Kass: The Misery Index Worsens

As some of the critics (Williams, Bianco, Ritholtz et al.) write, backing out the depressive effect of OER from the current statistically massaged CPI series leads to an inflation reading above what is reported by the government (see Jim Bianco quotation above).

Bill King wrote extensively about the subject in The King Report two months ago; it "bears" repeating:

The squeeze on American living standards was clearly highlighted last week by CPI data. Though most people brayed that inflation is benign, the headline number belied the rising costs of necessities with the decline in real income. For 2009, real weekly wages declined 1.6%, the biggest decline since 1990 (-2.5%). (Real average hourly earnings dropped 1.3% year over year, and average weekly hours worked declined 0.3.) Core inflation increased 1.8%. But owners' equivalent rent is about 40% of core CPI and 24.433% of CPI.

The Washington Post: "Energy costs for the 12 months ending in December shot up 18.2%. That was the biggest jump since 1979.... The energy surge was led by higher gasoline costs, which rose 53.5% after falling 43.1% in 2008.... The 1.6% drop in average weekly earnings for nonsupervisory workers was the worst annual performance since a 2.5% decline in 1990. Weekly earnings have fallen in five of the past seven years, underscoring the pressures American households were facing even before the recession began."

For years we have moaned that CPI is distorted, on purpose, by hedonic adjustments and OER. We noted that OER changes do not impact the vast majority of Americans because 67% own homes and do not rent. Also, people in public housing, rent-controlled units and subsidized housing are not impacted. Excluding OER, consumer prices increased 3.5% in 2009. However, due to Bennie's easy money, this inflation is accelerating. Non-OER inflation is up at a 4% annualized over the past six months and 4.5% over the past three months.

By the way, few economists or pundits have noticed that the BLS has increased the weighting of OER to 24.433% of CPI. It had been 23.158%. (Because it's now declining?) And let's not ignore the fact that Americans' misery index in reality is far worse than the above official numbers indicate due to fraudulent U.S. economic statistical methodology. U.S. solons have relentlessly altered CPI, jobs data and GDP statistical methodology to obfuscate declining U.S. living standards. John Williams notes, "On the inflation front, the CPI-U annual inflation rate jumped to 2.7% (3.4% for the CPI-W).... Adjusted to pre-Clinton (1990) methodology, annual CPI growth rose to 6.1% in December vs. 5.1% in November, while the SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.7% (9.68% for those using the extra digit) in December vs. 8.8% in November." Plug in the pre-Clinton or the SGS-Alternate Consumer Inflation Measure as well as a more reasonable nominal income metric -- U.S. solons greatly overstate jobs and income -- and the American misery index would be more in line with the palpable ire in the U.S.A.

In summary, it remains my view that the CPI calculation is rotten to the core. It understates the consumers' misery index and could undermine the self-sustaining recovery thesis. Despite evidence of improving retail sales since year-end, the consumer remains the weakest link to the economy and is potentially an albatross that could derail a smooth and durable domestic growth trajectory. While optimism resounds on the floor of the New York Stock Exchange and in the components of the Retail HOLDRs (RTH), a further recovery in consumption is likely to be derailed unless job growth rebounds significantly as the misery index will weigh on sentiment and, in the fullness of time, on consumption trends.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

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