 Inflation Pushes Down the CPI
Jim Willie
CB
Archives
Jim Willie CB is the editor of the "HAT TRICK LETTER"
Feb 4, 2005
Wait a minute!!!
Isn't that backwards???
Welcome
to today's world, where the financial sector has turned everything
upside down. Most past effects are working in opposite fashion
nowadays. Back in summer 2003, an irreverently titled series
of articles was put forth, "Ass-Backward Economics, part I - part II - part III and part IV." The foundation
mindset for US Economic policy and direction, well, has its head
squarely up its derriere. It is no surprise that various traditional
relationships are no longer working. The entire system is twisted
so badly, it can hardly be recognized from past cycles. In many
ways, the business cycle is broken. It should come as no surprise
that certain consumer prices are actually being pushed down as
a result of the utter desperation that is Fed policy. Assumptions
should not be made. Dynamics of forces are exerted in very bizarre
and atypical ways, ways the press & media fail to report
adequately. The CPI bears little resemblance to an indicator
of prices within the US Economy. It is indeed a strange mix.
The Federal
Reserve is surely stimulating, but its policy stimulus is feverishly
assisting Asia while it tragically crushes the real economy within
the USA, of tangible businesses outside the financial framework.
New application of money and credit is actually putting DOWNWARD
pressure on prices which comprise the Consumer Price Index. That
is not to say prices across the spectrum are falling nationally,
no way. Cost inflation is raging rampant rampaging. These lost
relationships and many other related topics are discussed and
analyzed in the Hat Trick Letter issues, along
with investment opportunities which profit from the grand commodity
bull market.
We will not
venture down the tired road of hedonic distortion in aggregate
economic statistics. Quality improvements are legendary in the
Consumer Price Index, Gross Domestic Product, income, savings,
productivity, and elsewhere. In the CPI to be sure, such self-serving
improvements have been made to justify lower adjusted prices
for numerous product items. Faster central processors (CPU),
faster disk storage access, and faster connectivity for both
personal computers and larger servers enable wizards in the USGovt
ministries to claim that computer & network system expenditures
are 10 to 12 times larger than reality. This practice goes hand
in hand with associated lower price adjustments, from greater
speeds. Anti-lock brake systems are a critical enhanced feature
in automobiles. So presto, car prices are suppressed to account
for greater functionality and quality. Additional television
backplane connectivity and other features enable end product
prices to be adjusted downward here too. Hedonic adjustments
turn an economic stall into strong growth in the GDP, notwithstanding
chronic containment of the deflator (price inflation offset).
For instance, Q3 of 2004 conveniently avoids all reference to
higher energy prices!!! Hedonics keep the CPI down by directly
lowering prices for a raft of products. The deception is blatant,
obvious, and shameful. Let us put the wonders of hedonics aside.
The other side of the CPI deception is intentional weighting
of large items in order to suppress the index itself.
Inflation factors
which push the Consumer Price Index down are many:
- Ample low-cost
mortgage funds have lifted housing prices, but have smothered
the housing rental market where bargains are commonplace.
- Zero percent
deals for car sales have kept new car sales on "life support"
for so long that easy financing and rosy incentives have become
the norm, thus smothering the used car market, and their prices.
- Dollar supply
explosion has provoked a falling US$ and rising systemic cost
inflation, which causes more business failure, more liquidations,
more bankruptcies, and accompanying distressed lower prices.
- Credit explosion
is directed toward Asian imported products, which has forced
a monstrous trade gap, thus enabling a massive Asian industrial
expansion, followed by continued flood of low priced goods inside
the USA.
THE HOUSING
MARKET
Over
30% of the weight in the CPI is devoted to rental prices. What
an absurdity. Who cares the motive for such incompetence, misrepresentation,
and distortion? It is what it is. The tide is surely coming in
to provide ridiculously magnificent mortgage funds for potential
homeowners. Fanny Mae, Freddy Mac, and other federal mortgage
pools have made the application process a slam dunk. Low income,
low asset ratio, complications from inspection, money under the
table for closing costs, not a problem. Come on down! Regardless
of loan quality, Fanny will enable a portfolio recycle of funds,
origination points being earned. No distinction is made for new
construction or existing homes. The ratio of housing value to
rental income is an excellent indication of price-earnings ratio
commonly reported to stocks. In the case of housing, the value-to-income
ratio is at least 5% above the previous bubble peak in 1989.
