By Michael Pento

With the evolution of economic theory, more economists (Keynesians excluded) have assented that inflation is an increase in the money supply. With today’s report on the PPI, however, the government would have us believe that the rate of inflation can be expressed by two numbers, overall inflation and the “core rate” which excludes the more volatile food and energy component. What is inflation in actuality? It is the rate at which the currency is being diluted. Higher prices (what the bureau of labor statistics attempts to measure) are the result of that inflation.

When the treasury increases the money supply, newly created money has to end up somewhere. It does not, however, end up evenly distributed across all asset classes. The problem is that the official government statistics distort both realized price increases and inflation. The core rate of inflation, manipulated through substitution and hedonics, is a useless exercise that eliminates two substantial and mandatory parts of consumer spending. Further, it is in the government’s interest to maintain that inflation is quiescent, which saves it millions of dollars per year on debt interest and C.O.L.A. increases.

So what was the actual inflation rate in the U.S. for 2005 and what were the price increases for a basket of consumer staples? I’ve compiled a list of price increases for what the average consumer likely paid for last year. It is by no means perfect nor scientific, but highlights what increased money supply has helped do to so many ordinary expenses. With the exception of apparel prices, all data was collected outside of the B.L.S. official numbers:

1. The average cost of both new and existing homes increased 10%

2. Overall energy cost increase 16.6%. Some component increases: natural gas 17%; heating oil 16%; propane 12%; electricity 7%.

3. Average property tax increase 7%

4. Automobile insurance increase 1.5%

5. Home owner insurance increase 2.5%

6. Commodity price increases 17%. Componnts include: grains, meats, orange juice, coffee, cocoa, sugar, energy and precious metals.

7. Health care insurance increase 9.2%

8. Public and Private college tuition increase 6.5%

9. Cable television increase 6%

10. New automotive price increase 2.5%

11. Apparel price decrease 0.7%

The actual rate of price increase for this basket of consumer staples in 2005 was 7.1%, if evenly weighted (again, which I acknowledge is not appropriate, merely used for illustration’s sake). Not coincidentally, the increase of M3 for 2005 was 8.2%, significantly higher than the official C.P.I. of 3.3% (2.2% for the core rate).

Why are the government’s numbers different? Since price differences vary greatly between asset classes and individuals, the government can skew the numbers by emphasizing goods and services that are suppressed. For example, wages of low skilled employees have different rates of growth than those of higher skilled workers. Workers who don’t have to compete with an influx of immigration will have higher wages than those occupations that have seen an imbalance in the workforce. Likewise, when the B.L.S. over-weights goods that are imported from emerging markets instead of goods that don’t have to compete with foreign suppliers, the inflation data is skewed to the downside.

Unlike what most government bureaucrats would have you believe, inflation is not caused by higher oil prices or an “overheated economy.” Higher oil prices are merely a symptom, and the disease is inflation of the money supply, which causes sustained price increases across a wide spectrum of goods, as we’re seeing today. Without that increased liquidity, the attempt by producers to pass along the increased costs becomes unsustainable. Likewise, an “overheated economy” cannot induce inflation. Without the added stimulus of an increase money supply higher wages will not be supported.

In conclusion, while it is true that prices vary between good and services, our government is selective with what they measure and how they measure it. What is purported to the American consumer as the true inflation rate is far from reflective of the actual price increases seen by the average consumer. With a currency that has no intrinsic value and is printed by fiat, a new “conundrum” has emerged. How can a government with trillions of dollars of debt claim that it can no longer afford to accurately compile statistics for inflation (M3 money supply)? This leaves investors with two choices: one is to continue to purchase fixed interest bearing assets and let your wealth be eroded away. The other is to hedge against a falling U.S. dollar through exposure to precious metals, foreign stocks and other non-dollar investment vehicles.

**Sources for data above: 1. National Association of Realtors 2. Energy Information Administration 3. CNN/Money 4. Insurance Journal 5. Insurance Journal 6. Reuters/Jefferies C.R.B. index 7. National Coalition on Healthcare 8. The College Board’s Report on Trends in College Pricing 2005 9. Wall St. Journal 10. Society of Motor Manufactures and Traders 11. Bureau of Labor Statistics