Don’t Be Fooled By Official Inflation Numbers and Anticipated Future Inflation

Don’t Be Fooled By Official Inflation Numbers and Anticipated Future Inflation

The Government and Federal Reserve are making sure that the general public is under the impression that Inflation is low and under control. Over the past decades the Government through its Bureau and Labor Statistics (BLS) has done an excellent job ensuring that Americans are not concerned about Inflation. They have done so by tweaking the formula of the Consumer Price Index (CPI) in order to keep it within its predetermined low range of approximately 1-3% yearly inflation.

Here is the official CPI data for the last decade:

2000 3.4%
2001 2.8%
2002 1.6%
2003 2.3%
2004 2.7%
2005 3.4%
2006 3.2%
2007 2.8%
2008 3.8%
2009 -0.4%
2010 1.6%

Note that the official inflation numbers do not reflect the increase in cost that Americans experienced during the housing and credit bubble. The cost to own or rent a property greatly increased in just a few short years yet the CPI remains low within the Federal Reserve’s desired range. The cost for energy also experienced a massive increase yet nobody would come to that conclusion solely by looking at the official inflation numbers.

CPI comparison old and newOver the past three decades, the CPI experienced three major changes in how it is calculated. There is the pre-1983 CPI, the pre-1998 method of calculating the CPI, and the method with which the BLS calculates today’s published inflation numbers. There certainly are always reasons why one could change a formula to increase its correlation to what it is supposed to track and describe but these changes clearly reduce the nominal inflation number and therefore keep inflation closer to its publicly targeted rate.

Since the Federal Reserve was established under the pretense of ensuring price stability and preserving the purchasing power of the US Dollar it is important to provide the public with the impression that this entity is successful in doing so. Since it cannot provide indefinite price stability with its inflationary monetary policy it’s in the best interest of the Federal Reserve to continue having a revised CPI to provide the illusion of price stability and low inflation.

The loose monetary policies cause inflation and do everything but allow for steady economic growth. If they cannot meet their official mandate to deliver low inflation they sure can manipulate the formulae that are used to calculate the official inflation numbers. This ensures that the publicly announced inflation remains within its acceptable numeric range. The Federal Reserve Bank of New York Staff Report states:

From the early 1950’s through 1983, the BLS used an “asset price” approach that measured the cost of buying a home and so involved tracking home prices and financing costs.  However, in the late 1970s and early 1980s, when home prices and mortgage interest rates were rising rapidly, the asset price approach came under severe criticism. It became clear under those circumstances that this approach overstated inflation of housing services because it could not separate the investment aspect of homeownership, which is beyond the scope of a cost of living index, from the current consumption of housing services…In response, the BLS adopted the “rental equivalence” approach in 1983. This approach imputes to owner-occupied units the same rate of change of rent as that observed for comparable rental units. From 1987 through 1998, the BLS turned to a split-sample approach.  This involved expanding the CPI housing sample to include owner-occupied units as well as rental units and linked each sampled owner unit with two or more rental units with similar locational and physical characteristics. It then estimated the change in OER for the owner unit using the change in the rents of the matched rental units. The implementation of the rental equivalence approach has changed over time.

From 1983 through 1986, the change in OER was calculated using the sample of rental housing units used to estimate tenant rent.  In the calculation, rental units in areas with a high proportion of owner-occupied units were given more weight in the OER index than in the tenant rent index….So, beginning with the publication of the January 1999 CPI, the BLS returned to estimating the change in OER based on a reweighted sample of rental units. Moreover, the BLS made a number of technical changes intended to reduce or eliminate many of the then-known biases in measuring shelter prices”

CNBC reports in its article “Inflation or Disinflation?” that the productivity of the American workforce grew in the fourth quarter but that wages remain under downward pressure. The article quoted Credit Suisse economist  Jonathan Basile who made the case against an inflationary outcome:

“The YoY (year-over-year) trend in labor costs continued to point in a disinflationary direction as opposed to an inflationary one. The 0.2 percent rate in Q4 was a record eighth straight negative quarter—the weakest sustained stretch in the postwar period. Labor costs make up the biggest chunk of business costs and are a reliable indicator for core inflation.”

WTF Finance disagrees with the assessment of future inflation. While the American Consumer can continue to enjoy and abuse easy credit it is only possible because of the many manipulative policies by both the U.S. Government and the Federal Reserve. Without the Federal Reserve actively participating at Treasury Auctions in support of the USD Americans would already experience massive price inflation as foreigners would have already fled US denominated securities while also increasing their prices on their exports to the US. The purchasing power of the US Dollar greatly diminished in recent years yet many Americans still are oblivious to that fact because they aren’t forced to live within their means. It’s one thing to notice that the costs have risen; it’s another to actually have to adjust spending behavior and pay for the rising cost through earnings and savings rather than through credit and Government subsidies.

Many Economists debate whether the future will consist of inflation or a deflationary environment. WTF Finance believes that it is narrow minded to make the case for either or. In the absence of Government manipulation salaries should continue to experience wage deflation and the job market should continue stagnating until the Government deregulates the labor industry and with that encourages viable competitive productivity. In the long term the US will experience massive inflation on imported goods as was the case in the Weimar Republic where inflation was strongest on that specific category of goods.

The US is destined to ultimately be exposed for not having the ability to meet their debt obligation absent of debasing the US Dollar. With that credit dependent purchases should increase in price while non-credit dependent goods should deflate in price as more people will sell whatever they own in order to make ends meet. With that WTF Finance expects the future to include a combination of inflation, stagnation, and deflation.

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This post was written by:

Jesse Livermore - who has written 99 posts on WTF Finance.

