When you talk about gold you have to talk about inflation and when you talk about inflation, at least in the United States, you have to talk about the Consumer Price Index (CPI), which is the government’s official report of inflation at the retail level. The CPI is reported every month by the Bureau of Labor Statistics (BLS).

The CPI in recent months has been showing a “core” inflation rate in the neighborhood of 2% per annum. This allows Ben Bernanke to tell Congress that inflation has been “contained” and therefore that the Fed is doing a splendid job. And the newspapers report the 2% inflation figure without a hint of irony.

It is not disputed that this “core” inflation number excludes food and energy, but that is rationalized by describing these prices as “volatile” and therefore misleading. And for anyone who doesn’t eat or drive a car that makes perfect sense. But for those who lead normal lives, however, the “core” CPI, right off the bat, is a joke.

I think most people understand “volatile” to mean that a price goes up and then goes down. Applying that to the real world, you would then have to say that the price of crude oil went up to $40 a barrel, then down to $50, then up to $60, then down to $70 and finally up to $80. As for food, the prices of wheat, corn and dairy products are at or approaching all time highs. In fact, if you haven’t been getting sticker shock at the grocery store you are lot richer than I am.

But that’s not all. Most people, I believe, assume that the CPI, from month to month, looks at the actual prices of a constant basket of items and then reports the change. And, in fact, prior to the Clinton administration, the BLS calculated the CPI exactly that way.

But Clinton didn’t like seeing the CPI go up and told the BLS to do something about it — and they did. They started introducing “adjustments” intended, they claimed, to make the CPI more accurate (i.e., lower). If the price of something in the index was going up too fast they would replace it with something more to their liking.

As if that weren’t enough, they began to make what they called “hedonic” adjustments. (“Hedonic” means relating to pleasure). So, for example, if the price of a computer went up they would look at that and if, in their judgment, you got more for your money (more memory, faster, etc.) they would treat it as if the price of the computer had stayed the same, or even gone down. And the Bush administration, of course, has told the BLS to keep up the good work. Who wants higher inflation?

My source for this analysis is the work of an economist named John Williams who compiles what he calls “Shadow Government Statistics.” He has taken the CPI, gone back to the pre-Clinton era methodology and added back food and energy. By Williams’ calculation, the true CPI, calculated in this manner, is running at about 10% per year. That’s right — 10%

I don’t think anyone reading this (other than a Buddhist Monk) will be the least bit surprised. So you can now stop believing the 2% BS from the BLS. Also, in case you are wondering, Williams says that the rest of the government’s statistics are just as phony and that we are, right now, already in a recession.

This entry was posted on Thursday, September 27th, 2007 at 6:06 am. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.