America's Poor Spend 60% Of Their Income On Food & Housing Proving CPI Is Meaningless

http://www.zerohedge.com/news/2015-04-06/americas-poor-spend-60-their-income-food-housing-proving-cpi-meaningless

For many Americans, the rise in food and housing prices is a tough squeeze. That’s because—even in an era with low overall inflation—low-income Americans spend a disproportionate share of their money on food and housing.

New data from the Labor Department show the extent of the discrepancy. The bottom 10% of Americans, by income, devote 42% of their spending to housing and an additional 17% to food–nearly 60% of their total spending, according to the Consumer Expenditures Survey. By contrast, the wealthiest 10% of Americans dedicate only 31% of their spending to housing and 11% to food–closer to 40% of total spending…

Average Annual CPI

Click on Image to Enlarge

10 Items Whose Prices Have Jumped the Most in the Past 10 Years

This is further evidence that the CPI data published by the BLS is "understated".  Or in less polite terms, inflation data released by the government are a bunch of lies.

"There are three kinds of lies: lies, damned lies, and statistics." - Mark Twain

http://finance.yahoo.com/blogs/the-exchange/10-items-whose-prices-jumped-most-last-10-200433174.html

Why Reported Inflation Seems Different Than Reality

http://www.streettalklive.com/daily-x-change/1399-why-reported-inflation-seems-different-than-reality.html

Change To Inflation Measurement On Table As Part Of Budget Talks -Aides

This is just another method of stealing from the masses by our allegedly benevolent government.  Inflation as measured by the CPI is already understated.  This calculation change will prove to be an even bigger lie on the cost of living adjustments.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201106211841dowjonesdjonline000414&title=change-to-inflation-measurement-on-table-as-part-of-budget-talksaides

Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.

Gas and electricity price shock shows the Government measure of inflation is meaningless

It should not shock readers of this blog about the parallels between official British and US government reporting of the Consumer Price Index, and how out of touch it is in calculating the true cost of living increases. 

http://blogs.telegraph.co.uk/finance/ianmcowie/100010515/gas-and-electricity-price-shock-shows-the-government-measure-of-inflation-is-meaningless/

Consumer Price Index Summary

http://www.bls.gov/news.release/cpi.nr0.htm

The Consumer Price Index for All Urban Consumers (CPI-U) increased
 0.5 percent in March on a seasonally adjusted basis, the U.S. Bureau
 of Labor Statistics reported today. Over the last 12 months, the all
 items index increased 2.7 percent before seasonal adjustment.

 The index for all items less food and energy rose 0.1 percent in
 March, a smaller increase than in the previous two months.

 The index for all items less food and energy
 has increased 1.2 percent with the shelter index up 0.9 percent.

The US government must think its citizens are fools to believe this inflation data.  Sure, I cherry-picked some data, and more detailed data does show rising prices in food and energy, but to suggest our cost of living has only increased 2.7% year-over-year is insulting at best.

ShadowStats' John Williams Explains Why It's All Been Downhill Since 1973

http://www.chrismartenson.com/blog/shadowstats-john-williams-explains-why-its-all-been-downhill-1973/53536#new

Official inflation statistics are understated in China

http://www.businessinsider.com/chinese-researchers-find-official-statistics-massively-understating-inflation-2010-11

Gold vs. silver

Click on chart to enlarge.

Yes, I'm a self-admitted gold bug, but I'm actually more bullish on silver. Here's why, according to John Williams of shadowstats.com:

Gold and Silver Highs Adjusted for CPI-U/SGS Inflation. Despite the June 28th historic high gold price of $1,261.00 per troy ounce, gold and silver prices have yet to approach their historic high levels, adjusted for inflation. The London afternoon fix, per Kitco.com of January 21, 1980 would be $2,382 per troy ounce based on July 2010 CPI-U-adjusted dollars... and would be $7,727 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars [all series not seasonally adjusted].

In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce [London afternoon fix, per silverinstitute.org] has not been hit since, including in terms of inflation-adjusted dollars. Based on July 2010 CPI-U inflation, the 1980 silver price peak would be $139 per troy ounce and would be $450 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars [again, all series not seasonally adjusted].

Note that his calculations for inflation are different than the official CPI data released by the US Bureau of Labor Statistics, which have been altered over the years and hence, grossly understate true inflation.

Also, silver has underperformed relative to gold, as it is an industrial metal used in many different applications, and with weakness in global economies, silver's price has been dampened. But it has appreciated since the market meltdown in 2008 because investors are starting to realize that silver is also a store of value, much like gold is. And because it is not hoarded like gold is, the pending shortage of physical silver will exacerbate the squeeze on silver prices.

