By Jeffrey A. Tucker
The newest inflation data is out, with a familiar spin. Once again, we are told that it is easing, cooling, settling down, and generally less worrisome. So just relax.
Once again, the reality is different from the spin.
So much common language in economics is metaphorical and therefore imprecise. Even the word inflation itself is drawn from the Latin word inflare, which means to blow into, so one can imagine, for example, bellows on a fire or glass blowing.
Its original English usage embedded both the cause and effect: It was the money supply that was inflated, thereby causing prices to rise. But sometime after World War II, the word came to mean a rise in the general price level only, leaving out the causal element entirely. That led to vast confusion that persists today.
Even monthly reports of the consumer price index are subject to this metaphorical problem. The Bureau of Labor Statistics (BLS) reported that May’s inflation numbers were “unchanged” from the previous month. Drilling down into the index, however, reveals that restaurants, used cars, and shelter prices were all up by 0.4 percent in just one month!
And you know this if you have gone out to eat or shopped for cars in the past month. Trust your experience to tell you the truth!
In any case, the claim of “unchanged,” of course, stuck in the morning report, such that all major media once again claimed that inflation was cooling and easing—two more favorite metaphors with imprecise meaning. Measuring overall price increases year-over-year, they were still roaring ahead at 3.3 percent!
Think of this. During the largest declines in purchasing power in 45 years, the main message of each reporting period has been that our plight is going away. Looking back, it was never true. For those of us who watch carefully, we always knew it was wrong.
We’ll get to why even that number is completely underreported. But first, consider the theory of E.J. Antoni of The Heritage Foundation. He argues that after 2020, the Federal Reserve surreptitiously decided to change its entire inflation target from 2 percent to 3 percent on a continuing basis. This seems to fit all existing facts and further suggests that the BLS’s sanguine attitude toward ruinous declines in purchasing power is actually the new normal.
The latest report put in motion the pinball machine that we’ve come to expect. An “unchanged” inflation rate that is actually intolerably high suggests that the Fed now has a strong basis for cutting rates in the fall leading to the election. This excited a credit-soaked Wall Street. Financials soared on the news, with the Nasdaq up by 1.9 percent and the S&P up by 1.5 percent within two hours!
Let’s take a closer look at the index itself, including the utter fakery of its medical insurance numbers. As Mr. Antoni further and correctly observed, the BLS stated that the prices are down by an incredible 19.1 percent since 2021. The low number drags down the entire index, of course. There is no living soul in the United States who believes that this is true. How can this be?
The problem is traced to the “hedonic” adjustment scheme that the agency has generally adopted. Yes, the costs of insurance premiums have soared, but people are consuming far more than they did during lockdowns, while medical consumption plummeted (in the middle of a pandemic, if you can believe it). If you are paying but not consuming, what happens when you start consuming vastly more from the same premiums? To the BLS, this means a price decline.
The thinking is as follows. If you buy one hamburger this week for $10 and two hamburgers next week for $15, your inflation rate is not up. You simply consumed more and got even more product for your spending. In that case, you could say that your purchasing power has risen.
But wait a moment, you say. You have to pay these large premiums for health insurance regardless of what you consume. That’s exactly correct, which is why the hamburger analogy doesn’t really fit. But according to the adjustment-happy economists at the BLS, that doesn’t matter. They say you are consuming more, so the estimated prices need to reflect that.
Admittedly, this is a very confusing problem that really traces to the crazy-quilt system of U.S. health care with insurance premiums, employer provisions, deductibles, third-party pricing schemes, and outright federal subsidies of everything. The system is so complicated that it simply does not lend itself to any form of price tracking that makes sense. But this much we know: Your health insurance has absolutely not gone down in price over four years.
There are additional problems with the inflation index. It does not calculate rent in any coherent way, it leaves out the cost of interest completely, and it does not account for shrinkflation, additional service fees, and quality declines in light of formula changes. In so many ways, the index is at best approximate but also seriously subject to political manipulation.
Not having an accurate reading of prices means that inflation adjustments become inaccurate, too; for example, on income-tax tables. It affects the calculation of real income—which is dramatically down, far more than reported—and even routine reports of retail sales. That latter number is particularly egregious since retail in real terms is never even reported.
Month after month, we keep hearing about higher retail sales. But a careful look shows that this is due only to the reality that consumers are having to pay ever more for the same thing! How crazy is that? Once you adjust retail sales in real terms, even using underestimated and deeply flawed data, you come out with a different picture.
Again, relying on Mr. Antoni, he said official data report an increase of 13.2 percent over the past three years, but adjusted data show that it is down by 3.6 percent.
To return to the original definition of inflation, the latest data on M2 show that it is trending up yet again, meaning that we can forecast inflation as far as the eye can see.
Put it all together and you gain a picture of dramatic declines in real standards of living together with huge increases in paper profits fueled entirely by debt and funny money. That’s not the basis of robust prosperity in the future or even the present. The common person on the street is very aware of the prevailing decline, while our public culture is strangely barren of truly honest reporting on all of this.
