Monday, May 19, 2008

Will the real inflation rate please stand up?

Regular readers know that I am a long-term bull on commodities. Given all the problems for the US economy, the overall direction for the greenback is down which is conversely commodity bullish. Now rising concerns about CPI understating inflation is another nail in the coffin of the US Dollar.

CPI understating inflation
These concerns are showing up in the minds of the public. USA Today recently published a story entitled Inflation may be worse than consumer price index shows. Until recently, the debate over the problems of inflation measurement have been confined to academics and a few investors with snarks of inflation ex-inflation.

This article shows the history of how the CPI has evolved over the years. John Williams of Shadow Government Statistics indicated that if we measured CPI the way it was done in 1982 it would be 11.3% (in March 2008). Even if we accept the premise that we need to strip out the more volatile components of inflation rate, the Dallas Fed’s measure of trimmed mean PCE is consistently higher than core PCE, or PCE ex-food and energy.

My take: the chickens are coming home to roost. The public participation in inflation hedges is just starting and commodity prices are going to get really parabolic before this is all over.

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