The Fed's latest attempt to further conceal the impoverishment it creates

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:

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 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.

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%


  1. "people whom were" => "people who were"

    1. Thank you, I'm awful at using who/whom appropriately! Bad habit.

  2. Nice article buddy! So the core-CPI doesn't factor food/energy at all?

    1. That is correct. http://en.m.wikipedia.org/wiki/Core_inflation

      In fact the actual name of the report labeled as core CPI is ”CPI - all items excluding food and energy.”

    2. Excellent piece, Robert. I have always said the same thing in regards to CPI. So, the government is basically admitting the poor and middle classes are worthless, as food and energy are much larger percentages of their spending than anything else.

  3. Robert, this isn't a new change. The Fed has always been widely known to target PCE. This includes even Greenspan.

    1. Hi Edwin and thanks for reading.

      I believe you are mistaken, this is actually a very recent change that is even considered "historic", in that this is the first time the Fed has adopted an official inflation target. See: In historic shift, Fed sets inflation target

      Your point about the Fed using PCE internally, is valid, but the overwhelming majority of the public is not aware of this. It's pretty much the opposite of being "widely known".

      Even in the Reuters article linked above announcing this adoption of an inflation target, the word PCE does not appear once. If you search "inflation", "rate of inflation" etc. you receive information on the CPI. Additionally, the news reports the CPI as inflation every month, with virtually no mention of PCE.

      So it is reasonable to assume that when the media reports inflation every month and you read the contents of the article and it exclusively focuses on CPI, that when the Fed announces their inflation rate of 2%, one would think they were speaking of CPI. So that's kind of the point of my article to highlight what they are actually using (PCE) and how horrible of a metric that is.

      You are correct that those in the know may be aware of such things, but I think most people do not, and that is who I am trying to reach. I mean I didn't know and I study/research this stuff for fun!

    2. Yes, you're right that the explicit target is new, but they've always had an implicit target of around 2-3%. What I think you're wrong about is that you're making seem like there's been a new switch from CPI to PCE.

      "Even in the Reuters article linked above announcing this adoption of an inflation target, the word PCE does not appear once"
      No mention of CPI either, but that's just bad reporting. The first search result in google news for "explicit inflation target" that I found makes no mention of CPI, but does mention PCE.

      "If you search "inflation", "rate of inflation" etc. you receive information on the CPI. Additionally, the news reports the CPI as inflation every month, with virtually no mention of PCE."

      What the fed targets is a different subject than what the headline inflation is. Of course you'll fine more mentions of CPI. If you had ever searched something like "Fed inflation target" before the new announcement, most results would say that the fed targets PCE, not CPI. I guess by widely known, I mean by widely known by those who actually pay attention to what the Fed does. Most people don't even know what the Federal Reserve is, let alone what an inflation target is. In fact, most people probably don't even pay attention to inflation reports or even know what CPI is!

    3. I think most people assumed it was in reference to CPI, as that's how inflation is reported. And as you demonstrate, unless you are already aware of PCE and "explicit" inflation target, you are unlikely to think otherwise.

      I quoted Bernanke's comments on why he chose PCE over CPI (if it were widely known they used PCE, there is little reason to specifically address why you are not using CPI as the official target) and then added my commentary.

      Yes, people who are intimately familiar with the Fed are aware that they switched from using CPI to PCE as their informal target in 2000, but its certainly not widely known. That's why I added my commentary on Bernanke's explanation of why he chose PCE over CPI for the newly created, official target.

      That is what this post is about - and his statements on choosing PCE, instead of CPI, provided a good opportunity for me to express just how terrible of a metric that is and why.

  4. If the "true" inflation rate been something like 10% [according to shadowstats], the implication is that the economy has been contracting since 2004 and hasn't stopped! This contrary to all the evidence.

    1. Well, Edwin, the fact that they include government spending into GDP kind of makes GDP a useless measure.

    2. Desolation JonesMarch 1, 2012 at 9:08 AM

      If you remove government spending from the figure, contraction would be even worst though. This is still contrary to all the evidence. Especially when taking into account population growth, such a high inflation rate that shadow stats reports would mean that we're producing less today than 20 years ago.

    3. Why does a high rate of inflation mean the economy is contracting? Why can't the economy be growing while also having an inflating money supply and rising prices?

    4. If the inflation rate is higher than the rate of nominal output growth, then that means we're having negative real growth. If we have high inflation, but even higher nominal output, then we can still have positive real growth.

      But nominal GDP was only 4% for this year. If the "true inflation" rate was something like 10%, then real output must have been like -6%. That's a contracting economy, not a growing one.

      On the other hand, if nominal GDP was like 13% with 10% inflation, then it is indeed possible to have a growing economy with high inflation like you said. But this isn't in the case because nominal GDP was only 4% this year.

      High inflation and high nominal gdp tend to go hand and hand. Back in the 70s/80s when inflation really was in double digit rates, we also had double digit nominal GDP growth. Now in the past 20 years during what has been called the "great moderation", nominal GDP growth has averaged around 5% a year. If true inflation [according to shadowstats] has ever been over 5% in these recent years, then the economy has been contracting. We've been producing less than what we've had the previous year despite population growth. I find this to be an impossibility.

