The Inflation Conspiracy? EAT ME

by Darwin on May 26, 2011

CBSMoneyWatch published a piece of screed this week on the Inflation Conspiracy pretty much mocking and patronizing people who question the value or validity of the government’s official measure of inflation.  The author somewhat misrepresents the intent of mainstream inflation critics by saying they “believe that somehow there’s an inflation conspiracy going on, and the government is manipulating the numbers to keep the official rate low“.  So, OK, there are some people who do take it that far, but what many feel, and it’s tough to argue against, is more tied to the way the indices are formulated and weighted and how relevant those measures are in today’s society.  After all, aren’t all governments somewhat incentivized to understate true inflation?  Our government got to hold Social Security payments steady two years straight due to flat CPI.  That saved Trillions over a historical low single digit increase.  China lies about their inflation all the time.  Please name a country that “overstates” their inflation.

The notion that formulas matter is poo-pooed with the following line, “while you could quibble with the formulas, it doesn’t really matter, because the bond market is telling you that there currently is very little inflation and little worry about big inflation any time on the horizon“.  This is a somewhat simplistic view of how inflation works and is perceived.

First off, the bond market reflects many measures, with current inflation being just a single facet.  The bond market reacts to future perceived inflation, not what happened last quarter, while the CPI is reporting historical inflationary statistics.  So, this guy’s comparing a bond market which trades on anticipation versus an index which is a rearview mirror.  Next, you could actually have very high current AND future inflation and still have bonds with low interest rates.  How?  Well, if the thinking is that rising inflation is going to drive the economy into the shitter and we’re looking at a double dip recession while we already have 8% unemployment, we’re entering very dangerous territory and risk assets are going to shift into bonds.  Finally, US Treasuries are also very much dependent upon what’s going on elsewhere.  We don’t live in a vacuum!  Europe is burning – literally – from protests everywhere from Spain to Greece, over Austerity, bailouts and basically, debt.  So, if our bonds appear to be strong with low interest rates, it’s because we’re the lesser of multiple bad options for sovereign fixed income.

Here’s the sage advice the author offers: “If you want to understand inflation as an investor, don’t focus on your grocery cart or gas tank; follow the bond market“.

Umm, last time I checked, groceries, gas and other things that are in a continual upward trajectory like healthcare costs, college tuition and now, the cost of credit, are all rising well above historical inflation.  These are the things typical Americans spend their money on.  When 75% of your budget is seeing 5-6% inflation and the CPI-specific categories rose “just” (as the author states) 3.2% at the same time wages rise 1%, doesn’t it stand to reason that there’s less buying power in the economy?  Anecdotally, I can’t help but notice inflation in our household and we’re actually toward the higher end of the income continuum in America.  How the heck does someone making $35,000 feel when these inflation-prone expenditures comprise a higher portion of their income?

On one hand, it’s tough to argue with data and if the formulas that comprise the CPI and other government inflation measures say the “index” rose “just” 3.2%, then fine.  But 3.2% isn’t trivial in a stagnant economy, and more importantly, what’s being measured isn’t as relevant to most Americans as the government would have you believe.

What Are Your Thoughts?

Do You Feel Inflationary Pressures This Year?  Or Has Your Buying Power Increased?

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1 traineeinvestor May 26, 2011 at 11:24 pm

While investment theory asserts that buyers of bonds should factor in future inflationary expectations, the very obvious reality (both today and historically) is that there are other issues which influence bond prices. Right now the factors you mention are playing a role – creating a “flight to perceived safety”. Then there’s the small matter of the Fed’s purchase programme which either intentionally or unintentionally has the effect of providing significant support to bond prices.

As a practical matter, where I live, I’m seeing official inflation (CPI) at 4.6% YOY, my actual living costs rising even faster (housing, utilities, food, education, insurance, medical) and get close to zero on short term bank deposits and around one percent on term deposits/short term bonds. You have to go either a long way out on the yield curve or accept a material loss of credit quality to match the official inflation. If inflation were the determinant of interest rates/bond prices, you would conclude that there is no inflation (or deflation) expected in the short term and very low inflation expected in the longer term. Given that this situation has persisted for a few years now, the obvious conclusions are either that investors are consistently wrong with their future inflation expectations or that there are other factors which are exerting a greater influence on pricing.

2 King_Midas May 26, 2011 at 11:51 pm

Great post! I love that you get this, and can break it down!

3 Marie at familymoneyvalues June 2, 2011 at 10:34 am

Nice job on this post.
Yes inflation is affecting us – as we are on fixed income right now. I don’t track year over year what we buy at the grocery, but have noticed that year over year the bill always goes up – even though we have halved the number of people in the household! Part of that, I know, is that we buy more convenience and prepared foods than we used too, but most of it is just higher costs.

4 Financial Independence June 7, 2011 at 12:28 pm

Honestly inflation is vary from household to household. Depends where you money go.

Some of the items are even getting cheaper- for example, if you want to replace a laptop with the same spec 3 years later – it is actually getting cheaper : -)

I analyzed in my blog our expenses over last three years and it is not much of a difference, in comparison with 2008 or 2009.

But inflation is the one thing might force America to default on its debt.

5 Hunter June 9, 2011 at 3:18 pm

We are feeling the inflationary pressure. Despite our local gov’t touting lower property taxes due to 5 years of declining property values. They have thought of other ways to cover their deficit problems. Increased water rates, personal property taxes, and even record fine revenue for the police force. We are no better off.

6 Len Penzo June 11, 2011 at 3:42 pm

Pay no attention to the man behind the curtain, people! The obvious rising cost of living is all in your imagination.

Seriously, the government has accrued so much debt right now, it has real incentive to see inflation take hold — since they are unwilling to stop the deficit spending and cut the bloated government to affordable levels, it is the only other way to pay off the debt.

Remember, inflation is a debtor’s best friend. Unfortunately, it’s also the mortal enemy of savers and the fiscally responsible.

All the best,

Len Penzo dot Com

7 Bret @ Hope to Prosper June 13, 2011 at 11:35 am

Inflation is the goverment’s sneaky little way of stealing from everyone who owns a dollar.

As Len said, with the huge deficits, trillions in treasury bonds and COLAs on entitlement programs, they don’t have any practical choice but to lie about the rate of inflation. They have really painted us into a corner.

The real rate of inflation (pre 1990 calculation) is published at a website called It is right around 6% this year, which is much more accurate than the bogus rate published by the U.S. BLS.

8 JT July 8, 2011 at 3:50 pm

CPI is hardly understated. Food and energy are excluded, sure, but consider also that 70% of the upward trajectory in the consumer price index is due to housing.

The CPI uses “implied rents” to value homes. So, if rents rise, then home prices do too. Housing is actually falling in price, but rents are rising. The result is a higher CPI reading than necessary.

9 Marz Bonfire August 2, 2011 at 11:00 am

Careful not to confuse asset inflation with monetary inflation.

The Fed is trying to induce monetary inflation by creating asset inflation and is failing miserably.

It is counter-intuitive, but asset inflation is deflationary: higher gas, milk, etc. make one less apt to spend on other things and eats away at overall demand for credit, which is contracting, and thus holding monetary inflation at bay.

10 mintu kumar August 23, 2011 at 7:51 am

I’m posting my blog video here because I need to reach out to the real people who are effected by the Global Economic Crisis.

11 sophie August 31, 2011 at 3:25 pm

Thank you for explaining it honestly. You definitely explain it better than CBS Money Watch which is probably funded by the government.

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