I knew I was in store for a doozy when I came across this Bloomberg Businessweek article entitled, "Inflation is Still Too Low." Yet, I was still unprepared to see the following:
The Fed has been revising the statistics used to report price inflation for decades now, with every revision having the same effect of resulting in lower inflation reporting. In fact, economist John Williams has made a living and runs a website dedicated solely to reporting more accurate inflation metrics for businesses who found the revised government statistics to be too far detached from reality to be reliable.
Bernanke has said that he chose to base the Fed’s inflation target on the PCE because it’s a better reflection of the changes in people’s purchasing habits. One of the big blind spots of the CPI is that it doesn’t capture how people adjust to fluctuating prices by substituting cheap goods and services for those that grew more expensive. [emphasis mine]
The statistic the government uses to monitor the rate of price inflation is the Consumer Price Index (CPI). However, even after all the methodological tweaks, it still was reporting too high (or in Fed-speak, unstable) of a number, so recently we have been told to focus only on core-CPI; a stripped down version of the CPI which reports price increases on all goods, minus food and energy. So given that a monetary policy of inflation disproportionally harms the lower and middle classes, whom are very likely to spend a significant portion of their income on food/energy, because you know, you need these things to survive, critics like myself view the core-CPI statistic as being almost completely useless as an indicator of the effects of inflation on the average middle to lower class citizen.
Yet, somehow even this wasn't enough! Now we are being told that we should focus on the personal consumption expenditures price index (PCE), instead. Which, once again, produces an even further muted picture of price inflation. What blew my mind was the justification for this change. The perceived flaw in the CPI that was it stubbornly reported people who were unable to afford their regular good of choice due to rising prices, and consequently substituted it with a cheaper alternative, as an example of price inflation. As it should! This is the very essence of the ill effects of inflation. Prices go up faster than our incomes, and thus we are forced to either spend more money for the same thing or substitute it with a cheaper version.
The PCE, by contrast, can produce this even lower rate of inflation by "incorporating the changes in people's purchasing habits". Which is to say, gloss over the very wealth destruction their policy causes that results in individuals no longer being able to afford their original, preferred good of choice. Is this not the definition of wealth destruction? To report that no price inflation is occurring because those who regularly spent $25 dollars for steak (and can no longer afford to do so if the price rises to $50), because they now are buying $25 worth of hamburger (substitution good) obscures the very essence of what inflation metrics are designed to report!
Yes, hamburger provides a similar function as steak. But it is precisely the result of the Fed's relentless inflation that strips the consumer of being able to indulge in that luxury purchase of steak over hamburger. To create statistics that are specifically designed to obscure this continued rise in prices and the subsequent impoverishment of all those whom are stuck using US dollars is just one more Orwellian hallmark of a government gone mad.
Update: The American Institute for Economic Research has just released their "everyday price index" (EPI), which shows the inflation rate of everyday purchases at 8%