More and more analysts are catching on to the fact that Government measures of inflation are phony. The US Government tells us that inflation, as measured by the CPI, is 0.8%. This is largely a work of fiction however as the actual cost of goods purchased by consumers has increased.
The US Government hides this fact by changing the CPI regularly to underplay the threat of inflation. One of the most famous examples is the decision to drop food and energy prices from directly impacting the CPI via a gimmick called “hedonic adjustments.” In simple terms, if food or gas prices jump 100%, the CPI won’t rise anywhere near that much.
The CPI rigging goes much further than this. The CPI also adjusts how it measures the price of homes and rents. So if home prices or rent prices jump substantially, the jump won’t show up in the CPI.
By way of example, think back to the summer of 2008. At that time, the price of gasoline was at an all time high with Oil priced at nearly $150 per barrel. Food prices were approaching records. And home prices were only 10% off their all-time highs.
At that time, the official reading for CPI was 4%. The US Government claimed that with gas, food and housing prices (the most basic essentials) all at or near all time highs, that inflation was just 4%.
Why do this?
Because by downplaying inflation you can overstate growth. All economic growth in the US accounts for inflation via a “deflator” measure. If GDP grows 3% and inflation was 2%, then real growth was 1% in very very simple terms.
By using a low CPI deflator, the Government can overstate growth dramatically. A great example is the fourth quarter GDP growth measure for 2012 which, if using an accurate inflation measure, would have registered over NEGATIVE 1%.
However, by using a phony deflator measure, the US got away with a 0.4% growth rate. And the media could proclaim that things are still positive, albeit not as positive as they were in the third quarter.
This is yet another reason why Governments and Central bankers will always downplay inflation. It’s also why you’ll never hear a Central banker warn that inflation is a problem.
However, by any reasonable measure, real inflation today is closer to 6%. Stocks love inflation at first, until their costs start to increase dramatically. At that point inflation is a REAL KILLER for profits. This doesn’t mean stocks can’t soar (see Zimbabwe’s stock market returns) but it does mean you’re not getting any richer from them.