In keeping with the spirit that there are no easy answers to these questions.......I think we are all correct. Productivity has increased tremendously in certain areas, keeping prices down. China and globalization in general also keeps prices down. The goverment does there share by making the numbers looking much better than they are. They have realized that social security and pension plan increases are directly tied to the CPI (along with a number of other indexes) so it is in their interests to keep that number low. This by the way is not my original thinking, it is from Jim Rogers.............................enjoy! They Are Lying to Us Again This August, the Bureau of Labor Statistics will begin publishing a new version of the consumer price index -- the widely watched barometer that tracks inflation. The new CPI won't replace the old basket of goods and services, but instead will serve as a supplement. Proponents advocate the step as a way to address concerns that the current CPI routinely overstates inflation by as much 0.2 percent. The new index, called a chained or superlative CPI, goes beyond the complex existing instrument to include such subtle factors as consumers' tendency to stock up when a product is on sale. This may seem like a positive move, but it worries me. The supposed "death of inflation" has gotten a lot of press of late. Alan Greenspan's Federal Reserve is credited with helping to achieve price stability in our economy. At least that's the party line these days, the one I come across whenever I read the newspaper or listen to government pundits and economists patting themselves on the back. The numbers released by the Bureau of Labor Statistics appear to support this view: Inflation rose only 2.6 percent from January 2001 to January 2002, excluding the volatile food and energy sectors; and only 1.1 percent with food and energy added back in. Occasionally, economists even speculate about the possibility of Deflation, something the U.S. hasn't experienced on a broad scale since the Great Depression. I may have a unique, time-lapse perspective, but having just returned from three years abroad I can't help but notice how much more expensive things have become. I got a physical from my doctor and the price was over twice what it was before I left. Who can afford to dry clean their clothes any more? A can of soup for nearly $3? Movies for $10 and popcorn priced like gold nuggets? Granted, I live in New York, but New York was an expensive place when I left. Indeed, when I checked I found that from 1998 to 2001, the average movie-ticket price grew an average 6.4 percent annually, according the National Association of Theatre Owners. My wife and I have been stunned at how much prices of nearly everything are up since we left. Who can heat a house or buy insurance? When I point out the high prices to other people, they are almost always quick to agree. I broadcast recently that prices were actually a lot higher and received a deluge of email from people thanking me for bringing sanity back to their lives. A CEO of a major company tells me he hears daily how there is no inflation, but the costs of his supplies keep rising quickly. "Evidently," he writes, "my suppliers don't watch the same TV I do." Yes, he meant the TV networks and Wall Street which kept telling everyone to buy stocks because it was a bull market and a New Economy. There actually was no New Economy and the bull market had ended. 1998 1999 Advancing Stocks 3,928 4,224 Declining Stocks 5,879 5,467 Sixty percent of U.S. stocks were down in 1998 but Wall Street and the press either missed it or ignored it. Did you believe them then? Everyone now seems to accept that college tuition rises at generally twice the rate of inflation. Every university in the country complains of experiencing its own cost pressures. The U.S. Postal Service is suggesting an 8.8-percent increase in the price of a first-class stamp this June after 15.6% in increases while we were gone. The raw materials index fund I started makes me suspicious as well. It is based on an index that tracks the price moves of 35 different raw materials on commodities exchanges. I started it on Aug. 3, 1998 and it has risen about 45 percent through mid-March 2002. There's nothing subjective in the measurement -- it's just a gauge of the jump in prices for items like wheat, cotton, oil, or copper. (It's also an argument for investing in commodities: Over the same period the S&P 500 is up about 4% percent.) The BLS may quibble over the difference in the price of a tie at Marshall Fields versus one at K-mart but it can't argue with the price of silk on the open market. Such disparities make me question whether inflation isn't a little more slippery than the government's numbers show. The CPI has been a point of contention for many years, but only one side of the story has gotten much attention. In 1996, a Congressional panel, headed by Michael Boskin, the former chairman of the Council of Economic Advisers, concluded the CPI overstates inflation by 1.1 percent a year. Other studies, typically commissioned in part by the BLS and Department of Labor, came to a similar conclusion. The BLS has since "hedonically" modified the CPI several times during the past six years bringing the CPI down even further. I'm still not convinced we can trust the numbers -- new or old. Remember the CPI is used to determine cost-of-living increases in things like Social Security benefits and union contracts. A lower CPI obviously means lower increases. So there has been and will be great pressure to adopt the new version of the CPI as the standard. Even if my experience is wrong and inflation has been as low as the government has reported, I guarantee it hasn't been licked for good. Inflation is what happens when too much money chases too few goods. It's a simple supply and demand equation: increase the supply and the value goes down. Monetary economists, like Milton Friedman, make a good argument that inflation is what happens when the growth of money exceeds the growth in the economy. In fact, M3, a measure of the money supply that includes money market funds, certificates of deposit and dollars held in European accounts, jumped 12.8 percent last year, the most since 1981. M2, the most commonly used gauge of money supply, grew 10.3 percent last year, the biggest spike since 1983. The 11 interest-rate cuts made by the Federal Reserve last year will also have an inflationary effect. With more credit available, the system creates even more money, which in turn, drives prices up. Many believe Americans aren't spending as much in the shadow of Sept. 11, but in the 1970s we had serious inflation even in a bad economy. It was called stagflation. There has been little invested in the productive capacity of raw materials in the past several years so supply is down now as it was then. And let's not forget war. War has always lead to inflation because it raises the very cost of being alive. President Bush is, understandably, spending a lot of money to defend us. He is doing this in both traditional (bombs and bullets) and non-traditional (tighter airport security) ways. This isn't the same as spending more money on new highways and schools and advances in technology. The costs of fighting a war are, for the most part, used up the moment the money gets spent. Military expenditures tend to go towards preserving the status quo, as opposed to improving upon it. I don't believe inflation is dead. The government may tell you otherwise but if you get your financial advice from the government, you deserve what you get. Inflation can become a problem whenever conditions warrant it. This may not always be apparent in the ledgers of autocrats, but I suspect you see it wherever you shop, just as I do.
