Inflation Denial is Major Component of Decreasing Purchase Power
Inflation is outpacing increases in household income and weighing heavily on consumer confidence.
The consumer price index climbed to 7% in 2021 however that number is argued to be misrepresentation of what the actual purchasing power of the dollar is. CPI is used across the US to correct court payments, corporate contracts, retirement income, social programs; When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.
We now know when people and businesses expect inflation, this can set off an inflationary cycle and these inflationary expectations were driving the economy in the early 1980’s. To wring these expectations out may require severe recession. It’s impossible to know the scope of investments or what wage increases should look like to offset inflation without proper data.
Biased Data on Weighted Average
The BLS defines inflation as ‘the overall general upward price movement of goods and services in an economy.’ The most common metric quoted by media around the world is BLS’ CPI (Consumer Price Index). It measures the yearly price change of the basket of chosen goods and services.
One of the main factors to determine the inflation rate has been to assign each good a weight. Over the period of time, the relative importance of this good as compared to others may increase or decrease. The calculation seems pretty straightforward, and yet the BLS and Federal Reserve suffer a lot of criticism from investors and prominent economists who believe the metric is flawed and lacks data transparency.
Over the years, the BLS, under the influence of Congress, the Fed, and various interest groups, altered the way they weigh goods and services. Questionable ways of combining, excluding, adjusting, and smoothing data led to an index that doesn’t seem to reflect current consumer trends or prices in the market.
Some criticism of the CPI and other BLS metrics includes:
- Usages of outdated, subjective survey data (some 2-years old)
- Severe lagging or a delay of the metric in regard to the real-market situation
- Change from COGI (Cost of Goods Index) to COLI (Cost of Living) calculations
- Excluding rural homes, homeless, prisoners, and mentally ill from the main index (Urban CPI)
- Not taking into account customer substitutions for cheaper products
- Biased smoothing of the data
- Frequent calculation changes over the years that lead to lower inflation rates
During a global event such as Covid, priorities change. For example, the disruption of historical consumer spending changed significantly when stay at home orders took place. Instead of going out grocery and online shopping contributed to a larger portion of all spending thus, the weighted average was misrepresentative of the facts.
The older indexes seem closer to the actual market price change. We can currently see that certain goods and services increased dramatically, with oil and gas prices at the forefront (51%, and 28% increase) but essential food products not far behind (beef +24%, bacon +20%, and eggs +12%) In fact, some economists are proponents of the older calculation methods from the 90s or even the 80s, according to which the US inflation would currently be at 10% or 14%, respectively.
In 2020, the US government created an additional 40% ~$3T of the USD supply and continues to create more through quantitative easing (QE), leading many economists to expect much higher inflation and call for slowing or stopping the QE and shrinking of the Federal Reserve balance sheet.Once businesses are aware that households have more money to spend as a result of more welfare given by the government, they assume consumers will accept higher prices. Hence, inflation will follow a rise in welfare expenses similar to what we are seeing after pandemic relief funds.
Since then the national debt rose to an all-time high and almost 30T and a new modern monetary theory (MMT) emerged arguing that big economies could disregard debt and taxes, and continue creating a money supply.
An increase in the monetary supply would lead to devaluation of the country’s currency and rising prices of goods and services as we’re seeing now. However, inflation can be good for debtors — the ‘real’ (inflation-adjusted) value of their loans declines over time, easing the burden of the debt and aiding their eventual pay-off. Falsely low inflation rates are beneficial to maintain international competitiveness. There’s a clear conflict of interest with institutions who provide the sole source of inflation information.