Friday, December 22, 2017

Manipulation of Inflation

I find it fascinating how the masses believe everything spoon fed to them by the media.  It permeates into financial research, and muddies the reality of the current financial and economic situation.  I don't wear a tin foil hat, but I also don't take for granted everything told by the public as being straightforward and true.  Sites that reveal the true nature of the government statistics like Shadowstats are ignored as biased and fringe economic research. 

One of the most basic economic statistics, inflation, as measured by the CPI, has undergone drastic changes in its calculation over the years.  From the 1980s to the early 1990s, the CPI went away from having a fixed basket of goods to being an adjusted basket of goods that used substitution effects for higher priced items to another "similar", but lower priced item to suppress the inflation readings.  The government also used hedonic pricing to deflate a newer, more expensive item as being less expensive because it had better features.

As you can see, based on 1990 calculation of the CPI, the CPI should be closer to 6%, not 2% as is being reported by the government.  The government has an obvious incentive to suppress inflation readings lower, because it allows the government to provide lower cost of living adjustments for Social Security and other government benefits, which are adjusted annually by the CPI reading.  This also has the effect of allowing the government to issue bonds at lower interest rates, because the reported level of inflation is lower.  For the politicians, it allows for the real GDP readings to be inflated higher, because inflation is being manipulated lower. 

What is interesting about the above chart is that since the early 2000s, the difference between 1990-based CPI and officially reported CPI numbers has widened, from about  2.5% to almost 4.0%. 

This brings me back to what seems to be a growing fear in the current market, about potential inflation next year.  It is funny, because searching for higher inflation in the CPI is like looking for the right card to choose when playing 3 card monte in the streets of Manhattan.  They are trying to find something they can't because its a rigged game.

It leads to some really inane arguments on CNBC about how the Fed should get rid of its 2% inflation target.  When the premise is all wrong, since PCE and CPI inflation as the Fed measures it is not really inflation.  Its a butchered, manipulated government tool to reduce government benefits and hide the debasement of the dollar.

Is 2% inflation at all times absurd? Billionaire investor Druckenmiller thinks so

CNBC's Kelly Evans spoke to Stan Druckenmiller, who said he thought the Fed's mandate for 2 percent inflation was absurd. Jim Cahn, Wealth Enhancement Group; Stephen Guilfoyle, Sarge986; and CNBC's Rick Santelli discuss Druckenmiller's comments.


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Anonymous said...

Are you going to short spx starting january 2nd?

Market Owl said...

Yes, probably.