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Which way is Inflation Blowing? Watch CommoditiesGary Dorsch In an age when governments of every political leaning and ideological stripe distort economic data to promote their parties’ interests, it is hardly surprising that the nation’s inflation rate is reported in a manner that best suits their political needs. By the same token, in an age of near universal cynicism on the part of citizens towards their corrupt politicians, - it is entirely natural for official inflation data to be wildly at odds with the reality faced by consumers and businesses, and in turn, to be regarded with utter disbelief. Since the days of the Clinton administration, the US-government has tinkered with the methodology of computing the inflation rate, and therefore, the CPI is no longer considered to be an objective gauge of the prices of a fixed basket of goods, that consumers normally buy. Instead, the US-government has a vested interest in understating the true rate of inflation, because it enables Washington to lower cost of living allowances for Social Security checks, helps the Fed to keep interest rates artificially low, weakens wage demands, buoys confidence in the US dollar, and artificially increases the “real” rate of US-economic output. The tens of thousands of government apparatchiks who work for the Bureau of Labor Statistics, Bureau of Economic Analysis, US Treasury, Office of Management and Budget, Economics and Statistics Administration, and countless other agencies, - massage their spreadsheets day in and day out, and fudge the numbers. It’s hard not to notice that the inflation rate is reported with distortions caused by seasonal adjustments, hedonic deflators, chain-weighted substitutions, skewed sampling, delayed reporting, and with a twist of political bias. Yet perhaps the simplest advice on how to resolve contradictions between the costs that households face everyday, and the phony CPI, is to watch the dollars and cents flowing through the global commodity markets, and to map their longer term price trends. Who are you going to believe, the commodity price charts or skewed data from apparatchiks?
Commodities make-up 40% of CPI, According to the Bureau of Labor Statistics, in 2012, US-households spent 40% of their total expenditures on commodities, and the remaining 60% was spent on services. Thus, the commodities markets have become less of a leading indicator of future trends of inflation than in the past, when commodities made up 58% of expenditures in 1980 and 64% in 1970. Still, the alternative to relying on the commodities markets for clues on inflation, is to blindly adopt the Fed’s favorite gauge of inflation, the “personal-consumption-expenditures” price index, (the PCE), which strips out the cost of the basic essentials of life, and is conjured-up by apparatchiks. The PCE was reported to be +1.8% higher in May from a year earlier, or -0.3% less than the CPI. On June 17th, 2014, the US-government reported that consumer prices increased +0.4% in May - the biggest monthly increase in more than a year, saying the cost of food and gasoline showed big gains. Airline fares jumped +5.8% - their largest monthly increase in 15-years. The cost of clothing, prescription drugs and new cars all showed increases. Overall, the consumer price index was +2.1% higher compared with a year earlier. That left prices rising at slightly above the Fed’s so-called +2% inflation target, and traders questioned if the uptick would sound the alarm bells at the Yellen Fed. The increase in the consumer inflation rate was preceded by a sharp upturn in the market value of the Continuous Commodity Index (CCI), a basket of 17-equally weighted commodities – that started in January ‘14. Six months later, the CCI was trading +9% higher than a year earlier. For the first time in 2-½-years, the CCI has emerged from deflation territory (or negative year-over-year returns). However, commodity prices are notoriously volatile, and so, the outlook for inflation can often turn on a dime.
Commodity markets are notoriously volatile from month to month, and from year to year, quite often due to unforeseen acts of nature or military conflict. However, in order to filter out the “noise” of the markets, a simple approach is to take a much longer-term view of price trends. And for a wide array of commodities, their prices have trended significantly higher. For some of the basic staples of life, the market price of rough rice is up +83% higher, Butter is up +69%, and unleaded gasoline is up +67%, compared with 8-½-years ago. Milk and cattle prices are up +63%, and the cost of Wheat is up +61%. So when Americans are driving to the grocery store, they are feeling the pinch of accumulated rates of inflation. But what about the wages of the US-worker, - have they kept pace with the increasing cost of living? According to the Labor Dept apparatchiks, the average wage is up +19% compared with 8-½-years ago, for an increase of +2.2% per year, on average. However, for many Americans, their incomes are actually declining and that could put a squeeze on discretionary spending. For example, in the month of June ‘14, the BLS reported that the number of higher paying, full-time jobs plunged by -523,000 to 118.2-million while lesser paying, part-time jobs increased +799,000 to over 28-million. That suggests that many US-workers’ are being forced into part-time work, and their income is decreasing. Thus, the hallowing out of the US-middle class and the impoverishment of the lower income groups is worsening. As such, the Fed is already talking about moving the goal posts again, from targeting inflation to targeting wage increases. “Signs of labor-market slack include slow wage growth and low labor-force participation,” Fed chief Yellen said on July 15th. Earlier, on July 11th, Chicago Fed chief Charles Evans, said on Bloomberg TV that it would not be a “catastrophe” to allow the inflation rate to overshoot the Fed’s +2% target. “Even a +2.4% inflation rate, I think that could work out,” he said. So the message is; the Fed would be tolerant of above target inflation, since lower paying part-time wages are supposed to keep inflationary pressures in check. For the Fed, with the passage of time, many of its sins of the past, in the form of a higher cost of living, are seemingly washed away into obscurity. Fed chief says Uptick in Inflation is “Noisy”-- When asked about the recent uptick in the consumer inflation rate to +2.1% in the month of May, Fed chief Janet Yellen downplayed the threat saying; “So I think recent readings on, for example, the CPI index, have been a bit on the high side, but I think it’s - the data we are seeing is noisy. It’s important to remember that, broadly speaking, inflation is evolving in line with the “Committee’s” (ie; Politburo’s) expectations. The Fed (ie; politically appointed Politburo) has expected a gradual return in inflation towards its +2% objective, and I think the recent evidence we have seen ... suggests that we are moving back gradually over time to our +2% objective, and I see things roughly in line with where we expected inflation to be,” she said. To read the rest of this article, please click on the hyper-link located below: http://sirchartsalot.com/article.php?id=192 ### Jul 16, 2014 321gold Ltd |
