Thursday, June 23, 2005

by Larry Edelson, Safe Money Report


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The cost of a 5-ounce can of pistachios I bought yesterday is up 12% in a month. A large size bag of Lay's potato chips is up another 14%.

Corn and wheat prices are up 13% and 11% respectively since early May. Soybean prices are on a tear, UP 23% in barely four weeks. The price of cocoa is up 10% in a week. Sugar is up 10% in three weeks. A loaf of bread is up 8.9% since the first of the year. A head of lettuce is up 13%.

An evening at a typical, three-star hotel will now cost you at least 10% or 20% more than a year ago. Transportation costs are up 11% so far this year.

This tells you inflation is already on a roll. You know this, though. Like me, you go to the grocery store. You go to the gas pump. You travel and you go to hotels.

What's driving prices so rapidly higher? And why doesn't the government-issued Consumer Price Index show that inflation is sharply rising? These are two questions that I think are on everyone's minds, so I'll answer them right now ...


Why Prices Are Surging

First, it now takes nearly $59 to buy a barrel of oil, its highest dollar price in history. If you're living in Europe, in terms of the euro, you are now paying the highest price ever for a barrel of crude oil.

Oil and petrochemicals are major components of virtually everything manufactured. So when their price rises, it drives up costs in just about every industry in the world.

Oil and petrochemicals are found in rubber tires, gloves, shoes ... in the manufacturing process for clothing items, medicines, in every plastic made, even in cosmetics. It is the one commodity that is almost universally used in products from A to Z.

That's just oil's use in products. It does not include the amount soaring energy prices are costing us to heat and air-condition our homes, run our cars, lawnmowers, and more. Oil is used EVERYWHERE.

So don't let anyone convince you otherwise: Rising oil prices are inflationary. Period. They are driving the prices of just about everything much higher.

Second, the Consumer Price Index is essentially a sham. It's manipulated lower because it's the index the government uses to adjust Social Security, welfare, and Medicare payments. The lower the index — or the slower its rise — the more the government saves.

In my opinion, the Consumer Price Index is conveniently designed to mislead you. No taxes of any kind are accounted for as a cost of living. Not personal taxes. Not sales and local taxes. Not consumption taxes. Not even property taxes. For some reason, the government does not consider these items to be "a cost of living."

But the biggest manipulation in the CPI is the way the government calculates the cost of housing. It uses rents as a substitute for the actual cost of buying a home. But with millions of Americans dumping their rentals and rushing into home ownership, rents are actually going down in some areas. Does that mean it's now cheaper to buy and own a home? It's a joke!

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No seguimento do post anterior, recomendo a leitura do último artigo da saga "Storm Watch" do J. Puplava, publicado hoje no site Financial Sense, intitulado: "The Core Rate".


Deixo aqui um excerto:

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The Boskin Commission recommended several changes to the CPI index which included:

- develop and publish two indexes

- abandon the fixed-weight formula for CPI goods

- change the weight of items in the index from arithmetic weighting to geometric weighting

- introduce substitutions in the index

- seasonal adjustments to account for price increases that occur on a seasonal basis, which would smooth out the fluctuations

- reduce prices by quality improvements

The result of their implemented suggestions is the mish mash we have today, which bears no resemblance to reality. The Commissions recommendations had widespread support in the Clinton Administration, a Republican Congress and from financial luminaries such as Alan Greenspan, who was expanding the money supply at a very rapid rate as shown in the graph above.

Substitution
Up until the Boskin/Greenspan initiative surfaced the CPI was computed each month using a fixed basket of goods. That changed after the Boskin Commission. The Bureau of Labor Statistics (BLS) began using substitutions in their monthly computations of the CPI. If beef prices rose, it was assumed that people substituted chicken. If chicken prices rose, then consumers would switch to fish. If all these prices rose, well consumers would become vegetarians or maybe start eating Alpo.

Weighting
In addition to changing items in the index through the substitution principal the BLS also changed the weights of items in the index. Instead of straight arithmetic weightings the BLS began to use geometric weighting. The benefit of geometric weighting is that it automatically gave a lower weighting to those items in the CPI that were rising in price and higher weightings to items in the index that were falling in price.

