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Offical Fairytale Inflation Statistics

Economics / Inflation May 18, 2008 - 08:51 AM GMT

By: Andy_Sutton

Economics Best Financial Markets Analysis ArticleSomeone ought to consider changing the calendar. Maybe adding a few extra days so that next month the shock of double-digit annualized increases in import prices can wear off before we're told there is actually no consumer price inflation. The mainstream financial press quickly leapt onto the bandwagon with headlines such as “Inflation remains tame”, “Consumer prices stable” or the most ridiculous, “High Gas prices aren't affecting consumers”. I couldn't help but wonder what planet these folks are living on. It certainly isn't this one.


I think that by now even the most casual observers

have figured out that the Consumer Price Index report has two major objectives. First off, this report is used to give the Fed cover to pursue its monetary policy. It should be noticed that whenever the Fed wants to lower rates, first they send their Governors out to jawbone on slowing growth, then a few weeks later a very friendly inflation report will emerge as a justification for cutting rates. Secondly, it is very important that inflationary expectations remain under control. At all costs, the public must not begin to expect higher prices moving forward. If this were to happen, the fiat monetary system itself would be in jeopardy. This is something worth watching as recent food shortages and persistently high food and fuel prices have jolted the consumer into a sense that something has changed.

We should take the cue from this month's obviously fictitious CPI that the Fed wants to either cut interest rates again or at the very least wants to hold them steady for the short term.

There is another, less talked about angle to the understated CPI as well. Government payments to various parties such as Social Security recipients, Veterans, and disability recipients are based in part on changes in the CPI. Obviously, the lower the CPI, the lower the cost of living adjustments to these payments and the less the government has to pay out each month. So while prices are rising by double digit percentages, payments are only increasing by a few percent. This is creating a massive problem for people who depend on these cash flows to survive. The idea that people can have 7.25% of their wages confiscated without the ability to opt out, then have the buying power of that annuity stolen further by smokescreens and artificial statistics is deplorable.

The understated CPI ties into another area of major concern in the US Economy: consumer credit. Credit expanded at a blistering $15.3 billion clip in March. What exactly this money is being spent on is hard to say. If you listen to the Commerce Department, the money isn't being spent on consumer goods. The headline CPI was up a meager .3%, the infamous core CPI up just .2% But then if you listen to them again in their retail sales report, it isn't being spent anywhere in the retail sector!

Retail sales were up an anemic .2% in March. That certainly doesn't come to anything near $15.3 Billion. Don't forget to count in retail sales the higher gas and food prices. What gives here? US Consumers added $15.3 Billion to their collective debt in March, but the money wasn't spent anywhere in the economy? That's what we're to think if we believe these reports. Something is not jiving with all of this numeric mumbo-jumbo. It is clearer than ever these reports should be taken with a truckload of salt. A conclusion that makes much more sense is that people are borrowing to buy food and energy; an awful prognostic indicator looking into the future.

So how does one go about reconciling the difference between the prices they observe and government reporting? Oddly enough when I asked people, there isn't any reconciliation going on at all. Precious few of the local business owners I spoke to even knew what the CPI is, and the ones that did aren't paying attention to it. In their eyes, it doesn't matter someone says. It is the reality they deal with each day as they struggle to balance cost increases with declining business as consumers begin to retrench that counts. The discretionary businesses in this area have been particularly hard hit.

They are not in a position to pass on their price increases since in a slowing economy they lack pricing power. Nor are they in a position to continue to absorb the costs over the long run. On a more ominous note, many people who were running their businesses back in the 1970's say that conditions now are much worse than they were even during the worst of the 1970's inflation. An economic nuclear option is coming to pass: stagflation. Rising prices coupled with stagnant or declining growth. Despite a rosy view from various media outlets, this situation is going to get much worse before it gets better.

A more accurate indicator of consumer price movement would be the monthly measure of import prices. It makes complete sense when you think about it since much of what we consume in this country is imported. In April, import prices rose 1.8%. Annualized, this amounts to 21.6%!! A one-off event? An outlier? Take a look at these astounding increases in import prices for 2008:

March 2008 – 2.8% increase

February 2008 - .2% increase

January 2008 – 1.7% increase

Looking at these numbers it would seem like February's .2% increase was the outlier. We got April's import prices on Tuesday; we got April's CPI on Wednesday. Clearly one measure jives with what real Americans are experiencing; the other is a fairytale.

Luckily, in at least some areas of the country, the CPI remains irrelevant and largely unknown; exactly as it ought to be.

We will discuss this situation in greater detail on our weekly Internet radio program ‘Beat the Street'. The show starts at 8:30 PM EDT on Sunday evenings. For more information or to listen, please visit www.blogtalkradio.com/my2cents

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

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