CPI Numbers Show Mixed Results for the Economy

The Consumer Price Index numbers released Friday showed inflation levels increasing 0.2%, which is slightly better than investors expected. Part of the rise was attributed to the so-called core inflation index, minus food and energy prices, which increased 0.3% in August. The all items index rose to 1.1% for the 12 months, still below the target rate of 2% the Fed has set.

According to the Bureau of Labor’s report, the energy and food indexes went unchanged in August. There were price increases for shelter, vehicle insurance, apparel, communication, and tobacco. However used vehicles, household furnishing, recreation, and airline fares all declined.

According to Bloomberg, medical costs saw their biggest jump since 1984. Medical care rose 1% while the cost of prescription drugs also soared 1.3%, bringing the increase in prices over the past year to a total of 6.3%.

It seems the CPI numbers are bringing in a mixed bag for investors and a little more justification for the Fed to consider a hike this year. But there’s more to these inflation numbers than meets the eye.

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What is the Consumer Price Index?

The way the CPI is calculated can be complicated, and the method for calculating it has changed over the years. There are also different types of CPI data. For example, there’s core inflation, which doesn’t include products with volatile prices like food and oil. There’s also headline inflation, which does take those products into account. For more about CPI and inflation, click here.

The problem with the Fed is that it tends to favor the lower of the two numbers in justifying its monetary policy. Peter Schiff explains how other price omissions lead to warped representations of inflation levels during the Housing Crisis:

For example, the inflated price of residential housing was never reflected in the CPI because instead of using home sales figures, the Department of Labor substitutes a figure they call ‘owner equivalent rent.’ With all the shenanigans used to turn renters into buyers during the recent bubble, the rental market went into a slump for lack of takers. Since owner equivalent rent was used to represent residential real estate prices in the CPI, the index significantly understated the rate at which real estate prices were actually rising.”

When the Fed (aka government) deliberately uses misleading lower figures from the index, they’re doing so for specific political reasons like stimulating the economy during downturns and keeping their own debt obligations serviceable. The CPI index is used as a “propaganda apparatus,” according to Peter:

Not only are they largely bogus statistics constructed in a way that understates price increases, but the government represents them as official measures of inflation, ignoring inflation not reflected in consumer or producer prices. By focusing attention on a red herring, the government is deliberately diverting attention away from the real rate of inflation and its role in creating it.”

Typically, in a healthy economy, inflation and interest rates tend to rise and fall together. When inflation is low, the Fed lowers interest rates making the cost of borrowing cheaper. When inflation is high, it raises rates to rein in spending. By selectively choosing data that reflects “low inflation,” policy makers can justify printing money by keeping rates low. Thus, inflation has been artificially created for political ends.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.