Is Inflation Truly Low?

Today while I was grocery shopping, I had a startling revelation. The price of milk, of apples, of beer, of a head of lettuce, of just about everything in my cart seemed to be twice the price that it was a just few years ago. I grant you that this is anecdotal and not hard data, but it got me thinking.

I went to the US Government Bureau of Labor Statistics website which lists historical inflation rates as measured by the Consumer Price Index (CPI). So far in 2013, CPI is running at annual rate of 1.8%. CPI was 1.7% in 2012, spiked up to 3.0% in 2011, and was again down at 1.5% in 2010. 2009 was 2.7%, and in 2008 we had a paltry 0.1% inflation. Over the past 5 years, total inflation was 9%. How can this be? Just about everything that I buy on a regular basis is noticeably up more than 9%. Think about it: the price of food, the price of gasoline, my phone bill, my medical insurance, the cost of air travel, my utility bill, everything is up significantly over the past few years. I cannot think of one thing that I purchase on a regular basis that is more economical today than it was in 2008.

Some quick research on CPI indicates that it is a weighted average of the prices of 211 categories over 38 geographic regions, making a total of 8,018 indexes that are weighted according to some magic formula. Each one of the 8,018 indexes consists of many consumption items. Well, this seems very comprehensive and maybe somewhat overly complicated and possibly inaccurate. For example, it weights in things that I purchase infrequently such as a new TV. My new TV almost always costs more than my old one because I buy the latest technology. Sure, if I wanted a new 26" analog tube TV, I could pick one up cheap at a thrift store. What worries me most is that a complicated CPI formula might be susceptible to manipulation.

It is hard not to wonder if the CPI is purposely being manipulated to artificially prop up our economy. It is not completely implausible. The Federal Reserve is printing money at unprecedented levels to stimulate our economy. The monthly $85B in bond purchases called quantitative easing (QE) is helping to keep our economy from nose-diving. I am not an expert on monetary policy, but there is broad consensus among economists that QE will lead to higher inflation. What if under-reporting CPI is just another tool that our political leaders are using to sustain the economy?

Why does this matter? We all benefit from an improving economy - right? Well for one, many things are tied to the CPI such as cost of living increases for government benefits (e.g. Social Security). Wage increases within private industry are loosely tied to the reported CPI. What about the effects of inflation on our financial markets? High inflation would cause both the bond market and the stock market to crater. Of course, we all want to avoid anything that would damage our fragile economic recovery.

Unfortunately, in any situation there are winners and losers. Retired people on fixed incomes can have their savings and standard of living wiped out by inflation. Working people are somewhat less effected by inflation because their wages increase over time, albeit at a potentially lower rate than inflation. The big winners are those who own the capital that is being artificially propped up by a perception of low inflation. The stock market continues to achieve record highs. Hmmm...I do not know if the CPI is being intentionally manipulated, but it is something to think about.....