Yet again, the Fed Chairman reinforced the concept of the "Greenspan put" with Tuesday's FOMC announcement. The fed funds rate will remain artificially low for as long as necessary. Go to it!Investors, pile on the carry trade or buy some beta. Consumers, go refinance the old homestead for a third time, extracting an extra 10 grand for that Caribbean vacation you deserve. Or dump that 3-year-old SUV for a brand spanking new Hummer. We have evolved from a manufacturing economy to a service economy to a finance economy, where people can borrow and spend their way to prosperity. You see, inflation is negligible and those 0.50% money rates implore you not to save. It all sounds fine, except for the fact that inflation is not quiescent. I know, I read the paper like everyone else. The government says that the consumer price index is some low number like 1% or 2%, and the risk of menacing deflation is a legitimate concern. The government would never fudge something as important as the CPI, would it? But that number just doesn't smell right.
Where's the Deflation?Most of the goods and services I consume seem to be escalating in price by much more than a percent or two. My tuition bills, health care premiums, insurance costs, transportation and energy costs, home-operating expenses, are all increasing at high-single-digit or maybe even double-digit rates. Home prices in my neighborhood are skyrocketing. As for entertainment, the restaurant check, the movie tickets and the cable bill have all jumped much more than a couple percent. Deflation here? Give me a break. With my personal inflation experience so much different than government statistics, I decided to research the CPI. Here's what I discovered. First, the government removes food and energy, about 22% of the index, when calculating the core CPI. I guess if you don't eat, drive or heat your home, this would be appropriate.
|A Different CPI Perspective |
Here's what it looks like with real housing prices
|Source: Bureau of Labor Statistics, Freddie Mac|
It gets even better. The people at the Bureau of Labor Statistics make qualitative adjustments to goods when they perceive improvements. That is, they adjust the base price of a good or service upward due to quality improvements. This action then understates the increase because of price inflation of the good. The BLS does this with more than 50% of the CPI components! They do not, however, adjust base pricing lower for qualitative deterioration in a product. Steve Leuthold had a great example in a publication recently. Since 1979, the average price of a new car has risen from $6,847 to $27,940, or 308%. But the CPI-adjusted series from the same date reveals only a 71% increase. Therefore, about $16,000 of the $21,000 increase is due to quality improvements and not in price inflation. Ironically, the repair bills aren't deflating. The BLS is now attempting to expand the number of CPI categories adjusted for quality improvement.