Hedonics
The manipulation didn't stop there. The bureau also began to adjust prices for quality. This practice became known as hedonics. Hedonics adjusts the prices of goods as a result of the increased pleasure a consumer derives from a product. A few examples will illustrate how removed the index has moved away from reality. Tim LaFleur is a commodity specialist for televisions at the BLS. In December last year he adjusted the price of a 27-inch television set for quality improvements. The 27-inch television set had a retail cost of $329.99. However, he decided the new model, which still sold for $329.99, had a better screen. After putting this improvement through the governments complex hedonic adjustment model he determined the improvement in the picture was worth at least $135! Taking in this improvement he adjusted the price of the TV by $135, concluding that the price of the TV had actually fallen by 29%! [1] The price reflected in the CPI was not the actual retail store cost of $329.99, but $194.99. The only problem for we consumers is that if we went to Best Buy or Circuit City to buy that TV, we would still pay $329.99.

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The Substitution Effect
Substitution also plays a role in reducing the CPI. From 2001-2003 the CPI index fell by 1.6% reaching a low of 1.1%. Wall Street and the Fed were talking about the risk of deflation. Deflation was predicted everywhere in the press. The financial world became fixated over the risk of deflation even though the monetary presses were working overtime, credit was mushrooming, and asset bubbles were inflating in the mortgage, bond, and real estate markets. The reason for the decline was the substitution effect. Instead of using new car prices, which were going up each year, the BLS substituted used car prices, which were falling. In place of exploding real estate prices, the Bureau gave more weight to the price of rents, which were falling as more households bought homes. Rents were given more weight even though 69% of households own a home versus the 31% that rent.

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Seasonal Adjustments
As if these distortions weren't enough, there are the seasonal adjustments that remove the price increases that occur during certain times of the year, i.e. gasoline prices during the summer driving season or heating oil during the winter. Seasonal adjustments are nothing more than "intervention." They are designed to remove or scale down volatility or price spikes. The only problem is that price spikes never show up in the CPI. Only price drops get recorded. Price spikes are statistically smoothed away so they never show up. Sharp spikes in oil, gasoline, heating oil, or food get statistically adjusted. This keeps the CPI low. It is why the caller at the beginning of this article was puzzled. What consumers see everyday in real life is so different than what the government reports and the markets accept each month. It is unreality TV.

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This whole process of purposefully understating the real inflation rate also keeps real inflation artificially subdued. Think of all of the aspects of our economy that are tied to the CPI. Listed below are just a few examples:

- Wage and labor contracts

- Rents

- COLAs (Cost of Living Adjustments) on pensions

- Market interest rates

Labor contract negotiations begin with CPI adjustments. Annual raises at companies are based on CPI changes. Think of how many workers fall further behind in their pay because of an understated CPI. How many landlords are cheated out of their just rents by understated inflation rates? How many retirees are robbed of real increases to their pensions as a result of underreported inflation? What would be the real rate of interest, if bond investors figured out that the real inflation rate was 6% and not 3% as reported by the BLS.

An understated CPI also overstates GDP by not removing the full inflationary impact of pricing from nominal numbers. It also overstates productivity by overstating the numerator part of the equation.

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Ver o artigo completo em http://www.financialsense.com/stormwatch/2005/0624.html

Obrigado Paciente por mais uma interessante partilha de informação.

É de facto questão intrigante, esta do método de cálculo e aplicação de alguns indicadores económicos que têm tanta relevância (ou querem fazer parecer que...). Como sabes, leio com frequência o que o Puplava escreve e não é a primeira nem a última vezque questiona esses métodos. Porque é que não mudam? Simples, não convém....

Porque é que não mudam?

Já mudaram há tempos atrás! Agora tá quieto ...

Não convém mesmo nada e percebe-se porquê. Basta uma leitura atenta do artigo do J. Puplava.

Repara que aqui em Portugal é a mesma cena. Alguém acredita que a taxa de inflacção se situa à volta dos 2,5%?

Mas a verdade é que as rendas das casas (mesmo aquelas que foram congeladas há décadas atrás) são actualizadas de acordo com a taxa de inflacção oficial (o ano passado o coeficiente de actualização foi de 1,025).

E que dizer da actualização de salários? Até os sindicados, que têm a obrigação de defender os trabalhadores, aceitam estes números oficiais da inflacção. Isto é de deixar qualquer um perplexo.

Estamos todos a ser prejudicados no nosso poder de compra e ninguém diz nada! Mesmo os analistas económicos que vemos nas televisões ignoram esta situação.

Como dizes, não convém...