Thursday, May 08, 2008

The TRUE U.S. Inflation Rate: Between 6 and 9%

Kevin Phillips has the appalling story here. The government's chief measure of inflation, the Consumer Price Index, virtually ignores the costs of food and energy--two things everyone has to buy in quantity!! Foreign investors and bankers know the real story and are acting accordingly. Excerpt:
Critics, by contrast, smell a potential disaster. Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.

California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be in the 10 percent range. My own analysis, set out in much more detail in an article in the May issue of Harper's, comports with that of the cynical foreign investors.

Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.
Many writers love to prattle on endlessly about the supposedly growing prosperity of the Middle Class. Such specious arguments often rely on CPI data, which Phillips here exposes as fraudulent. In truth, the Middle Class of this country is squeezed and pressured on all fronts. (If we are honest, the mad frenzy to possess everything everyone else seems to have is part of what's wrong as well.) Most Middle Class families must contend with health care worries, multiple jobs, little time off for most people, and now the skyrocketing prices of food and energy. Consumer debt has reached phenomenal levels and housing costs have bitten deeply. All in all, it paints a grim picture--one which official Washington is loathe to recognize.

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