Examples of hyperinflation

Taking a break from the deflationist agenda, let's examine hyperinflation:

http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation

Note the many currencies which have suffered through hyperinflation. Also,

Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

* Outright lying in official statistics such as money supply, inflation or reserves.
* Suppression of publication of money supply statistics, or inflation indices.
* Price and wage controls.
* Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.
* Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest.

None of these actions address the root causes of inflation, and in fact, if discovered, tend to further undermine trust in the currency, causing further increases in inflation. Price controls will generally result in hoarding and extremely high demand for the controlled goods, resulting in shortages and disruptions of the supply chain. Products available to consumers may diminish or disappear as businesses no longer find it sufficiently profitable (or may be operating at a loss) to continue producing and/or distributing such goods, further exacerbating the problem.

Of course, this could never happen in America, right? At least, not again.

Inflation rises

Thanks to my friend Dick for this article. The headline says inflation rose 2% last month, but when you peel back the onion, you'll see a different picture.

http://www.breitbart.com/article.php?id=CNG.f4ca4a183df2102e9ad9338f1c9b7c75.171&show_article=1

Energy and food costs rose 18.7 percent against March 2009, up almost four percentage points compared with February.

I guess they believe items like food, gas, home heating, and electricity bills are immaterial. In their defense, the US government excludes food and energy in their Consumer Price Index (cpi) due to high volatility, but the omissions don't reflect reality in determining purchasing power.

Food prices soar

Food and energy prices soared last month, but since the Labor Department doesn't consider these items important in a household budget (sarcasm intended), it conveniently ignores these items when calculating the Consumer Price Index (CPI). The official reason for the omissions is price volatility. I'm thinking there are other reasons.

http://news.yahoo.com/s/ap/20100422/ap_on_bi_go_ec_fi/us_producer_prices_2

What inflation? Healthcare costs just went up 39%

A good friend told me last week her healthcare insurer informed her that her premiums will increase 39%. This article confirms it.

http://www.reuters.com/article/idUSN1820581220100218

Yet, official government statistics insist the Consumer Price Index ("CPI") is only 2.7%, excluding food and energy costs--since they are "too volatile" to track in the CPI. How convenient.

Lies and omissions

http://usawatchdog.com/real-deficit-numbers-and-real-consequences/

The reason why I ask is the government uses accounting gimmicks to make just about every number it puts out look better than what it really is. For example, the most recent Consumer Price Index for inflation was officially 2.7%; but if you compute inflation the way Bureau of Labor Statistics did it in 1980, the inflation rate would be 9.7%. The same goes for unemployment. Officially, it stands at 10%; but if computed the way BLS did it prior to 1994, it would come out to 21.9%. (source: shadowstats.com)

I asked economist John Williams of shadowstats.com to weigh in on last year’s record $1.4 trillion of red ink for the “real” deficit number. Williams told me, “It was closer to $2 trillion because they knocked off $500 billion with accounting gimmicks.”

In its latest budget, the White House is projecting $1.56 trillion in red ink, and that is another new record! What will the “real” deficit be when the year is over? Williams says, “With a weaker than expected economy, the 2010 deficit likely will top $2 trillion…”

No matter how the government does its accounting, the actual deficit will have to be financed. America will have 3 choices: (1) raise taxes to the moon in a very bad economy, (2) get foreigners to buy more debt, and (3) monetize the debt. (print money to pay the bills) Williams chooses what’s behind door #3. In his latest report he says, “…worse-than-projected borrowing needs for the U.S. Treasury likely will trigger increasing flight from the U.S. dollar. At such time as that moves to a panicked level, and U.S. Treasuries increasingly are dumped or otherwise shunned, the Fed will have little choice but to monetize the Treasury debt, becoming the buyer of last resort for Treasuries. Those circumstances should lead to mounting inflation woes and flight-to-safety outside the U.S. dollar, particularly to hard assets such as gold and silver…”

There is another possible consequence to record deficits–higher interest rates! Countries around the globe with high deficits are starting to see interest rates rise. For example, Greece is facing a huge debt load and interest rates there are skyrocketing. In a recent article from “Money and Markets,” analyst Mike Larson put it this way, “Imagine what would happen if Uncle Sam’s borrowing costs shot up like they have in Greece — by 60 percent! Imagine what that would mean for the cost of car loans, mortgages, and other products whose rates track Treasury yields! And imagine the impact on an economy still struggling to recover from the Great Recession! This is the next big story that few people are talking about.”

The founder of “Money and Markets,” Dr. Martin D. Weiss, went on to say, “…unless the Obama administration and Congress can somehow ax the budget or find a new gusher of revenues — both extremely unlikely anytime soon — collapsing U.S. bond prices and sharply higher long-term interest rates are unavoidable.”

