Inflation Fallacy

John Tamny, a writer for Forbes online, defines inflation - a decline in the value of money:

"…is what it's always been, and with the dollar the weakest of all the global currencies over the last 10 years, the U.S. economy will continue to suffer rising prices, and much worse, a continued flow of limited capital into the ground, and away from the innovators and entrepreneurs who'd be well-positioned to author our recovery absent extreme dollar weakness."

Basically, the amount of inflation is all in how you measure it. For example, China and India recently reported their CPI at 4.4% and 8.6%, where food accounts for 34% of China's CPI and 47% of India's. Egypt's inflation rate is around 10% and their food inflation is nearly 20%. We in the US strip out food and energy from our reported CPI. Our CPI is reported to be 0.8% here in the US (1.5% if food and energy are included). If our CPI were measured more closely to that of other countries, it would probably be much higher than reported. But, you already know that based on trips to the gas station and grocery store.

Over the last 30 years the federal government has made many changes to how they calculate inflation. For some reason though, all the changes that have been made have had the effect of eliminating inflation from the system. This is clearly a way to game the calculations to the advantage of the government. According to economist John Williams at Shadow Government Statistics, the CPI would be around 10% if the government calculated it the same way it did in 1980.

Commodity prices tend to rise when the dollar weakens and fall when the dollar strengthens. If we build our 'basket' of goods (to measure the CPI>) from commodity based goods, we would probably see higher inflation in the reported numbers. But, if our 'basket' of goods includes products, such as computers and cell phones (which ours does), this tends to flatten out the numbers because these products tend to go down in price over time with respect to specific level of service.

The government also manipulates the CPI by tweaking it in a way such that an assumption is made that you will buy lower priced products in substitute for ones that you used to buy. For example, if steak prices rise, the government just assumes you will buy hamburger instead for a lower price and the inflation is taken out of the system. Another example of this manipulation is when you go out to buy a computer. If you buy a computer today at the same price you bought one two years ago, the government considers that a price drop because you get a lighter, faster, higher capacity computer for the same amount of money. Never mind that it takes all that new found power to deal with the latest software and internet requirements.

Back to what causes inflation…the driver of inflation throughout the world is a weak US dollar. Since much of the world either directly pegs their currency to the value of the US dollar or that much of the commodity trading in the world is done with US dollars, a weak US dollar forces up the price of commodities. Since 2001 the US dollar has been the weakest currency of all the major currencies in the world. As Tamny puts it:

"That our inflation rate is low compared to the rest of the world where currencies haven't fallen as much as the dollar is merely a function of what's being measured, and not a signal that all is well."

"So while productivity and the government's ability to massage numbers may continue to reveal itself through benign inflation readings in the U.S., readers shouldn't be fooled."

The Federal Reserve has been flooding the world with dollars over the last few years to try to manipulate our economy. It has more than doubled the size of the monetary base in that time. So, increasing the number of dollars without increasing the need for goods and services to absorb those dollars makes each dollar worth less, and thus we have inflation.

Remember, commodities are priced in dollars, and the Federal Reserve has been pumping out dollars. Consequently, many of the world's markets are suffering from rising inflation, particularly the food sector. Over the past year the price of wheat on world markets has climbed and astonishing 114% and corn has surged 88%. This is magnified by the fact that much of the world allocates a significant portion of their earnings to food and other sustenance, much higher than here in the US.