Posted on 03 February 2011.
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:
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.
Over 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.