Why You Can't Trust the Inflation Numbers By BRETT ARENDS |
JANUARY 26, 2011
A surprising number of people on Wall Street will tell
you not to worry too much about inflation.
After all, they'll say, just look at the numbers. The inflation
picture is incredibly benign. In the past 12 months the
Consumer Price Index has risen just 1.5%—a remarkably
low rate. And when you strip out volatile food and energy
costs, they'll say, it's even lower—a meager 0.8%.
It doesn't stop there. Many economists will point out that
wages are also rising by less than 2% a year. With so many
people still out of work, goes the line, labor costs are
going to stay low for a long time too. So what's the worry?
Clearly, a lot of investors agree. Inflation-protected
government bonds, which people would buy to protect themselves
if they were worried, have fallen in price in the past couple
of months. Gold, another inflation hedge, is down. Ten-year
Treasury bonds yield less—3.3%—than they did
when President Eisenhower left office.
It's crazy. There is plenty to worry about. As you battle
to manage your family's finances, be aware that there are
three reasons why inflation needs to be on your radar screen.
• First, the official inflation numbers should be
taken with a fistful of salt.
Over the past 30 years, the federal government has made
a lot of changes to the way it calculates inflation. It's
taken place under presidents of both parties. Each change
in methodology has come with plausible-sounding justifications.
But, as if by magic, each change has had the effect of flattering
the numbers. Funny, that.
According to one rogue economist, John Williams at Shadow
Government Statistics, if we still calculated inflation
the way we did when Jimmy Carter was president, the official
inflation figures would look about as bad as they did when
... Jimmy Carter was president. According to Mr. Williams's
calculations, if we counted inflation under the old system
the official rate wouldn't be 1.5%. It would be closer to
Mr. Williams is just one voice. But it makes sense to treat
the government numbers with skepticism.
Under the official calculations, if steak prices boom,
the government just assumes you buy cheaper hamburger instead.
Or consider the case of Apple computers. We all know Macs
are expensive. And we know Apple doesn't discount. The cheapest
Mac laptop today costs $999. A few years ago, it also cost
$999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery
called "hedonics," Uncle Sam calls this a price
cut. His reasoning? You're getting more for the money. Today's
$999 Mac is lighter, fancier and faster than last year's
$999 Mac. So the government calculates that the "real"
price has actually fallen.
How's that work in the real world? Try it. Go into your
local Apple store and ask for 50% off thanks to hedonics.
(If you do, please, please video the exchange and put in
YouTube. We could all use a good laugh.)
Instead, the government is worrying about deflation, partly
because of all the "cheap" MacBooks out there.
• The second reason to treat the official inflation
figures with some mistrust is that they look backward. They
register what just happened, not what's about to happen
OK, so the prices of many things haven't risen. Yet. But
if the laws of economics mean anything, they will have to.
Why? Because costs are rising.
Economists need to stop focusing just on labor costs. The
world has plenty of surplus labor. But look at raw materials.
Around the world prices are skyrocketing, from copper to
cocoa. The United Nations Food Price Index has just hit
a new record high. Oil's back near $90 a barrel. Wheat prices
have nearly doubled since last summer.
Soaring food prices helped spark the revolution in Tunisia.
According to Alex Bos, commodities analyst at Macquarie
Securities in London, other governments—especially
in North Africa—have responded with panic buying of
Algeria alone, he says, has bought about 1.5 million tons
of wheat this month—maybe triple its usual amount.
Saudi Arabia is rushing to build up grain supplies. Corn
supplies are as tight as they were back in the inflationary
Sooner or later this is going to show up in your supermarket,
or at the mall, in higher prices.
Just ask McDonald's. Or paints and plastics giant DuPont.
Or Kleenex and Huggies maker Kimberly-Clark. Or 3M. Or Coach.
These companies, and many others, have warned in recent
days that they're getting squeezed by rising costs. They'll
either eat the costs, which will hit the stock, or pass
them on. How is this not inflation?
• The third reason to be mistrustful of the inflation
picture? Simple. Economics.
We are flooding the world with extra dollars. The Fed simply
invents as many as it likes. In the past couple of years,
to try to keep the economy out of a tailspin, it has more
than doubled the size of the so-called monetary base.
A dollar bill has no intrinsic value. Dollars are only
"worth" something because you can exchange them
for a haircut, or a pair of shoes, or a book from Amazon.com.
So if you drastically increase the number of dollars without
a commensurate increase in the number of goods and services,
each dollar must, by definition, be worth less. That's another
way of describing inflation.
So far, this inflation seems to have shown up in the unlikeliest
of places. It's like Whac-A-Mole. The price of vintage wines
has skyrocketed 57% in the past year, according to the Liv-ex
Fine Wine 50 Index. Real estate prices across China are
in a bubble. So long as the Chinese tie themselves to the
U.S. dollar, they are importing our inflation. But, once
again, one wonders how this can be called benign.
Is inflation certain? I'm wary of any predictions. Casey
Stengel once said, "Never make predictions, especially
about the future." Mr. Stengel would have lasted three
days as a Wall Street analyst. But he won five World Series
in a row, and he knew a thing or two.
Maybe inflation really will stay tame. But I'm not counting
on it. I'm not buying the conventional wisdom, and neither