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How The Fed Ignores Inflation And Has Already Missed The Turn

This post was originally published on July 31, 2013, but with the release of the latest PCE deflator and recent housing price data, it’s just as relevant or even more relevant today than it was 11 months ago. 

Fed apologist, bankster banger pom pom girls and boys are fond of touting the shibboleth that there’s no inflation when they beat up on well meaning but lightly armed pundits who say that there is, but can’t articulate very well, exactly why.

I just want to show you exactly why these shameless propaganda purveyors who parade across your TV screen daily are able to make the argument that there’s no inflation. It is mostly because the BLS does not include housing inflation when computing the CPI. It simply waves a magic wand and pretends housing inflation doesn’t exist. The shills for the Fed line take that banner and run with it. Then the BEA, which produces the PCE deflator figure that the Fed loves to follow, ignores even more data, coming in quarterly with a number even lower than the CPI. That guarantees that the Fed will, as always, be massively behind the curve and clueless when the shit finally hits the fan in the massaged data they follow.

I also don’t know how the BEA manages to get the PCE deflator, now at 0.8% down that low when the CPI was at 1.7% in June. I’m not much interested in the arcana of how they suppress the number even more, but CPI is the starting point and the number that the media mostly focuses on.  So that’s where I’ll start.

The BLS said that at the end of 2012 housing cost was weighted at 41% of the total CPI number. We know from various sources that the national median year over year increase in housing prices was in excess of 13%. This includes not only the NAR data, which showed a 13.5% year to year gain in June, but Dataquick at 13.5% and CoreLogic’s pending sales for contracts written in June at 13.2% (see page 3 of this report).  If it looks and walks and smells like a duck, then it’s a duck. This housing data is an inflation duck.

Naturally you’d think that that would be the number used in the CPI, but no-o-o-o-o-o. The BLS (Bureau of Liar Statistics) throws a whole bunch of stuff into this component, including the kitchen sink. The heaviest weight is something called owner’s equivalent rent. The BLS reported that the Housing component of CPI rose at an annual rate of 2.25% in June.  That’s right, not 13.5% but 2.25%.  The BLS understates housing inflation by 11.25 percentage points. That’s an 83% difference! Who are they kidding? Apparently their fans in the Wall Street owned financial media.  They love lies like this.

Housing Component of CPI - Click to enlarge

Housing Component of CPI – Click to enlarge

If the actual 13.5% gain were included in CPI, then CPI sure would look a lot different. Using the difference between actual housing inflation and what the BLS reports of 11.25 percentage points and the weighting of housing of 41%, the BLS understates CPI by 4.6%. The CPI including actual housing inflation would be 6.8% if housing were included at its actual inflation rate.

Maybe housing shouldn’t be 41% of a broad inflation measure. Maybe it should only be 30%. But one thing is certain.  Actual inflation isn’t 1.7%.  It’s way, way above the Fed’s maximum of 2.0%, more than double and maybe more than triple that, and it could get worse for as long as they continue QE.

What’s not keeping pace with actual inflation is wages and salaries of the vast majority of Americans. So spending will continue to get squeezed and the economy will weaken while the Fed and its army of media whores continue to look the wrong way and say that there’s no inflation.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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