“My Two Cents”
By Andy Sutton

9/22/2006

Whoa!!! Stop the presses!!! The PPI is down two months in a row. Let's break out the champagne, it's time to party. Ding dong the wicked witch is dead. Inflation is gone, let the good times rock! Ok, so I'm being sarcastic once again. In case you were wondering, no I don't believe any of this nonsense. Unfortunately, most folks don't really know what the PPI/CPI are, nor do they have time to spend researching it. So I will do it for them and lay bare the fraud that is the government's measure of 'inflation'.

First of all, the whole concept is an oxymoron because inflation is the growth of the money supply, NOT rising prices. PPI and CPI only measure the 'visible' effects of that inflation. My cynical side will tell you that PPI/CPI tell the government how good (or bad) of a job it does in hiding its inflationary practices. But lets go with the conventional wisdom for a second and pretend that these numbers actually represent inflation.

An almost 3 hour search of the Bureau of Labor Statistics website failed to find the specific formula used for weighting various items and industries and repeated requests for this information have gone unanswered. So we're left to guess how the indexes are weighted, but we've seen plenty of prior evidence and admissions of hedonic (read: unjustified) adjustments to these numbers.

Let's look at exactly what the PPI/CPI are. Put simply, PPI is the index of prices that producers pay for their raw materials which they convert into consumer goods. CPI is purported to measure the actual increases in the cost of consumer goods. There is a headline number and a 'core' number for each. The 'core' excludes energy and food, and the core, which right now is lower than the headline is the number focused on. So the government's inflation measure is true only for people who don't buy food or consume any type of energy. The only group I can think of that fits into that category are the Amish as they primarily grow their own food and do not use electricity or drive cars (although many do use oil for heat).
Rents currently make up 40% of the CPI, partly in the form of actual rents and the rest in what is called 'Owner's Equivalent Rent'. Basically the government contacts homeowners at random and asks them what they THINK they could rent their house for. This is all nonsense. Also factored in are ridiculous assumptions about substitution effect. In other words, if the price of product A is going up, the government assumes that people will buy a relatively cheaper product B and counts product B in the CPI instead of product A. This completely ignores the fact that the cost of product A has risen and that many people for whatever reason might not purchase product B and therefore are stuck with the higher price of product A. All this manipulation is done to create the illusion that 'inflation' is contained and we should feel free to bid up stocks, bonds and other paper products.

The take-home message is a simple one: These numbers are pure bull and should be taken not with a grain of salt, but rather a truckload.

So what does it all matter? Inflation or an increase in the money stock dilutes the value of other dollars in the system. It is a silent 'tax' on holders of dollars. People have been brainwashed over the years to believe that inflation is a natural phenomenon and is unavoidable. This is more nonsense. The reason the money supply continues to grow is because the government has racked up more IOU's of various kinds than it has matching real revenues to pay. So it has two choices: It can tax or it can print. The policies of the last 8 years in particular have been to lower taxes to create a perceived increase in wealth while firing up the printing presses to pay the bills. The end result is that people have more dollars, but they're worth a lot less and therefore people are actually WORSE off. The reason society tolerates this at all is because of the gross misconception that inflation is a necessary, unavoidable part of life. This misconception continues to be supported by monthly PPI/CPI data, mainstream financial reports and the media in general.

In conclusion and for your own edification, you can actually go to the Bureau of Labor Statistics website and calculate the amount of purchasing power that has been stolen from you based on the government's inflation numbers. The fact that this admission passes without nary a whimper of protest is a testament to a total lack of understanding of money, how money works and macroeconomics in general. I would contend that since the 'inflation calculator' linked below uses the CPI as its base for measuring the erosion of purchasing power that the situation is actually a whole lot worse than the numbers will tell you. Even at their stated value, the numbers are downright awful.

http://data.bls.gov/cgi-bin/cpicalc.pl

Recently, we've heard a lot of negative press about companies 'cooking the books' to increase profits. If this is true, then the US government is not only cooking them, but scorching them like an inattentive barbecue chef at a summer picnic.

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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