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  • Don

    Wow, I didn’t realize the CPI was calculated differently now vs years ago. Low inflation numbers never made sense to me before, now I realize why.

  • Richard T

    In addition to this information the CPI component of health care is weighted lower then the actual % of GDP spent on health care. Since health care is an above trend inflationary componenet this underweighting understates the true inflation rate. Hedonics also slightly serves to underweight the inflation rate. The price of gold does not lie, price increases in precious metals are not temporay but appear to be long-lasting and we are not even sure how far the upside is from here.

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  • Anonymous

    The one natural resource we most desperately need is LEADERSHIP. Get that and the other needs will be met.

    A leader should INSPIRE his/her people to great achievements. Not tear them down or try to do it all himself to feed his/her ego.

    A leader should ENABLE his/her followers and then get out of their way so that they can achieve greatness, not micro-manage and obstruct.

    A leader should help his/her followers build their own VISION of a better future and inspire them to get there, not impose his/her own

    limited vision on them.

    A leader does not tell his/her followers what to do, he or she FACILITATES their actions.

    Thre is an enormous difference between a leader and a manager. Looking at the political landscape right now, we have NO leaders.

    Obama is not a leader of the people – He is completely partisan and only looks to rewarding his backers and getting re-elected. Both

    Republicans and Democrats at City/County/State and Federal levels are wishy-washy at best. There are few who show any signs of true


    I am waiting for a presidential contender to stand up on his/her hind legs and say something like this:

    “My fellow Americans. I am a proud citizen of this great country and I want to help bring us back onto the course set by our founders over

    two hundred years ago.

    Past governments, both Democrat and Republican have been stupid and reckless. They have driven this country way too far into debt. They

    have imposed boondoggle projects, regulations and programs to please their buddies, lobbyists and backers with little regard to their

    affordability or prudence.

    We now owe $nn Trillion as a nation, $nnn thousand for every man, woman and child. This is scandalous and cannot be allowed to continue.

    We need to repair the damage starting NOW. I propose the following austerity measures, starting at the TOP (Insert LONG list). There will

    be NO MORE expanded or new entitlements, Those that exist will be cut wherever possible, there will be no more aid to countries that no

    longer need it. We will bring back our troops from Europe, close bases that are no longer needed. NO projects will be started unless they

    can be PROVEN to be completely self-funding and/or ABSOLUTELY necessary.

    We will start aggressively exploiting our natural resources immediately both on land and offshore. We will do so carefully and prudently

    with REASONABLE consideration for the environment. But we WILL reduce our dependence on foreign energy, we will use the money from this to

    pay down our debt and to fund research into better sources of clean energy which shall be self-sustaining, without the need for taxpayer-

    subsidies like corn ethanol.

    We have the best technology in the world, the best workers, we CAN DO it. If there are problems, if there are accidents, we will deal with

    them, make good and move forward again. By buying oil from overseas, we are NOT preventing pollution – we are just exporting it.

    We will get out of the way of small business, of private enterprise, out of the way of individual freedom. We will trust you, the American

    people to do what you do best, work hard, build dreams and prosper.

    We were founded as the “CAN DO” nation. We grew to a position of strength and prosperity the like of which the world has never seen

    through our “CAN DO” attitude. We did not compromise with our enemies, we did not avoid our challenges, we did not give up when there were

    setbacks, we faced them all head-on and won!

    We WILL recover that “CAN DO” attitude and we WILL put it to work. When America prospers, so does the rest of the world.”

    There is a lot more that will need to be said along these lines but this is the type of thing we NEED – Honest talk, respect and a
    commitment to making real changes back to the solid, sound, conservative principles embodied in our constitution. But again, most of all,

    we need true LEADERSHIP.

    Of course all the political “experts” and “Analysts” will be horrified. They will cry that it is too extreme – Yes it is too extreme for

    the liberal “intelligentsia” in the big cities (well they think they’re intelligent but too many years of in-breeding and too many

    cocktail parties have long-since robbed most of them of any real intelligence) but a plain-talking, “upfront” statement of intent

    something like this, speaking honestly, openly and treating the American people as adults and partners in the venture WILL resonate with

    the vast majority of REAL American people.

    The exploration for and exploitation of those resources will directly and indirectly create thousands if not millions of jobs, will pump

    billions into the economy, reduce the debt and even generate more tax revenue for the government.

    Can you just imagine the REAL growth and prosperity that this will bring?

    • Jesse Livermore

      I very much agree. What you described is pretty much Constitutional Government. I agree with Reagan in that Government is not the solution but the problem. I just disagree with many that Reagan was any different than the rest of the big government spenders.

      If we had constitutional limited government, less taxes, less bureaucracy and less regulation we truly would be a more prosperous Nation. The U.S certainly didn’t get successful with the current environment (with current I mean that of the past decades.)


      • Anonymous

        Yes but most of all, a leader needs to BELIEVE in his “cause” and be able to inspire his/her followers accordingly.

        If he/she does not believe, how can others be inspired to do what it will take to succeed.

        My question would be “Does the current leadership truly believe in what America stands for” This goes for ALL levels of government from POTUS all the way down.

        Unfortunately, I KNOW the answer to that – at least as it applies to Obama and most if not all Congress, Senate and Cabinet members.

        • Jesse Livermore

          “My question would be “Does the current leadership truly believe in what America stands for” This goes for ALL levels of government from POTUS all the way down.”

          Sadly, of course not. Most politicians don’t as they enact rules, laws, and taxation that are out of line with the Constitution.

          • Anonymous

            You are 100% correct, of course.

            My question was meant to be rhetorical.

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