    5. I should probably add that Nominal GDP = Real GDP + Inflation if it wasn't obvious.

    6. GDP is not useful as measure of the health or growth of an economy. I spent so long arguing this point with academic Keynesian economists who acknowledge "of course its not", then go on to act like it is anyway.

      Here's one reason: http://robertfellner.blogspot.com/2011/06/debunking-importance-of-gdp.html

      But again, apparently not even Keynesian economists believe it is, either. It's at best "a rough measure of economic activity."

      Anyways, I have zero interest in rehashing that arugment, but one thing you did say I found interesting was that its impossible to have had a contracting economy in the past several years.

      I would say that it seems reasonable, certainly possible, that the financial crisis/housing collapse caused a contraction in economic growth, no?

    7. I would mostly agree with most of what you said in that blog post of your. But that's all irrelevant to my point because I never claimed GDP was an accurate measure of the health or wealth of the economy. I do think it's "a rough measure of economic activity." And I do think is useful in terms of identifying business cycle fluctuations. And I also do think it's useful because there does seem to be a rough relationship between unemployment and GDP growth. When GDP grows, employment tends to grow as well. When GDP falls, so does employment.

      When I say there's been contraction, I don't mean our wealth has fallen. I mean there there's been less economic activity, less production, and less spending. For my argument, whether that spending is useful or not is irrelevant. Business cycles aren't defined by falling and growing wealth. It's defined by falling and growing economic activity, which is exactly how I'm using GDP.

      "one thing you did say I found interesting was that its impossible to have had a contracting economy in the past several years.

      I would say that it seems reasonable, certainly possible, that the financial crisis/housing collapse caused a contraction in economic growth, no?"

      I never claimed this. By recent, I mean the overall 20 years I was referring to. Obviously there has been several years where output shrank during the recessions, which is reflected in the GDP figures. But those years should have been overwhelmed by the years where we've had growth. What I find hard to believe is that we're producing less today in 2012 than we were in 1990. That's the implication if one thinks the true inflation according to shadowstas has been correct. Wenzel's theory of a booming economy in 2011 would also be incorrect. If you believe the true inflation rate was 10% in 2011, then you must think we've had negative growth this year. This contradicts all the evidence that we've had a growing economy in terms of economic activity.

      If you think government spending is useless. Fine, leave it out. Only count nominal growth produced by the private sector. If you adjust private sector growth with the "true inflation rate" (according to shadow stats), then we've still been having negative growth.

      That shadowstats link I posted above seems to be adjusting GDP for the supposed 1990s version of inflation as far as I can tell. If you used the 1980s version, then the picture would be even more ridiculous.

    8. It still seems you are referring to growth by measuring spending...in an economy with stable money supply wouldn't the definition of growth be that increased producitivy lowers the cost of goods and thus total spending can fall despite a growing economy.

      Aggregates can be so harmful and misleading.

    9. "It still seems you are referring to growth by measuring spending.."

      Yes, spending on investment and consumption. That's how I would define growth in domestic economic activity. But the growth has to be inflation adjusted.

      "in an economy with stable money supply wouldn't the definition of growth be that increased producitivy lowers the cost of goods and thus total spending can fall despite a growing economy."

      Yes, you can have growing real spending with falling nominal spending only if we're having deflation. But obviously you don't think we're having deflation in this situation.

      If you don't want to muddy up GDP with government spending, then lets take a look at the growth of nominal GDP (call it expenditure or production. They're equal to each other via accounting) in the fourth quarter of 2011. Nominal spending was 3.9% (annualized). It was all private sector nominal growth because government did not increase its spending in that quarter. If you think the real inflation rate was 10%, then that means all the increase in private sector spending was pure inflation. The total dollar value of spending increased in the fourth quarter, but it must have just been do to rising prices if we were really experiencing 10% inflation. Even worst, at 10% inflation, that means real number good produced in that quarter actually fell when adjusted for inflation. Do you believe real spending actually fell this fourth quarter?

    10. I see the point you are making and think it is a valid one.

      I don't think the real rate of inflation for 2011 has been 10%. I would caution against using annualized numbers to analyze quarterly periods, however.

      But overall I see what you are driving at.

  5. As to why the Fed targets a core measure of inflation, I would look a these posts.




  6. I came here through through your link on Wenzel's blog where Ron Paul was claiming the real inflation rate was something like 10% because of his groceries. The thing that annoys me about that argument is that nobody ever claimed the lowish headlinie inflation was the same for EVERY single item. CPI measures the overall price level, not just groceries. If you want to know how much grociries rose, you can even look at the BLS's data and look at individual items. For example, have you felt that dairy prices something like 10%? The BLS would actually agree with you.

    How meat products? Definately way more than the headline 3%.

    The thing about groceries is only a fraction of CPI. The biggest component of CPI is rent because that's what we spend the biggest part of our income on. And that has been depressed for obvious reasons.

    That has grown below 2% this year so it's not that far of stretch that overall price level is only 3% because rent takes such a huge chunk of people's income. CPI weighs rent more heavily.