The most recent record breaking budget does not take into account what we will spend in the continued bailout of failed mortgage giants Fannie and Freddie. The two were nationalized last year and, on Christmas Eve, the Treasury decided to give them both unlimited bailout funds for the next three years! There is a total of $8 trillion in liability.

So, it looks like higher inflation or higher interest rates or both are coming.

Inflation is pending--but when?

According to Milton Friedman and his fellow monetary theorists, an increase in the money supply precedes consumer price inflation--but with a time lag.

http://www.caseyresearch.com/library/articles/3037/when-will-inflation-really-hit-us?/

Excerpts:

What the monetarists (or the first of them to be equipped with computers) found was that when the growth rate of the money supply rises:

* The initial effect is on the prices of bonds and stocks, an effect that comes within a few months.

* The peak effect on the growth rate of economic activity comes about 18 to 30 months after the pick-up in the growth rate of the money supply.

* The peak effect on the rate of consumer price inflation comes about 12 to 18 months after that, which is to say it comes 30 to 48 months after the peak growth rate in the money supply.

Specific to this financial cycle:

If you apply the findings of the monetarists to the present situation, here's what you get. The peak growth rate in the money supply occurred last December, so based on the general monetarist schedule:

* Some of the effect on stocks and bonds should already have been felt.


* The peak effect on economic activity should come between the middle of 2010 and the middle of 2011.

* The peak effect on consumer price inflation should come between the middle of 2011 and the end of 2012.

Investment implications:

1. When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.

2. If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive.

Deflation or Inflation?

That is the big question, because the answer to that question is a key driver for investment decisions.

My answer? It depends. That sounds like a cop out, so I will need to clarify.

Top-down, the answer is that essential goods and services will experience a surge in prices as a by-product of a weakening dollar. We will pay more to heat our homes, fill up our gas tanks, and put food on the table. Why is that, when we have slackening industrial demand? Because we are now competing with a growing middle-class population in Asia--billions of them, in fact. As their standards of living continue to rise, they will eat more meat, putting pressure on grains. They will drive more, and buy more homes as they urbanize. Hence, we should continue to see an uptrend in prices of basic commodities--even as the economy sputters in and out of recovery.

The Consumer Price Index (CPI) may continue to flash deflation, as the US consumer de-levers and cuts back on consumption. A moribund economy will keep a lid on labor rates, which will help control inflation on some services. Not only are home prices declining, but so are rentals. The cost of high-end consumer discretionary goods will also be dampened due to cuts from even the wealthy. The government will declare that deflation is the boogey-man--not inflation, self-rationalizing that continued deficit spending and quantitative easing will be necessary to keep "stimulating" the economy.

Yet, US consumers will feel the brunt of this bifurcation, as our wages decline while the cost of essentials rise. This is a consequence of our economy being driven by the US consumer, who is tapped out. Seventy percentage of the US economy is consumer-oriented. By contrast, only 40% of China's economy is consumer-driven. As their economy matures and continues to fluorish, consumption will surely rise, even as manufacturing exports to the US and Europe decline. A rising Chinese (and Indian) consumer will strain tight supplies. Coupled with a weakening dollar, the US consumer will have to grapple with diminished purchasing power, even though prices for some items will be deflated.

Enclosed is an article on what to expect going forward:

http://www.businessinsider.com/rosenberg-buy-commodities-as-the-trade-war-escalates-2009-9

Fed inflation projections

According to Bloomberg:

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

My translation: don't listen to government statisticians and economists. Expect massive inflation down the road, not deflation. The technical reason: economists are retrospective, relying too much on lagging indicators, instead of forward-looking data. The "real" reason: it's in the government's best interests to under report inflation data. Pension fund and social security payments with cost-of-living adjustments are linked to the consumer price index (CPI) data. Also, a soaring cpi is unnerving to markets and consumers, driving up interest rates, especially at the long end of the curve (longer expiration bonds). This caps economic growth as the cost of borrowing increases.

As consumers, we know the real story when components of our budget are rising on a regular basis. So what should we do in the face of diminished purchasing power? Precious metals and other commodities, including energy and grains are good hedges against inflation. Aside from the physical commodities, mining companies and commodity exchange traded funds (ETF) are other potential plays. For bond investors, there are Treasury Inflation Protection securities (TIPS), and the TIP ETF.

Disclaimer: Due your own due diligence and consult with your financial advisor. These are not specific recommendations.

The Girl Scout Inflation Indicator

Girl Scouts are known for telling the truth, so we'll believe them when they say the cost or producing cookies increased 30% last year. That's why they're keeping the price of a box of cookies the same, but they're including fewer cookies:

Girl Scout Cookie prices

It seems the Girl Scouts are a little more honest about the rising cost of goods than the US Government is with its incessantly under-reported Consumer Price Index (CPI) figures.