I for one think everyone should withdraw all of their cash and investments.... buy gold, gems and the dirt in my backyard (ore rich) and stuff it in their mattresses

[tricky]

Originally Posted by xian

Of course we should strive for better but we should have a better notion of what that means. Compared to the late 70s through early 80s... today is much better. Guess what? It'll get even more better... always does.

Are you fucking kidding me? You need to pass me some of that shit you're on. My wages have been stagnant while my expenses skyrocket...and that pesky lack of health insurance thing.

[PETA]

Originally Posted by tricky

Are you fucking kidding me? You need to pass me some of that shit you're on. My wages have been stagnant while my expenses skyrocket...and that pesky lack of health insurance thing.

you've got a job... unemployment is at what traditionally has been regarded at full employment

it is true that purchasing power has stagnated... that needs fixing

health care? I didn't have health insurance at all as a kid... nor do I bet your parents did. Your complaint is the lack of a luxury your parents never had.

the prime lending rate hit nearly 20% in the 70-80s period... unemployment got up to nearly 10%.... almost double today's rate.

Things are not rosey.... but they are a far cry from what your parents survived 20 years ago.... buck up pup