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Posts Tagged ‘Inflation’

Washington’s biggest lie (and why it continues to be told)

December 2nd, 2012 No comments

pinnochio1


Normal people have no trouble defining how they measure inflation in their own lives. They compare what the same exact purchases of goods and services cost them today versus one-year earlier. It would include everything they spend on.

Big ticket items like gasoline, insurance (health, life, auto and property/casualty), food and utility bills have the greatest impact. Increases in other major expense categories such as college tuition, property taxes, FICA, Federal, state and local income taxes can also add tremendously to your year-over-year true cost of living.

Those of us old enough to have lived through the 1970s remember the bad old days when prices were escalating at a sickening pace. The value of a dollar fell 30.9% in the five years through 1974 and plunged 91.87% cumulatively in the decade ended Jan. 1979.

The officially reported 1980 CPI increase of 13.91% was the ‘straw that broke the camel’s back’ in terms of what our leaders were willing to admit to. They decided to change the way CPI was calculated to avoid making people even more upset.

Intentionally understating CPI also served to diminish COLA (cost of living adjustments) in government salaries, pensions and social security obligations. It also kept the rates paid on government borrowing somewhat below what would otherwise have been demanded by bond vigilantes. Those nasty lenders insisted on being compensated for the fast-diminishing value of their dollars.

Unions across America used the high CPI rates to justify huge increases in pay and benefits. While inflation calmed down from the roaring period described below the BLS again adjusted their calculation of CPI in 1990 to further understate the truth as most of us see it.

Today’s headline core CPI excludes food and energy completely. That’s impossible for us to do that in our real lives. Remember the old sub-$2 per gallon gasoline prices? How about the health insurance premiums, grocery expenses and electric bills you’re paying today versus four or five years ago?

inflation-1970-1982-source-bls

CPI Year-to-Year Growth

The CPI-U (consumer price index) is the broadest measure of consumer price inflation for goods and services published by the U.S. Government’s Bureau of Labor Statistics (BLS).

While the headline number usually is the seasonally-adjusted month-to-month change, the formal CPI is reported on a not-seasonally-adjusted basis, with annual inflation measured in terms of year-to-year percent change in the price index.

The chart below shows the Shadow Government Stats -Alternate CPI estimate. It figures inflation based on our own government’s official methodology for computing the CPI-U in the years through 1980.

Under the old rules US inflation has been in the double-digits for much of the preceding five years. The ‘new’ BLS numbers want you to believe price increases since 2008 have been quite mild.

The Bureau of Labor Statistics also uses a technique called ‘substitution’ to hold down their reported inflation figures. If an item in their index goes up in price they can assume consumer would simply trade down to something cheaper instead.

If your favorite rib-eye steak went from $7.99 to $12.99 per pound you’d simply eat hamburger instead. Have those organic bananas gotten too expensive. Try prunes. Need a replacement for your Lexus? Buy a Kia instead. Presto, there’s no inflation evident in any of those situations according to the BLS.

All these changes in the way CPI is calculated have been duly disclosed to the public. That doesn’t make them any less dishonest when viewed the way most people gauge changes in their real cost of living.

shadow-stats-alternative-inflation-data-as-of-nov-15-2012-source-shadowstatscom

inflation-lies-from-the-bls1

Fed Chairman Ben Bernanke has put Bond Vigilantes on the endangered species list with his multiple, and now eternal QE programs. Interest rates are no longer useful as measures of present or future inflation.

If truth in advertising were being strictly enforced the BLS might be renamed just the BS.

Please post comments to this article letting others know which view matches your personal, real-life experience.

Dr. Paul Price Dec. 2, 2012

How much more will be stolen through QE programs?

August 8th, 2012 No comments

dollar-devaluation-since-fed-creation-through-mid-2012-source-using-cpi-inflation-by-robert-schiller

Washington’s BIGGEST Lie

July 18th, 2012 1 comment

Washington’s BIGGEST Lie

How do you choose just one when there are so many whoppers to pick from? I’m going with this one because it affects 100% of the population and the deception is so blatant.

