Inflation Is Finally Rearing Its Ugly Head

Warning:  Long post follows, but I think it’s relevant today. 

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In keeping with my “current events” posts of late I’d like to discuss some things I’ve noticed at the grocery store lately.

At the Hannaford’s Grocery store in Damariscotta (Maine) this weekend I picked up a bag of baked potato chips and it cost me $3.99.  That’s four dollars for a bag of chips!  I try to eat a reasonably healthy diet and a couple of years ago started substituting baked chips for the regular deep-fried super-tasty Humpty-Dumpty chips that I love so much.  But $4 a bag?  I might just go back to eating the heart-attack-inducing-but-oh-so-yummy regular chips that go for half that price.

I knew inflation was coming and that prices were going to go up, but it doesn’t really hit you until you see a bag of chips for $4.  Egg Beaters – always expensive – costs $4.99 for one container.

A couple of months ago I was sitting in the sauna at the local YMCA chatting with a guy who – as it turns out – is an economist.  We got talking about the sorry state of affairs and I commented on the fact that the mainstream media keeps saying everything is fine, the economy is recovering, not to worry, etc.  His reply to that was, “Of course they are!  You pay me enough and I’ll say whatever you want me to.”  I’m dead serious.  As you can imagine that doesn’t give me a great deal of confidence in what’s being reported on the major news sites these days, not that I really had much faith in it before that mind you.

It did get me thinking about inflation though, so I decided to go back to the basics and see what I could find out.  According to everybody’s best friend Wikipedia:

n economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1]When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4]

Ok, basically the price of an item or service goes up and the paycheck I was making before doesn’t go quite as far as it did before inflation.  The way they keep track of inflation is through the CPI- the Consumer Price Index.

So far so good, but what is the Consumer Price Index?  Back to Wikipeida:

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI is defined by the United States Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”[1]

So the key here seems to be the market basket of goods that we, as consumers, buy.  But what makes up the market basket of goods?  According to BLS.gov:

What goods and services does the CPI cover?

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

  • FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
  • HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
  • APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
  • TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
  • MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
  • RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
  • EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
  • OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

There are several other things as well, but at this point it starts to get complex and therein lies the problem.

At one point I believe the CPI was at least somewhat accurate, but statistics, which this whole house of cards is based on, can be manipulated many different ways.  For example check out this excerpt from www.shadowstats.com:  (BLS stands for Bureau of Labor Statistics):

Let Them Eat Hamburger
In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.
Although the ensuing political furor killed consideration of Congressionally mandated changes in the CPI, the BLS quietly stepped forward and began changing the system, anyway, early in the Clinton Administration.
Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.
The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.
The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.
Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.
Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.
The BLS publishes estimates of the effects of major methodological changes over time on the reported inflation rate (see the “Reporting Focus” section of the October 2005 Shadow Government Statistics newsletter — available to the public in the Archives of www.shadowstats.com). Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting — most of which not included in the BLS estimates — takes the current total CPI understatement to roughly 7%.
There now are three major CPI measures published by the BLS, CPI for All Urban Consumers (CPI-U), CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the Chained CPI-U (C-CPI-U). The CPI-U is the popularly followed inflation measure reported in the financial media. It was introduced in 1978 as a more-broadly-based version of the then existing CPI, which was renamed CPI-W. The CPI-W is used in calculating Social Security benefits. These two series tend to move together and are based on frequent price sampling, which is supposed to yield something close to an average monthly price measure by component.
The C-CPI-U was introduced during the second Bush Administration as an alternate CPI measure. Unlike the theoretical approximation of geometric weighting to a variable, substitution-prone market basket, the C-CPI-U is a direct measure of the substitution effect. The difference in reporting is that August 2006 year-to-year inflation rates for the CPI-U and the C-CPI-U were 3.8% and 3.4%, respectively. Hence current inflation still has a 0.4% notch to be taken out of it through methodological manipulation. The C-CPI-U would not have been introduced unless there were plans to replace the current series, eventually.
Traditional inflation rates can be estimated by adding 7.0% to the CPI-U annual growth rate (3.8% +7.0% = 10.8% as of August 2006) or by adding 7.4% to the C-CPI-U rate (3.4% + 7.4% = 10.8% as of August 2006). Graphs of alternate CPI measures can be found as follows. The CPI adjusted solely for the impact of the shift to geometric weighting is shown in the graph on the home page of www.shadowstats.com. The CPI adjusted for both the geometric weighting and earlier methodological changes is shown on the Alternate Data page, which is available as a tab at the top of the home page.

Wow.  Ok.  So the government can manipulate the numbers at will.  Not exactly a shocker, but interesting to see it laid out so concisely.

So we have all this information, but what causes high inflation?  Back to Wikipedia:

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[7][8]

Excessive growth of the money supply?  Seems to me that Quantitative Easing is just that isn’t it?  Well, more or less.  Check out this video on Youtube for an explanation of what QE is.

Uncle Sam is pumping trillions of dollars into the economy hoping that the bankers will start loaning, which will create real money (as real as it gets with our fractional reserve non-gold standard money system anyway) and that will get the economy going again.  Hopefully.  Maybe.

But wait!  There’s more!  Even measuring inflation can be done in different ways.  Have you ever heard of core inflation?  That’s the measure of inflation without factoring in gas and food.  The idea is that gas and food prices are too volatile and might not reflect the true amount of real inflation out there.  For example:  if the price of food goes up because of a drought it doesn’t necessarily mean that core inflation is rising, which is a measure of the general rise in prices.  In other words inflation could be caused by a lack of an item rather than because of money being pumped in and core inflation is the measure of that.

In the end it’s hard to say exactly what’s causing high prices today.  War in the Middle East and speculation on the stock market probably have something to do with high gas prices.  Poor crop yields last year may be causing higher food prices this year.  The world is also contending with China and other countries adding more people to the middle-class role, which means people who eat more meat, drive cars instead of bicycles, and so on and pumping trillions of dollars into the economy has got to be starting to have an effect on core inflation.

I think it’s a combination of all these factors causing the high prices we’re seeing.  Short supply/high demand and a increase in the core inflation.  Gold and silver prices are through the roof right now, which means that the dollar is worth less as a store of value.

The only thing that I’m really sure of though is that prices are going up at the counter and the pumps.  Keep prepping and keep watching, folks because if this keeps up we could be in for a hell of a ride!

-Jarhead Survivor

BTW:

If you made it through the whole post I promise not to do another one this long for at least six months!  Have a great weekend.