Price inflation has been a part of our economic world since the last Depression. The total US Dollars floating around has increased just a tiny bit more than the size of our economy, making them just a bit less more valuable with time.
Inflation is rarely questioned because we are used to it and it’s not large. It’s even considered good policy because it penalizes taking money out of the economy by stuffing big piles of cash into a mattress. But it also covers up a lot of sins and makes it much easier to fudge the numbers.
Longtime readers will recall that just last year the watch-word was “deflation”, when prices fall. Economists were concerned that there wasn’t quite enough money in our system and that the contraction could accelerate if we didn’t take action. This included the Federal Reserve, which among other actions injected $1.6 trillion in “Quantitative Easing” into the system – essentially printing more US Dollars. This combined with our interest in increasing manufacturing exports caused allegations that a “Currency War” was at hand.
Nevermind that. Spikes in oil and food prices have created inflation and we’re humming along again. Or are we?
The chart below is from the St Louis Federal Reserve, as always. The blue line is the year-over-year change in the Consumer Price Index, and the red line is the same data excluding food and energy:
You can see where the overall figure drops below zero, causing the watch for deflation last year. As long as you don’t get around or eat, prices did drop through the end of the official “recession” (shaded area). But it’s clear that, leaving out food and energy, prices have been increasing at a fairly constant clip, 2-4% every year.
This means a lot more than it looks at first.
Inflation as a constant phenom gives rise to what’s called “real” data for things like investments, Gross Domestic Product (GDP) calculations, and other things. If you invest in your retirement and get 3% every year, you’re barely treading water. If you aren’t getting a raise of 3% at your job, you’re just even. And if the economy isn’t growing at that rate we’re never going to create the jobs we need. All of that assumes no one eats, of course – right now, inflation is actually around 7% overall. If you like to eat and are getting less than that, you’re losing ground every year.
But if you like to eat nothing but fudge, the official stats offer a lot for your diet. Consider this observation from the interesting site (which I am still working to make sense of) called the “Consumer Metrics Institute”, an unnamed group that states: “Many ‘leading’ economic indicators are published, but few (if any) are sufficiently ‘leading’ to be meaningful to investors.” Yes, they are after my own heart! They consider the “Price Deflator” – the flip-side of inflation as the Dollar becomes worth less every year, and its effect on our GDP:
The importance of the price deflater used by the BEA (Bureau of Economic Analysis) cannot be overstated. In calculating the “real” GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA’s sister agencies. The mathematical implications of the deflater are simple: a lower deflater creates a higher “real” GDP reading. If April’s CPI-U (as reported by the Bureau of Labor Statistics) of 3.2% year-over-year inflation is used as the deflater, the reported 1.84% annualized growth rate shrinks to a 0.56% annualized rate, and the “real final sales of domestic products” is actually contracting at a 0.63% rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7%), the “real” GDP would be shrinking at a 1.82% annualized rate, and the “real final sales of domestic products” would be contracting at a recession-like 3.01%.
Summary: at a real rate of inflation running around 7%, the economy is shrinking considerably faster than noted before. Even excluding the volatile parts of the consumer price index, the calculations of “real” (inflation adjusted) GDP growth are using a bizarre number that over-states growth considerably.
Is the BEA lying to us? As Mark Twain famously observed, “There are three types of lies: lies, damned lies, and statistics”. This one has to be filed under the last category. But if you are barely treading water in your investments or salary, perhaps you can take heart in knowing that just about everyone is in the same situation right now. What you might feel in your guts is more accurate than the official numbers, however, and that makes it hard to know just where we are as a nation.