Don't Believe the Latest CPI and Inflation Reports

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When most of us think about inflation, we think of the prices of the things we buy regularly. The government supposedly measures that in the CPI – the Consumer Price Index.

I think that, intuitively, most of us experience a higher level of inflation than the government reports.

There’s a reason for that. The government doesn’t measure inflation – at least, not as it’s classically defined. The classical definition is a rise in the “general” level of prices. That should include all things that are bought and sold – that have prices.

The CPI doesn’t do that. It measures a narrowly defined and statistically manipulated basket of consumption goods and services. And the government does its best to suppress the inflation rate of those items. That’s because the CPI was never intended to measure a rise in the general level of prices. It was intended as a means for indexing the cost of labor contracts and government contracts in eras of high inflation.

Given that purpose, government statisticians have habitually looked for ways to get these numbers to understate actual inflation. They use hedonics to substitute lower-priced goods for higher-priced goods when prices are rising because, in theory, consumers will make that switch. But if we wanted to measure general inflation accurately, wouldn’t we survey the prices of the same goods over time?

Then there’s the biggest trick of all.

Assets Don’t Count, and That’s Bad News for Us

Assets don’t count at all, only consumption goods. So if housing is inflating at 6% a year, it doesn’t count because houses are “assets,” not consumer goods. I’d argue that they’re wasting assets that are being consumed because they require regular expenditures to maintain, but the government says they’re assets. They don’t count.

Instead, the government replaces home prices with rent. But it even manages to make that phony by ignoring market rent, which is rent as paid in current market transactions. Instead, they ask tenants how much rent they are currently paying. It doesn’t matter if they just rented the place or have been there for years with a lease with nominal increases – or worse, rent control.

It just bears no resemblance to the actual inflation rate of housing. The government imputes housing inflation at the reported rate of increase of contract rent. That counts for nearly 40% of core CPI. It has meant that through the years, CPI has understated inflation by between 0.75% and 1% ever since house prices began to recover in 2012.

So we know, right off the bat, that inflation is running a lot hotter than the government reports. How hot is it? I like to look at several alternative measures that don’t manipulate the numbers, plus an adjusted CPI that includes housing at the actual rate at which it is rising.

Here’s How Hot CPI Really Is

First, here’s how the Wall Street media treated Wednesday morning’s CPI release. The Wall Street Journal headlined with, “U.S. Consumer Prices Flat in November.” It said that “U.S. consumer prices were flat in November, a sign a recent drop in oil prices is holding down inflation.”

Now, I don’t know about you, but it seems to me that when oil prices are falling, the Journal and its ilk like to emphasize the top-line number. But when oil prices are rising fast, they like to strip it out and emphasize what they call core inflation – which is the CPI excluding what they routinely describe as “volatile” food and energy. All right, there’s rationale for that, but let’s be consistent. Use core and ignore the huge swings in energy prices all the time, not just when it helps the bullish case.

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CNBC.com indeed noted that “U.S. consumer prices were unchanged in November, held back by a sharp decline in the price of gasoline, but underlying inflation pressures remained firm amid rising rents and healthcare costs” [emphasis mine]. So I must give CNBC its due for giving that a fact a shout out.

Unfortunately, they then softened that after pointing out that core CPI rose 0.2% in November, and 2.2% for the 12 months ended November. They added,” While core prices remain firm, the inflation outlook is benign amid falling oil prices and signs of slowing economic growth…” Whoopee! The outlook is benign! Maybe the Fed won’t raise rates!

Not So Fast – the Outlook Isn’t Benign at All

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About the Author

Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

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