Inflation’s Demise Has Been Exaggerated

Monday, October 17, 2005 | 02:16 PM

Similar to Twain’s observation, reports of inflation’s death have been greatly exaggerated. Despite tales to the contrary, it is alive and well and making itself broadly felt. Indeed, we believe that inflation has been vigorous for the past 3 years, and goes far beyond food, oil and natural gas.

That is, unless you rely on BEA headlines. We have long lamented that the adjustments taken to arrive at a core CPI is one conveniently bereft of increasing prices. These systemic modifications only serve to obscure the actual inflation occurring in the economy. Friday’s CPI data was no different. For readers who prefer their economics without artificial sweeteners, we revisit this issue today.

Post-bubble, -recession and -9/11, the entire purpose of unprecedented government stimulus has been to massively re-inflate a flat-lining economy. At this, the government has succeeded all too well. Far too many commentators insist that only Energy is going up in price; This canard is belied by the data, and by your everyday experience.

The core rate has inflated significantly - BLS data be damned. To wit:

• Commodities: The CRB Index has spiked since 2002. This move is roughly equivalent to 1976-77 increase. The late 70s inflation spike came on top of the 1972 move, so perhaps we should consider ourselves fortunate-so far; Nonetheless, CRB has been going higher for 4 years.

• Health Care Expenses: Have been going significantly for nearly a decade. Anecdotally, health insurance premiums have been rising 15% annually. (How much has your own firm’s premiums run up? Next case);

• Precious metals: have moved higher, with Gold at multi-decade (18 year) highs. We take rising Gold as a sign of inflation.

• Education: Anyone who isn’t employed by BLS knows painfully well that tuition and textbooks have skyrocketed;

• Housing: Housing affordability is at a 14 year low, despite mortgage rates still relatively cheap at 6%. Don’t look for this factor in CPI, as the BLS model uses something known as Owner’s equivalent rent - astonishingly, OER has actually fallen as home prices rose due to a rental glut. (See nearby chart)

It hardly needs to be stated that if Inflation appears robust in BLS data, then the many entitlement programs with COLA adjustments will cost significantly more than the nearly 2/3rds of the Federal Budget they consume at present. Given the precarious state of Uncle Sam’s finances, the motivation for understating inflation is apparent.

However, unless investors fully understand the risks which actual inflation presents to their equity and bond portfolios, they may find themselves more reliant on entitlement programs than they ever expected to be.

Monday, October 17, 2005 | 02:16 PM | Permalink | Comments (6) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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What does the Media's/Governments missing of the boat on the above facts mean for the Markets in the future... We've already had some easy picking downside in retail/real estate...and more recently the rest of the bunch...What of the money mangers pundits gov officials you can see on CNBC (if you watch) who seem to adhere to a Bullish philosophy @ this point...Are they hoping in order not to get crushed or are they simply the otherside of the trade which is necessary to produce even further downside when in fact the weakness of the scenario is finally realized.....In other words, regardless of any near term bounce off this decline..Shouldn't it be obvious to anyone paying close attention that we are in for more downside???

I mean while "everyone's" been crying about how bad the market is and how the hurricanes will spur growth, etc etc....I've done the best I ever have on the short side...After all, the dow was @ 7500 three years ago, and is appears tired addition to the myriad problems in the world slash/government propoganda and mismanagement...

Holla Back



Posted by: Dave Singer | Oct 17, 2005 4:24:37 PM

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