As we have previously discussed, inflation remains contained to the
rest of the world ex-USA. Globalization be damned, there may be
rapid price rises in most of the world, but there is no inflation in
the U.S., thanks to a combination of hedonic adjustments and the
absurd focus on the core rate.
Whenever I hear the phrase "excluding
volatile food and energy" I just laugh. Can a pricing group be
considered volatile if it merely goes up each month in an orderly
fashion -- for years and years?
That's not volatility,
that's a trend.
One way to actually measure how absurd the US
core inflation measure is to look at what has happened to the spread
between headline CPI and Core CPI. If Core CPI is understating
inflation, than the spread should be widening. If it is accurate,
the overall ratio between the two should be relatively steady.
What does the data show? The spread has
increased substantially since the US adopted an ultra low rate/easy
money policy under Greenspan (now
affiliated with bond giant PIMCO). Since the easy money policy
of the 1990s, and the rate slashing of the 2000s, it is no
coincidence that the spread between the headline number and the core
has grown dramatically.
If you want to trace this widening spread back
to its origins, it coincides with implementation of Boskin
Commission changes in CPI. (About as intellectually dishonest
analysis of Inflation as has ever been penned -- its goal was to
reduce Social Security payments and avoid bankrupting the US
Treasury -- not measure inflation accurately). Since then, the
spread between the core and headline data have only grown further
apart.
This simply reflects the government's BLS
inflation data diverging from reality.
Core CPI flatlined over the past 8 years because
that is how it was constructed -- to not show inflation. However,
the absurdity of the adjustments in inflation measures is revealed
in the widening spread between Core and Headline:
CPI minus Core CPI (1980 to present)
Notice how tightly the two data series coincide
(top chart) in the latter half of the 1980s and all of the 1990s?
See how that starts diverging in 2001?
Bill King points out: "Targeted inflation
may be the headline CPI, or a derived core inflation measure. In
either case central banks should be aware of the sources of error
and bias in their country’s CPI"
