Ben Bernanke’s Land of Illusion

By Andrew McCleese

April 26th, 2011

Welcome to the Land of Illusion, a little early for Halloween.  In his first regular news conference, sans tough questions, Helicopter Ben’s promulgation was that there is no inflation and all is basically well.   The calm and serene steward of our economy first shook off rumors of an impending QE3, or what should be known as QEn until further notice.  Uncle Ben then went on to state that job growth would be better than expected and the unemployment rate will fall to 8.4% best case, 8.7% worst case by years end.  Bernanke said CPI measured inflation would uptick but would be well within the Fed’s acceptable range while core inflation would remain low, around 1.6%.  Everything that is happening in commodity prices is simply “transitory” and will pass.  Finally, the Fed stands behind its strong dollar policy.

Hold on please, I need to collect myself after having to type the above.

Okay, now back to reality.  One thing that makes my skin crawl is how inherently flawed both CPI and “core inflation” tend to be in calculating the hidden tax’s true cost to the consumer.  The CPI and core inflation are the two numbers always referenced in the media and by the Fed despite much more accurate measures of inflation existing.  First, core inflation can basically be thought of as a subset of CPI in that it excludes food and energy from the equation.  This is what central bankers devised and trot out now when then want to convince people that the ice cream half gallons always were 1.5 quarts.  I generally disregard core inflation and do not even consider it, since real people need things like food and energy to, I don’t know… live.  That leads to CPI, also known as headline inflation, which involves its own bit of chicanery in the computation, but at least does count elements of food and energy.

If we were to look at CPI as calculated today as opposed to different times dating back to 1983 (when the most significant change to CPI was made), you will see an entirely different picture than is being reported by the mainstream media and Fed cheerleaders.

 

Looking at this graph and taking the stagflation era methods as our measure, 8.9% is extremely significant and completely destroys one of Bernanke’s main arguments in his press conference, which was that wage will outpace inflation (that has not happened in real terms in quite some time, which is for another article).  At nearly 9% inflation, that is a doubling of price in roughly 8 years.  Why is there such a discrepancy in inflation reporting now from just 1983, what has changed so much?  Something tells me after the Paul Volcker battle with hyperinflation, the monetarists needed another arrow in their quiver to try and slay the Misery Index. 

What actually changed in the CPI was the housing category, which is the biggest component.  The new methodology to determine what people spend a month on housing is now called “owner rent equivalent”, which is described as “the amount of rent that could be paid to substitute a currently owned house for an equivalent rental property”.  So, basically it is a made up number is another way to look at it.  Additionally, the fact that housing is the largest component of CPI, and housing is still deleveraging in most areas (thanks in large part to homebuyer tax credits that extended the search for the bottom), this artificially depresses the inflation reading.  Throw into the mix that many people are moving back in with parents, moving in with friends, or sadly living on the streets or in tent cities right now, housing is not as large a part of the consumer aggregate as it used to be.  With faltering housing starts, foreclosures and lack of willing buyers, less and less people are having their dollars going toward housing through new home purchases as well.  There are other problems with the CPI outside of just housing, observe the key components below.

 

Most people would look at this and say this is not an accurate representation of their composite of consumption.   But there is more to the story than just the problems with the category weights.  Inside each of the categories there are errors in the modelers assumptions.  CPI only takes into account certain beverages, alcoholic beverages.  So forget it if you are like me and have a callus on the inside of your right index finger from years of downing 2 liter sodas as your beverage of choice, this would not be included in CPI.  In fact, all the categories are just a very selective and seemingly arbitrary basket of goods.  Is this basket of goods really representative of the common household purchasing patterns or is the basket designed specifically to paint a false picture of inflation?  A decade ago $.89 Coca-Cola 2 liters were the norm where as $2.11 is now typical.  Excluding beverages that every day people drink in favor of less widely consumed social beverages distorts the reality people feel in the checkout line of their local grocery or convenience store.  A more appropriate measure would be one that included things such as milk, juice and soda since most Americans do not drink alcoholic beverages for life giving sustenance.  Milk prices in particular have roughly quadrupled in a little more than a decade.

Education costs continue to skyrocket for the real family, but don’t blame college subsidies in any way shape or form you heartless snake.  When I was in school, on student loans, the average tuition hike was 9%, on the nice years it was 6%.  Just yesterday morning on my way into work I heard on local radio a school district here in the suburbs of Cincinnati (Lakota West I believe) was raising their extracurricular activity cost to $550 a sport/activity.  I remember when our high school football team had to do a Lift-A-Thonto raise money for our jerseys,  but to shell out that kind of money to play sports or do band is right up there with the extortion tactics of cutting bus service. 

These sorts of intangibles cannot be accurately quantified, calculated or controlled.  Individual economic decisions cannot be properly understood by central planners and their formulas.   Other goods and services, 3%?  Where does that $500 plus restock on my fishing equipment in the last two months fit?  Surely that is not in the equation or basket.  In terms of transportation weighted percentage, how can this still be accurate when a fill up for most people has gone from $30 a tank three months ago to $55 a tank this month?  Airline costs are also beginning to rise noticeably as fuel costs are being passed on to the consumer there as well.  Maybe that is the reason the State Department wants our prenatal care information, to help us decide the price to travel long distances is not worth the hassle or the cost?  Don’t take me too seriously on that one.

Of course the rub here is the anecdotal nature of these examples are not the big picture, which CPI is supposed to represent.  Some of these things are too volatile is the counter, which brings us back to the purported necessity of “core inflation.”  However, if we look at the big picture, YTD gains in stocks if measured against this non-inflationary environment (sic) leaves you with a bull market return of .89%.  So if you have been cashing out those profits and actually trying to buy anything, live large on that nearly .9% return.  But wait, who can forget about taxes.  Sorry, you lose again.  Going a step further down the ladder, if we look at the S&P 500 now versus a decade ago in simply nominal terms, there has been actually a slight loss for the shrewed buy and hold investor.  Adjusting for inflation would put such a person is quite a hole one would assume.  On January 1, 2000 the S&P 500 was at 1469.25.  Today, the S&P 500 was at 1355.66.

So, in retort of Mr. Benanke’sMinistry of Truth public relations speech today I say the following:  Inflation, inflation everywhere but not a job to spare, despite the assurances of Ben Bernanke who can stick his press conferences you know where.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>