What about Inflation?

My Dearest Moo Moo Cow,

Today's market wrap commentary posted on FSO by Market Commentator, Tony Allison, whould be of interest to you: Inflation: Comparing Apples to Oranges, Smoke & Mirrors Won't Pay Your Bills

Mr. Allison argues that the inflation is there and it only appears to be under control because of how the inflation is measured simply has been changed.

• Inflation is one of those issues that concerns people, but the normal reaction is a shrug of the shoulders, and shake of the head. It’s a problem that affects lives and futures, but most see it as a murky, complex subject beyond their control. And the media seems to think it’s “well under control,” even if our wallets argue otherwise.
  For those who grew up in the 1950’s and 1960’s, the world was a different place. An average guy with a high school education could support a large family. His wife didn’t have to work. He could save for retirement. He could pay down, or even pay off his mortgage by retirement. According to the US Census Bureau, Department of Commerce, the average family income in 1950 was $3,300. But then the average cost of a loaf of bread was 14 cents. That wouldn’t pay the sales tax on a loaf of bread today.
  These days you need two paychecks to support a family, usually with no more than one or two kids. Both parents need college degrees to get good jobs. They have little or no savings and their kids will be saddled with student debt if they go college. How can a middle class family be worse off today than 50 years ago with a booming economy, low interest rates and “minimal” inflation?
  These are complex issues, and globalization and the exporting of a large portion of our manufacturing base play a role. But inflation has not gone away, and is not as “quiescent” as the Fed would like us to believe. In the early 1990’s, the government was watching inflation rise and adversely affect federal deficits and what it paid out in entitlements. To bring down the cost of entitlements, the inflation rate was adjusted lower, but not by cutting government spending, or raising interest rates. No, inflation was lowered simply by changing the way in which it is measured.

Don't you agree?

Even here in Malaysia, what was the price of your favourite plate of chicken rice a decade ago compared to now? What about your absolute favourite 'roti canai'? What's the price now? How?

And Mr. Allison highlights some issue on how they are changing (or should I say fudge?) the numbers.

• Based on today’s numbers, Williams believes that the current inflation rate is approximately 10%, given the way inflation was measured prior to the 1990’s. Williams also reconstitutes M3 (the money supply), which the government no longer reports. “It’s growing 11% on a year over year basis.” Williams notes with dismay that Fed Chairman Bernanke is already planning to change the current CPI index to even more of a substitution basis, instead of a fixed-weight basis.
  “The original intent of the CPI was to measure a constant standard of living,” said Williams. “They are moving toward a declining standard of living, where you substitute hamburger for steak in the CPI because steak is getting too expensive. The next (comparison) may go to dog food.”

Mr. Allison warns the danger in fudging the numbers...

• You can’t get rid of inflation by changing how it’s calculated. And no nation in recorded history has ever been able to create prosperity by printing increasing amounts of its currency. Smoke and mirrors only buys time for elected officials to gain reelection and sweep the problem temporarily under the rug. However, more Americans are discovering their quality of life is in retreat. If the CPI is really 10% as John Williams believes, then those 4.5% Treasury Bond yields don’t look so good on a real return basis.
  While the cost of many consumer goods has fallen over the last few decades, especially electronics, the cost of living has risen relentlessly. The easier availability of credit has helped many to survive, but ultimately the debt load becomes a burden that cannot continue.

My dearest Moo Moo Cow.

Do give the article a good read.

Cheers!