CPI Manipulation

The debate about inflation being transitory or not misses the point.   It doesn't focus on the tool for measuring inflation.  The goverment has changed how the CPI measures inflation over the past 40 years, with the biggest change happening in early 1980s and the early 1990s.  Here is what Shadowstats shows if using the 1990 style CPI measurement. 

You can see that the difference between the 1990-based CPI and the official CPI has grown since 2000, from about a 2.5% average differential in the 2000s to around a 3.5% average differential in the 2010s.  Shadowstats CPI based on 1990 measurements would show an average of 5% CPI inflation over the past 30 years.

From 2001 to 2021, crude oil has gone from $23/barrel to $73/barrel, a 6% annual increase.  Corn has gone from $2.10/bushel to $6.75/bushel, also approximately 6% annual increase.  From 2000 to 2018, the median monthly apartment rent went from $841 to $1588, a 3.6% annual increase.  From 2000 to 2020, median single family home prices have gone from $119,000 to $334,000 according to the US Census, a 5.3% annual increase.  Also, these price increases don't factor in the fact that new apartments and houses are built smaller than in the past, yet are priced higher.  That would probably add 5-10% to the actual price/square foot.  So those estimates are under reporting shelter inflation.

 So if you have corn and oil prices as a proxy for food and energy, that has gone up 6%/year, and monthly apartment rents and housing prices have gone up 3.6% and 5.3% respectively, so averaging out to 4.5%/year (not considering that new homes and apartments are definitely smaller than older ones).  So food, energy, and shelter, the basic goods that people need, has gone up way more than the CPI.  This also doesn't look into service costs like healthcare and tuition, which has gone up at an even faster rate than the above.  

So how does the CPI measure inflation over the past 20 years at an average of around 2%?  Its lies, damn lies, and (government) statistics.  Substitution effects, hedonic pricing, etc.  

And this doesn't even cover asset price inflation, such as stocks and bonds, which as income producing assets, give you less income when bought at inflated valuations, as they are now.  The very definition of inflation.  Getting less while paying more.  

So the whole argument about whether inflation is transitory or not is ignoring the elephant in the room.  The measurement of inflation.  Its flawed and manipulated. Inflation has been much higher than the average reported 2%/year, which would be obvious for anyone with a half decent memory.  So letting inflation run hot above 2% is really a joke.  By that measure, they've let inflation run hot for the last 50 years!  The government has only gotten more zealous in manipulating the CPI lower over the past 20 years, thus allowing the Fed to pretend like inflation is low so they can keep rates low, and do QE, reducing funding costs for the government without sacrificing the currency, and boost the stock and bond markets. 

With this kind of government manipulation of inflation statistics, of course inflation will be transitory.  These higher inflation numbers will raise the baseline number for which the next year's inflation will be measured against, thereby making it harder to have "high" inflation due to base effects.  In the end, where inflation goes up in a stair case fashion or a straight line, there will always be an excuse by the Fed to say that high inflation is transitory, and can be ignored, and low inflation can never be ignored and is a sign of deflationary forces that need to be fought by printing massive amounts of money.  So either way, whatever inflation is printing, the Fed will keep their loose monetary policy.  

Its the only way to service $30 trillion in debt without any pain of having to pay massive amounts of interest on the debt.  Keep those interest payments low with ZIRP, and try to keep the dollar from weakening by repeating the strong dollar mantra which is all talk, no action.  

Market action is back to usual low vol, grind up market.  A good market for long investors, a bad market for traders.  Not much edge here on either side.