Rental prices are way down on a relative basis. Homeowners who
chase a property for purchase leave the rentals wanting. Deals
to rent a house are commonplace. The result of the multi-year
housing boom which began in 1994 or 1995 has been to greatly
suppress rental prices. A primary beneficiary in the statistics
world has been the CPI.
THE AUTOMOBILE
MARKET
Over
30% of the weight in the CPI is devoted to used car prices. What
an absurdity. Who cares the motive for such incompetence, misrepresentation,
and distortion? It is what it is. The tide is surely coming in
to provide ridiculously magnificent lending funds for potential
automobile owners. However, the deals are for new cars almost
exclusively. Dealer lots are overrun with used cars. South America
simply cannot take up the slack, as they have done in the last
few decades. The bulk of the practical cost for a "beater"
car is not so much the cost of metal, plastic, glass, and rubber.
It is the cost of passing inspection for safety and emissions.
What usually had been timely cash-back incentives to move end-of-year
inventory have become routine year-round lures. What had been
attractively low rates for financing sales have become routine
year-round lures. Late summer last year, even with heavy incentives,
inventory did pile up, like three months worth. Detroit is
desperate not to accumulate gargantuan inventory, as labor contracts
dictate not to relax on production schedules. Japanese market
share has risen every single year, partly because they have joined
the easy finance parade. A veritable flood of used cars work
against the supply & demand curve. The result of the multi-year
car sales game which began in 2001 has been to greatly suppress
used car prices. A primary beneficiary in the statistics world
has been the CPI.
REAL ECONOMY
STRESS FROM HIGHER COSTS
Past
articles such as "The
Failure of the Fed Reflation Initiative" addressed the details and dynamics
behind the colossal backfire of higher costs across the entire
US Economic spectrum. That is ok for the financial sector, which
enjoys high bond prices, high housing prices, and high stock
prices. It is anything but ok for the real economy. Households
must deal with higher costs for gasoline, home utilities, food,
professional services, and more. Businesses must deal with with
higher costs for shipping, building utilities, construction materials,
industrial metals, fertilizers, lubricants, other petroleum-based
products, and more. Labor costs are not rising so much, but
health care costs are increasing over 10% per year, and have
been for years. The uniformly higher cost structure will continue
to act like an unsteady air supply on the US Economy which seeks
new fuel not only to grow but more importantly to sustain its
massive asset bubbles and enormous debt burden. In a sense, Chinese
output and lower labor costs deny our economic fire that needed
fuel. Asia tilts our pricing power and wage structures greatly.
Higher commodity
and energy costs are a direct consequence of the falling USDollar.
The US$ exchange rates are on a severe downtrend for a host of
reasons. Yawning trade gaps and burgeoning federal budget shortfalls
from the twin tower deficits offer a powerful thrust in the currency
markets to send the US$ down down down. Low interest rates within
the USA sphere render the USDollar vulnerable on a competitive
basis internationally. Europe, England, and Canada all offer
higher short-term and long-term rates. So the US$ slides relentlessly
lower.
The human
toll and the commercial fallout lead to distress from profit
margin squeeze and shrinking household budgets. The unfolding
damage comes from business failure, inventory liquidation, business
and personal bankruptcies. Job outsourcing goes hand in hand with the frantic
attempt to maintain cash flow and liquidity for operations and
debt service. It is an uphill battle to remain competitive. The
result of the distress to businesses and households has been
to greatly suppress product prices in the real economy, where
things are made. A primary beneficiary in the statistics world
has been the CPI.
ASIAN DEVELOPMENT
& FLOOD OF IMPORTS
The
bottom line outcome of the grand Fed Reflation initiative was
two-fold. In the financial sector chamber (alternative reality
room), it puffed up bonds and housing, and permitted continued
levitation of stocks. In the real economy chamber (genuine reality
room), it encouraged household debt to send a strong current
of money directly to China.
