U.S.Inflation Reports - Contradictions and Absurdity

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The PPI (producer price index) was out Tuesday and the CPI (consumer price index) was out today. Both were up 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and helped keep inflation down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). So much for consistency in U.S. government reporting of inflation.

Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used.

There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the currency and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold has been hitting a series of all time highs in U.S. dollars in the last six weeks, it is also recently started hitting all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value.

Gold hit another all time high in morning trading in New York today, with spot gold reaching $1153.90. Silver was even stronger reaching $18.86 at one point. The trade-weighted dollar traded as low as 74.90, it's third break of the 75 level. The dollar rallied strongly yesterday on Bernanke's comments that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably other times as well. Based on the dollar's performance, all the Fed has done is watch it go down. The Fed also constantly says that there is no inflation in the U.S. The markets disagree. You decide which one you want to believe.

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The U.S. Government Goes From Lying with Statistics to Just Lying

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In the first Friday of October 2007, the U.S. government released a revision for its employment report for August. It was in this revision that federal government statisticians made a key transition from lying with statistics to simply lying. The original figures indicated a loss of 4000 jobs and that 300,000 workers had vanished from the work force. A month later the workers who had mysteriously disappeared, just as mysteriously reappeared. Instead of a loss of 4000 jobs, there was suddenly a gain of 89,000 jobs. Almost all the newly found jobs were government workers. The government statisticians claimed they had trouble 'estimating' correctly the number of government jobs that were created. Cynics wondered if the same people who had claimed the non-existent weapons of masss destruction existed in Iraq were now working for the Bureau of Labor statistics.

The purposeful fudging of Federal government statistical was by no means a new thing and had been honed to a fine art when it came to producing U.S. inflation numbers that made the people in charge look good (Please see our video on the topic: "America's Perfect Little Goldilocks Economy - Or is it? at: http://www.youtube.com/watch?v=puC4_6OV3p8). For about 25 years, 'improvements' had been added to U.S. inflation calculations that reduced the official reported level of inflation (interestingly no 'improvement' wound up increasing reported inflation). First, instead of measuring the cost of housing by comparing house prices from one period to another, owners-equivalent rent was introduced to measure housing inflation (rents usually go down on a relative basis when house prices go up). While no reputable statistician would use a substitute number for something that could easily be directly measured, government statisticians had no such qualms.

The concept of substitution effects and geometric weighting was then introduced. The idea behind a substitution effect is that when the price of some items goes up, consumers will buy less of it and more of something else. Geometric weighting means the cheaper item gets more importance in a basket of goods and the more expensive item less. This approach lowers reported inflation significantly because items go up in price at different rates and the ones that go up the fastest get less and less importance as they do. The classic example for a substitution effect is hamburger versus steak. Steak becomes expensive, eat more hamburger. So in the case of substitution and geometric weighting, if your quality of life goes down, inflation goes down as well.

The government then introduced hedonics into inflation calculations, where if your quality of your life goes up, inflation also goes down as is does with substitution. In hedonics, if you get a better product (which in an modern economy continually happens for many products), even though you pay the same price, you are considered to have paid less. For instance, if the new car you bought has more functionality than the previous car you bought several years ago, even though the actual price may have gone up, the government will say it went down because the new car is 'better' than your old car. So when hedonics is combined with substitution effects and geometric weighting, essentially no matter what prices you are paying for what combination of products, officially reported government inflation stays under control through statistical trickery. Unfortunately, the money you need to support your lifestyle is determined by the actual inflation rate and not the fantasy government figures.

Next: The Myth About the Trade Deficit and the U.S. Dollar

Daryl Montgomery
Please see the New York Investing meetup web site for more information about us: http://investing.meetup.com/21.