Friday, April 30, 2021

Missing the point about inflation - reality versus political correctness


A couple of days ago, I wrote an article titled "Inflation: Read the signs all around you, or risk being overwhelmed".  One reader commented:

You've been predicting that MASSIVE inflation is coming SOON for the last decade. How are things different now? What does Hal Lindsey say?

I replied:

Please see the linked articles above, and examine your own grocery bills over the past couple of years.

I rest my case.

His comment bothers me.  The inflation that so many (including myself) have been predicting for so long IS ALREADY HERE - yet people appear blind to it.  They claim that because the warped, twisted, "massaged" official inflation rate isn't changing much, that inflation isn't a major problem.  They ignore the reality that the official rate of inflation isn't worth the paper it's printed on.  It deliberately skews its analysis to favor the lowest possible rate, leaving out so many major factors that it's basically meaningless.

To take just one example, let's look at housing price/cost inflation.  The official inflation rate is far below the actual numbers found by those buying and selling homes.  Wolf Richter pointed out last Tuesday:

House prices soared by 12.0% from a year ago, the biggest increase since February 2006, near the peak of Housing Bubble 1 ... The Case-Shiller Index compares the sales price of a house in the current month to the price of the same house when it sold previously. This “sales pairs method” tracks the amount of dollars it takes to buy the same house over time. Home improvements are included in the methodology. This makes the index the most appropriate measure of house price inflation in the US.

The Consumer Price Index (CPI), on the other hand, tracks the housing inflation component based on rents. The CPI for “Owner’s equivalent rent of residence,” weighing about 25% of the overall CPI, is based on homeowners’ estimates about how much their home would rent for, which ticked up 2.0% from a year ago (green line), compared to house price inflation as measured by the Case-Shiller index (red line):

There's more at the link.

So . . . a 12% increase in housing prices, according to Case-Shiller, versus a 2% increase according to the CPI.  The former's figure is six times higher than the latter's.  Guess who's right?  If you guessed "the CPI", you're living in cloud cuckoo land.  Official figures bear little or no relation to the reality facing homebuyers and -sellers right now:  yet the official rate of inflation blithely ignores that reality.  The same applies to vehicle prices, as we discussed recently.  To put it as simply as possible, the official rate of inflation is completely untrustworthy, and is manipulated to give the most favorable result to the government for its purposes - not to convey facts and economic reality to the consumer.

We've also noted that inflation in the USA at this time is overwhelmingly a currency problem.  We're printing new money like there's no tomorrow, and it's devaluing the existing dollars in everyone's pockets.  I put up a video clip on Wednesday of Peter Schiff discussing this issue, and I'm going to repeat it here.  It's less than two minutes long, but encapsulates the reality of our situation.  If you haven't already watched it, please do so now.  It's important.

Now comes an article from the Foundation for Economic Education titled "Why Your Grocery Bills Are Going Up (And Are Only Expected to Get Bigger)".  The trouble is, the article relies on official inflation figures, and completely ignores the reality that those figures are concocted, manipulated, and entirely untrustworthy.  Apart from that little problem, it's a fine article.

According to the Bureau of Labor Statistics, food prices jumped 3.9 percent in 2020, nearly triple the rate of inflation.

Unfortunately, this trend seems poised to continue. The US Department of Agriculture estimates grocery bills could increase by another 3 percent in 2021, while some experts are betting on even longer-term problems.

“I think food prices are going to continue to increase for probably a good year, year and a half,” warns Phil Lempert, founder of

Shoppers are already feeling the crunch. Long Island resident John Kermaj recently told NBC News, “We used to buy this stuff for $30. Now it's $60.”

Again, more at the link.

Note the disconnect.  The Bureau of Labor Statistics (which calculates the "official" CPI) says food prices rose by just 3.9% last year.  A shopper, who counts the dollars leaving his wallet every time he goes to the supermarket, says prices have doubled (although he doesn't say over what period of time).  Who do you believe?  I can tell you right now, based on the contents (or lack thereof) of my own wallet, that the shopper is a darn sight closer to reality than the BLS statisticians.  In fact, if BLS dropped the "L" from its acronym, it'd become a lot more appropriate description of the statistics it produces!

Anyone who trusts the official CPI figures is ignoring reality.  The facts on the ground have long since overtaken the statisticians, who've been instructed to gloss over that reality and make things look good for the government (which wants to restrict legally mandated cost-of-living increases to programs such as Social Security, welfare, pensions, etc.).

Those who ask, "Where is the inflation you've been forecasting?", are ignoring the reality outside their front doors.  I'll be very surprised if the actual overall rate of inflation this year is less than 10%:  in some significant areas of the economy, it may approach or even exceed 20%.  Just look at how fuel prices have risen since the Biden administration took office.  Fuel affects the price of everything that's transported using it - and its cost has skyrocketed since January.  That's just one example.  I provided several others earlier this week.  Follow the links there for more examples, and see for yourself.

The danger of out-of-control inflation is very real right now, because the Biden administration wants to spend trillions of dollars that don't exist on programs that it deems politically necessary.  Add those new trillions of dollars to the trillions already conjured up out of nowhere over the past few years (particularly in COVID-19 relief measures) and the picture is gloomy indeed.  As we noted earlier this year, "The US government, over the past year, printed or electronically created over 40% of all the dollars that have ever existed."