The most egregious falsehood? The one repeated by Uncle Bernanke and Uncle Sam on a daily basis…

“There is little to no inflation.”

For the period ended June 30, 2012 preliminary Chained CPI [C-CPI-U] was reported as being just 1.6% [source: Bureau of Labor Statistics].

Most individuals think of inflation as the increase in cost of buying the same basket of goods and services that they did versus the previous month or year.

That’s not how the BLS reports things. They readily admit …

The CPI is a statistical estimate that is subject to sampling error.

Chained CPI for All Urban Consumers (C-CPI-U) covers approximately 88 percent of the total population. CPI-U include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force.

The C-CPI-U in its final form accounts for any substitution that consumers make across item categories in response to changes in relative prices.

Translation: Chained CPI assumes those who used to eat filet mignon have switched to chuck steaks, pork chops or hamburger due to rising filet prices. It could mean comparing from-concentrate orange juice prices to what fresh-squeezed, not-from-concentrate OJ was selling for one year ago.

Including perhaps involuntarily self-employed people, part-timers, unemployed, retirees and others ‘not in the labor force’ stacks the deck in terms of BLS’s license to assume trading down in response to higher prices.

But wait, there’s more.

If you pay your bills or shop for your own groceries you’ll recognize another big source of hidden inflation. Here are some common examples.

hidden-inflation-through-product-shrinkage

New ‘cases’ of Coke now contain 20 cans- not 24, a 16.67% price change if the ticket price remains unchanged. Half-gallons of ice cream are almost universally 1.5 quarts now while their packaging appears identical to the naked eye.

If you’re a healthier soul consider the change in Tropicana orange juice and my own Independence Blue Cross premiums from 2011 to 2012.

ibx-and-tropicana-price-changes

Blue Cross offered me a static premium if I was willing to take a much higher deductible plan with way bigger co-pays. Tropicana charges the same now as they did before the 7.8% shrinkage in their package size. [Thank you, George Constanza].

george-constanza

Why does our government lie to us about such an important topic?

They’re committed to cost of living adjustments for active and retired civil servants, welfare recipients, and social security beneficiaries.

It’s much cheaper to lie and costs less votes to cheat rather than reporting the truth. Undocumented inflation steals from everyone in the same lethal way that fudging LIBOR rates did. That sin is being talked about daily. False CPI numbers never get mentioned.

Please let me know in the comments section if you think I’m off-base in my conclusions based on your own real-life experiences.

Dr. Paul Price

BeatingBuffett.com July 18, 2012

Inflation is NOT Contained - Don’t Believe Uncle Ben

July 16th, 2011 Comments off

Bernanke is sweating bulletts trying to keep the public from knowing the truth about the real rate of price increases. Anyone who’s been to the grocery stroe or even Wal-Mart knows prices have been ratcheting up dramatically even as as government officials say ‘core inflation’ in quite low.

You don’t even want to think about your new health insurance premium or even your NetFlix subscription cost (which just jumped substantially).

inflation-being-held-down-by-uncle-ben

John Williams’ Shadow Stats shows a much truer ‘Alternative CPI’ that more realistically reflects the true cost of living…

shadow-stats-john-williams

Doug Short’s ShadowStats.com tells the truth regarding inflation…

September 18th, 2010 No comments

The official CPI numbers for the year ending September 17 look pretty tame at 1.15% but I doubt that any of you feel this represents your true cost of living increase from 12 months ago.

 

inflation-rate-official-cpi-sep-17-2010His insightful ‘adjusted’ inflation numbers restates the government’s figures using the methodology they themselves used in past decades (before major changes in 1982) which included removing food and energy from their ‘core’ inflation rate figures.

Unless you find you don’t use food and energy, the adjusted number is more likely to reflect you real cost of living increase than the bogus ‘core’ CPI number.

 

inflation-rate-adjusted-sep-17-2010The worst is yet to come as deregulation of electricity prices is on tap in many areas starting next year and many of the people reading this site will surely see huge percentage increases in their Federal income tax rates on dividends and capital gains starting January 1, 2011 as well. Tax rates do not get figured into either set of CPI numbers even as they impact your net spendable income in a major way.

