Skousen: Masking the Inflationary Economy

World Affairs Brief June 16, 2006 Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief


According to Bloomberg, “U.S. consumer prices excluding food and energy rose more than forecast for a third consecutive month, increasing speculation the Federal Reserve will keep raising interest rates beyond this month. The 0.3 percent jump in the so-called core consumer price index reported by the Labor Department in Washington today exceeded the median forecast of a 0.2 percent increase by economists in a Bloomberg News survey. Core inflation over the last three months was the highest since 1995. Including food and fuel, prices climbed 0.4 percent.”

But as George Ure of Urban Survival comments, “What’s more interesting to me than the numbers themselves, is how the mainstream media has swallowed with virtually no disclosure the fact that the inflation reports in 2006 are not the same thing that we were looking at in 2005 … The Labor Department announced in 2005 that they were ‘changing weights’ of various components: Effective with release of data for January 2006, the Bureau of Labor Statistics (BLS) will update the consumption expenditure weights in the Consumer Price Index for All Urban Consumers (CPI-U) and Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the 2003-04 period.”

This is not the first time the BLS has tampered with the CPI. It’s a constant process of removing highly inflated prices from the “typical basket of goods” Americans buy in order to manipulate the numbers downward. The BLS creates lots of different categories, as well, in order to mask inflation. They have created what they call a “core inflation rate” which, strangely, does not include food and fuel! How can these two basic necessities not be included in the core inflation category? They do it because they have a political mandate to hide the chronic effects of government monetary creation.

When that isn’t enough, they engineer more sophisticated statistical methods like changing the weighted averages, as we are seeing again in 2006. This means they assign weights or relative importance to some prices over others, so that when the total inflation numbers are calculated, they are lower – even though the fuel component is going through the roof. By weighting fuel lower compared to other factors, they can make it appear as if the price-rise impact of fuel is less than it really is. The BLS says they will regularly “update” the weights at least every two years – just to get people used to the inconsistencies of changing the underlying criteria.

Dean Maki, chief U.S. economist at Barclays Capital said, “The true underlying trend in core inflation is beginning to emerge, and that trend is higher than the Fed is likely to be comfortable with … The Fed is likely to tighten at least twice more, and the risks to that are to the upside.”

And, it’s not just the US in inflationary trouble. Economic adviser Joel Naroff was quoted by Bloomberg as saying, “Underlying inflation pressures are worldwide now … Banks in Europe and Asia are looking into the future and seeing that this is not just a U.S. phenomenon anymore. They have to face the situation.” In fact, if it were not for other countries inflating almost as fast as the US, the dollar would be in a free fall.

Bloomberg continues by citing what each of us already know: “The increase in prices is straining Americans’ paychecks. Average weekly wages adjusted for inflation fell 0.7 percent in May, the biggest decline since September 2005.”

Inflation is not only understated but is accelerating. According to Bloomberg. “Consumer prices in the first five months of the year were up at an annual [understated] rate of 5.2 percent, compared with a 3.6 percent increase at the same time last year. Energy prices rose 2.4 percent in May after rising 3.9 percent a month earlier. Gasoline prices increased 4.9 percent. Housing costs, which include some energy costs and account for one-third of the index, rose 0.3 percent after rising 0.1 percent. A category designed to track rental prices jumped 0.6 percent, the most since August 1990. Airfares rose 2.6 percent last month, the biggest increase since April 2005.”

EPI President Lawrence Mishel and Policy Director Ross Eisenbrey came up with 4 major points that explain the weakness of the economy [my comments in brackets]:

(1) Profits are up, but the wages and incomes of average Americans are down [However, almost all of the increase in profits is due to inflating prices, and the income of average Americans is not keeping pace. The prices are being driven up by the minority of people on the receiving end of the government’s deficit spending, which includes the credit creation mortgage machines that are still funding the flattening housing markets].

(2) More and more people are deeper and deeper in debt. The indebtedness of U.S. households, after adjusting for inflation, has risen 42 percent over the last five years. The level of debt as a percent of after-tax income is the highest ever measured in our history. Mortgage and consumer debt is now 120 percent of after-tax income, more than twice the level of 30 years ago. The personal savings rate is negative for the first time since the Depression.

(3) Job creation has not kept up with population growth, and the employment rate has fallen sharply. Private sector jobs are up only 1.5 percent. At this stage of previous business cycles, jobs had grown by an average of 8.8 percent and never less than 6.0 percent. The unemployment rate is relatively low at 4.6 percent. But the percent of the population that has a job has never recovered since the recession and is still 1.3 percent lower than in March 2001.

(4) Households are spending more on health care. Family health costs rose 43-45 percent for married couples with children, single mothers, and young singles from 2000 to 2003. [That’s not all. Have you seen a dentist lately? The prices have almost doubled in the past 3 years. It’s no wonder more and more Americans are flocking to Mexico for dental work]. Employers are cutting back on health insurance. [Actually, this is a good thing for the economy and for people too – forcing them to pay the consequences themselves of their bad nutrition habits. When insurance pays, it appears “free” to the user and provides no resistance to price increases. Also, Lack of insurance beneficially forces people to seek for alternative remedies which are safer and more effective than drug therapies].

Gold and Silver experienced a hot rally in the past month, rising to above $600/oz., but prices were beat back down to the mid $500 levels in the past two weeks as larger institutional traders and central banks began selling. Central bank sales or loans of gold are a core tactic in the establishment’s system of keeping precious metals prices low – also to mask inflation. Unlike most markets, only a portion of gold and silver transactions are publicly reported. Major players working within private channels can sell on the public side and buy back privately, so that only the sell side registers on the markets.

Housing: Bill Bonner states, “Major new condo projects are being closed down in Washington, DC, as well as Las Vegas and Miami. Nationwide, there are said to be almost four million new and used houses on the market. Reports from all over the country tell of rising inventories, slower sales, and price-cutting.” With interest rates sure to continue rising, on inflation fears, housing speculators are worried that the future pool of buyers for their spec homes will be steadily diminishing. Yes, I think there will be a leveling off of the housing boom, but not a crash. With an inverted yield curve (short-term rates higher than long-term rates) a 30 year mortgage below 7 percent is still a good deal. The real rate of inflation is at least double the CPI, probably between 7-9 percent per annum. The Fed really doesn’t have a lot of options anymore, given the political demands of deficit spending to fund expensive wars as well as increasing benefits to citizens and non-citizens alike. Count on inflation, and invest in things that will keep you rising with the inflationary tide.

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