Great article! Thx for posting it. More great explanations of visible inflation. And it explained/confirmed several things to me about what I first posted. But I do have one more question. What does he mean by "There has been little invested in the productive capacity of raw materials in the past several years so supply is down now as it was then"?
He means that over the last twenty years the vast majority of investment has been in financial assets such as stocks and bonds and such while neglecting productive capacity such as Sugar Plantations, Oil Refineries, and Led Mines.
Hence the high P/E ratios and low bond yields. But when the Fed et al run out of tricks and the Kondratieff Winter finally sets in we have Stagflation for ten years or so.. Deflation is still a plausible variation though, what with the recent reduction in M3 and all. Maybe everybody will get out of the game and just sit on whatever cash they have while the economy disappears. But then - there's that multi-trillion dollar debt situation - does anybody really have any cash? Hmmm....what to do..what to do.
Interesting idea. But doesn't this fall mostly on the backs of the execs? They have a choice to invest their capital into RnD, productive capacity and the like. It sounds like they have instead taken their capital and pumped it into financial capital leading to overinflated evaluations? In other words, they have left us vulnerable...
This article argues for a potential stagflation based on increasing TIPS investments (even from heavyweight Bill Gross): http://money.cnn.com/2003/11/20/commentary/bidask/bidask/
Frankly, there is no one on the face of this earth who knows what lies ahead for the US economy, we seem to be on unchartered ground.....A sole superpower in an Information/Global Economy where the fortunes of literally every other economy hinge mostly on our $10 trillion Great American Consumption Machine. Alot of fundemental, textbook economics, as all of you know, has gone right out the window in this environment. (with the exchange rate mechanism being the foremost example). Who knows what lies ahead? Who knows if Prechter has it right and we are going to deflate or if Fleckenstein/Rogers has it right and we are about to inflate, or if Kudlow has it right and we are on the brink of another multi year wave of prosperity, or if Bollinger has it right and we go sideways for the next 15 years? I have stopped trying to invest on any of these premises (except for my bullion holdings) and so I just trade. When stocks break out I buy them and when they break down I short them with absolutely no regard for fundementals, news, or opinion. I keep some high quality bonds for income. After a degree in Finance and tons and tons of reading, researching, and thinking, that is the best I can come up with. I have found thinking/conversing about these issues is intellectually rewarding, but rarely financially rewarding.
productivity has gone up. gdp has gone up. inflation in check. But these cpi #s take quality enhancements into account. That's fair by my standards. You could drive a "cheaper" model and still have the same or better driving quality as with the upscale model from 10 years ago. Oranges or gas or cinematickets don't change in quality. (Maybe the governement even takes into account that a new 2ghz computer is twice as valuable as last year's 1hz computer and therefore 2ghz should be twice as expensive in $$). These kinds of goods and services we do pay highly inflated prices for. So possibly we aren't richer than 10 years ago. But we do drive bigger cars and play cooler videogames ps. and not to forget: enjoy advanced healthcare!
Agreed, but I think they should publish both #s so you have an idea how much they are "valueing" quality. The way I see it: higher prices will generally slow down the economy even if we get more quality.
I just listened to interview on FinancialSense.com with Dr. Lawrence Parks, the author of "What Mr Greenspan Really Thinks." He revealed something about Greenspan that totally blew my mind. I am sure that all of you have read Greenspan's 1966 review of Atlas Shrugged where he credits gold ownership as the only way to protect your wealth from the inflationary effects of a central bank. It turns out that Rep. Ron Paul from Texas, who is associated with GATA, actually brought a copy of this article to a Humphry Hawkins hearing last year and asked Greenspan to autograph it. As Greenspan was doing so, Mr. Paul also asked him if he would (as head of the Fed) change anything in that article right now if he could. Greenspan looked him square in the eyes and said, "Not a word." Those 3 words translate into this: The Federal Reserve can be counted on to keep promoting inflation. Now more than ever, because the US is the largest debtor nation in the history of the world, and with the prospect of asset deflation, Ben and I are prepared to print money in unlimited quantities. What more of a case is there for Gold, when Greenspan, who in theory should be the foremost opponent of gold, is advocating its ownership? I will bet anything he has some 100oz bars stashed way somwhere. You couldn't make this stuff up!