I’ll leave the health care cost inflation discussion for another day.

I’d recommend all of you subscribe to ShadowStats.com to keep informed of what’s really going on in America. Don’t trust the official government figures which are biased to reflect the political needs of the leaders currently in charge.

 

Dr. Paul Price

www.BeatingBuffett.com    www.OptionsProfits.com

ShadowStats.com tells the truth about Inflation

August 21st, 2010 No comments

cpi-alternative-versus-offical-government-cpi

Our government changed their reporting basis for CPI some years ago to downplay the true inflation  numbers. The SGS Alternative restates the figures to reflect the old way (pre-1990) of looking at the CPI as an apples-to-apples comparison.

The alternative CPI includes food and energy (as do all of our budgets). We’d all have been thinking differently in late 1999 and during 2005 - 2008 if we’d been aware that the true inflation rate was in the double-digit range for the first time since the early 1980’s.

See my earlier posting about the great deflation myth being sold to us on a daily basis.

What could work if we enter a high / hyper-inflationary period?

June 23rd, 2010 No comments

            If (when?) the dollar’s purchasing power starts its inevitable serious decline due to out of control deficits what could protect us from keeping good nominal wealth while seeing our inflation-adjusted net worth relatively intact?

This is truly the $64,000 question. Only the older folks in the crowd will remember that TV quiz show. Imagine anyone getting worked up over $64,000 anymore. Talk about inflation!

            If the $US is going to lose buying power you’ll need to own ‘things’ that can be marked UP to market as opposed to paper that stays level or worse in dollar terms. Some of the answers to my question might not seem intuitive.

A great asset would be to have as large a fixed-rate debt (like as mortgage) as you can safety afford to service for as long a period as you can obtain. If you could take out a 30-year 4.7% fixed rate loan now and we get back to 15% inflation you’ll be able to park the cash in  riskless CDs or T-bills at 15% and simply use 31.3% [4.7%/15%] of the interest you’d collect to pay off the loan interest. Best of all, you’ll be paying back principal with cheaper and cheaper dollars.

 

asset-classes-during-high-inflation-periods-chart          Back to the chart. Even the 5th quintile (6.6% - 14.7% annualized inflation) may not be as high as we can expect to see in the future but that’s the best historical data we have.

 

The four best asset classes you could have owned [with high inflation] were:

Asset Class

Average Annual Return

Positive

Negative

Average Inflation Rate

9.9%

N/A

N/A

Commodities

20.0%

72%

28%

Small-Cap Stocks

18.8%

72%

28%

Real Estate Securities

15.8%

70%

30%

Treasury Bills

8.8%

100%

0%

 

            Many unsophisticated investors might glance as the data immediately above and opt for the 100% positive returns on T-bills over the higher return but less predictable asset classes. Why would that be a bad choice? Let’s take a look on a ‘real world’ basis- after tax and after inflation.

Asset Class

Nominal Return

After 30% Tax

Minus Inflation

Net Change in

Buying Power

Commodities

20.0%

14.00%

-9.9%

4.10%

Small-Cap Stocks

18.8%

13.16%

-9.9%

3.26%

Real Estate

15.8%

11.06%

-9.9%

1.16%

Treasury Bills

8.8%

6.16%

-9.9%

(3.74%)

 

            Of the four assets classes that did best during historical high inflation periods the only one that didn’t maintain full buying power (after-tax and after-inflation) was the ultra-safe appearing T-bills. In fact, they were guaranteed losers to the tune of almost 4% per year in reduced buying power.

            Nobody wants to see hyper-inflation but if you want to protect your wealth you’d better be in something that has a fighting chance of success – not a 100% chance of failure.

Long-term government bonds were, by far, the worst performing asset class with a 1% average annual nominal return and a negative (9.2%) per year loss of purchasing power. Buyers of 30-year treasury bonds today are playing with one of the worst asset bubbles in history and they are likely to suffer the biggest losses if inflation rates pick up dramatically. Ironically, these are seen as safe-havens today while history says they will perform horribly overall and will decline in 42% of all high inflation periods.

 

Dr. Paul Price

June 23, 2010