Refer to Peter Schiff's video clip above.  We're undermining the value of our own currency, and sooner or later our trading partners are going to re-value it a whole lot lower than it is now.  When that happens, the price of everything we buy from them (because we have to - we're no longer producing it ourselves) will shoot up, because it'll take a lot more dollars to buy it than it does at present.  Voila - inflation, even perhaps hyperinflation.  It's by no means impossible.  (Read the linked article in the light of what Peter Schiff says above.  The synergy is very clear.)

I can only repeat my warning from earlier this week:

Batten down the economic hatches, folks.  It's going to be a long, hard ride.



Divemedic said...

I heard that. Here is my take:

BillB said...

I have seen it in the grocery bill. We on-line order from a major food store here in South Texas. My wife was doing the ordering and asked for suggestions. I said to look at ribeye steaks. The price was up nearly 50% since the first of the year. Our overall grocery bill has gone up around 40% in the last year with most of that in the last few months. I wonder why? Change of Federal Administration maybe? (YES)

That CPI "Owner's equivalent rent of residence" is interesting. Some of the Democrats have proposed using the actual value for a particular home that is behind that to charge people who have paid off their homes an imputed income equivalent to the rent on top of their actual income. Just a way to drive people out of home ownership as having a house with a mortgage is essentially renting a house even though one's name is on the deed.

Orvan Taurus said...

Those building up reserves might still benefit from supply-chain screwiness. The once hard-to-get rice? Local store had (note tense) been getting an-declared replacement and the order codes weren't caught/suppressed/whatever for a month or so. Result? The 'off brand' rice is on sale for 50 cents for 2 lb bag. And it might go down further just to clear out the backstock. They got that stuff on EVERY shipment for a month or more (3x a week) so...

But it's the weirdnesses like that one has to have open eyes for, they happen when they happen, if at all.

Though, yeah, overall, prices are up, up and UP.

The Freeholder said...

Or they could just look at ShadowStats, and see what the numbers look like when calculated "the old way"-before they decided to cook the books.

Rob said...

When someone asks "where's the inflation" ask if they have priced an eight foot long 2x4 lately...

paladin3001 said...

As to houses, just had a house appraised by a realtor. It's taxed at 165,000, the realtor gave us a quote of $350,000 and said it could get more as is. We live in a small town and that price terrifies us.

I’ve Seen Things You People Wouldn’t Believe said...

One one hand, our home value is up significantly, but it's all illusory, as any gain on sale will be eaten up on a new home.

BUT...our food bills are way up this past year. For example, a package of 4 steaks that cost roughly $30 last year are now over $40 this year at our "club" store.

Toirdhealbheach Beucail said...

Food prices are up all over - not just in the grocery store, but in restaurants as well.

I have often wondered at this seeming reluctance to include the actual cost of food (and fuel) as is in the CPI. My initial conclusion is that if the actual numbers were seen, people would be much more angry (as they should be, actually).

The cognitive dissonance disconnect cannot continue forever. At some point even the shopper quoted, where things have effectively doubled in price, has to ask the question "Who is telling the truth?"

Blue said...

Not just in America, here in Aus a 1Kg packet of oats could be had for $1 a couple of years ago, now it's $1.20 for 750g.

Steve Sky said...

@Blue - That's the other way that goods inflation is accomplished & "hidden". The size of the item is reduced, and the price "stays the same", or is only minimally increased. So most people ("Where's the inflation?") miss it. Just go thru the store and calculate the actual price increase, when the item weight is reduced by 1/4 (coffee, sugar, flour, tuna fish, etc).

I'll note when growing up, the candy bar manufacturers were the early implementers of this kind of cheating. A candy bar of 1 & 13/16ths OZ instead of 2OZ? Most people didn't realize that the price was going up, even if "it cost the same", because it looked to be the same size. My father taught me to look at that, and realize how I was paying more.

Francis Turner said...

Japan has had no inflation for 30 years. At least that's what they'll tell you and it is mostly right in that quite a lot of things are the same price. But not everything. And I've noticed that the new 900ml bottle often replaces what used to be a 1L bottle/pack before in a number of cases recently.

And it's getting harder to get a lunch in a restaurant for under Y1000 - not impossible, but definitely hard in big cities and popular tourist places.

I suspect we're going to see more of this

Aesop said...

You can't explain inflation to people too stupid to do math.

It wastes your time, and annoys the pig.

Mike Doyle said...

Yep. I remember a story about a BLS charm offensive from the Obama administration.

BLS representative: "The economy is going great! Just for one example, the cost of an iPad is less than $200 - a quarter of what it was under Bush!"

Citizen, tartly: "I can't eat an iPad..."

Funny how higher-higher seems to think we'll forget about that inconvenient fact...

Chip Anderson said...

Mr. Sky, your mention of chocolate bars reminds me all too much as to when I first noticed inflation under the Carter Presidency. Today I use the price of gold in dollars to measure the value of a dollar.

Divemedic said...

Gold prices can be useful, but that market is so manipulated, I don't think it is accurate as a yardstick for inflation

Aesop said...

Au contraire: an ounce of gold has the same purchasing power now as in 1932, 1392, or 392 B.C.

In 1933, an oz. of gold went for $20 and change.
Now, it goes for so many more dollars, the value of $1 is about 2¢, which is less than what that dollar costs for paper and ink.
That's exactly what it is, and what it's worth.

SiGraybeard said...

Linked back from my place on Tuesday the 4th.