Recovery is
heralded, although exaggerated. Its makeup resembles an obese
gentleman racing down a pathway, burdened by an 80-lb millstone
around his gut, twisted from one leg twice the length of the
other leg, roused into a frenzy by massive timed doses of amphetamines,
sweating fluids as quickly as he takes them in. Much new money
goes toward evermore debt tied to cars, household appliances
& furniture, home electronics, vacations, and elevated lifestyle.
Debt pays as often for an orgy of excess as for the meeting of
needs. While income growth from wages has almost collapsed since
the year 2000, consumer spending has risen 10% on an inflation
adjusted basis. An overlooked statistic is that US consumer
debt has been growing in lockstep with the Chinese trade gap
(bilateral to USA).
Total consumer
debt, from both revolving and installment sources, has risen
almost 22% since January 2001, from $1711 billion to $2085 billion
through November 2004. During the same stretch of time, the Chinese
trade deficit accumulated by a commensurate $440 billion. Hmmm,
similar magnitude !!! Up to the past spring, during the last
four years our consumer debt (+$331B) and Chinese surpluses (+$322B)
had grown by roughly the same magnitude. Since last summer
though, consumer debt has advanced by another $42 billion, while
the Chinese booty from surplus has outpaced the indebted drag
by gaining $117 billion. One can conclude that the early
foundation of economic recovery opened a Chinese savings account,
but the next gear for that false recovery has filled that Chinese
savings account.
The result
of Fed stimulus has been a massive Asian factory buildup. Their
central banks have ensured that currency corrections do not interrupt
the "grand giveaway" by mindless US officials. The
Asian imported product influx has greatly suppressed product
prices in the real economy, where things are made. A primary
beneficiary in the statistics world has been the CPI.
BRIEF CONCLUSION
The
more the Federal Reserve stimulates with its tired antiquated
weapon of ineffective cheap money, the more it works to keep
the Consumer Price Index under a heavy thumb, held down, kept
low. This is an unrecognized paradox. Monetary expansion, carried
out US style (read: VIA DEBT), pushes down the CPI incredibly.
The CPI measures poorly the prices across the economy. It is
a pathetic statistic designed to reflect run down rent, crushed
used cars, distressed sales, and cheap Asian imports. The
Fed has been pushing on a string for so long, that a pile of
string has backed up to actually weigh down and alter the scales
used in CPI weights & measures. Chairman Greenspan is
the world's foremost monetary drug dealer. His middle men (financial
sector) love him. He answers to their orders. However, their
customers (real economy - Joe Sixpack and Main Street vendors)
are suffering.
The financial
sector absolutely loves the CPI as an index to measure price
inflation. Its inadequacy as such a proper measure is completely
irrelevant. What is relevant is that it measures a narrow range
of consumer prices, each kept down from monetary expansion (inflation).
Therefore, the CPI remains tame as monetary inflation rages
out of control, thus signaling a "green light" to our
Fed and the banking system to proceed with the massive extension
of debt. The financial sector loves it, since assets inflate
most easily, with the least resistance. The damage to the real
economy comes primarily from the cost inflation which results,
better measured by commodity prices (CRB index) and the Producer
Price Index. The CPI has become a joke, a tool for inflationists
to suppress easily via statistical games, a tool to justify their
continued inflationary policy. Their games are blatant, hidden,
and work from misdirection. The financial sector benefits while
the real economy suffers.
THERE ARE NOT
ENOUGH BAGHOLDERS IN THE WORLD FOR THE US DEBTS. THERE IS NOT
ENOUGH MAYLOX IN THE WORLD TO HANDLE US INDIGESTION. THERE IS
NOT ENOUGH ASPIRIN IN THE WORLD TO TREAT THE US HEADACHE. THERE
IS NOT ENOUGH SPACE TO DOCUMENT THE STATISTICAL DECEPTION.
Jim Willie
CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jackass
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Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
about subscriptions, contact him at JimWillieCB@aol.com.
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