Busted: Bankers and The Global Economy

March 20, 2008

U.S. Central Banking and Inflation

U.S. business and consumers paid more for food, energy, gasoline, automobiles and most other products last month. Recently, the government confirmed an inflation rate of 8%, which is still vastly underestimated and underreported. The rate is closer to 18% and 20% for food prices. This double-digit increase is a fairly recent event. Whether the Fed or the U.S. government care to admit the full truth, inflation is rising to new heights, due in part to continuous reductions in the central banks’ interest rates.

Most of you are no doubt familiar with the Consumer Price Index (CPI), that broad inflation measure the Bureau of Labor Statistics publishes once a month. The BLS’ monthly report includes another inflation measure, known as “core inflation,” which excludes food and energy. Once a month, the Bureau of Economic Analysis releases headline and core versions of another closely watched price index known as the Personal Consumption Expenditures (PCE). Food and energy items have been deliberately and systematically removed when most economists look at price movements. Removing food and fuel is the economists’ effort to eliminate “noise” in inflation measures.

The term core inflation was coined in the early 1980s. The practice of stripping certain components from consumer prices began in the late 1950s. The practice of reporting a CPI excluding both food and energy prices began when energy price volatility dramatically increased in the 1970s. Central banks desire to subtract the appearance of volatile swings in prices. Many of the arguments for excluding food and energy are based on the notion that an exceptionally large price increase today will be offset, somewhere down the road, by an exceptionally large price decline. When increases in food and energy prices represent trends, the arguments made for excluding food and energy prices are on shaky ground. This has been exactly the case since the 1970s. As a result of this simple accounting principle, inflation rates are skewed and inaccurate. Creative figures and inflation targeting have further reduced official inflation rates. Routinely excluding food and oil price movements from inflation gauges has been misleading at best, especially with the lowered costs of cheap imported food in the current U.S. economy.

The reality is that the interrelation between national economies within the global economy as a whole has become more important in measuring inflation and other economic factors. The growth of control by the world central banking community has become more important in establishing effective measures. This fact has been largely ignored by most economists.

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