Can you trust the inflation numbers released today?
The Federal Reserve has dramatically grown the monetary base but still says it doesn’t see any near term price inflation. But the way the Bureau of labour Statistics counts inflation may be providing deceptively low numbers.
Economist Bob Murphy talked to Stephen Reed at the BLS to ask about how it was counting the prices of cars bought under the cash for clunker program. The answer Is surprising. Apparently, instead of counting the price as the total amount received by the dealer—which is the amount paid by the customer plus the government subsidy—the BLS is completely discounting the subsidy. This means that it makes it seem as if prices on cars were falling.
Now the cash for clunker program could have an indirect effect, because dealers will presumably be willing to sell a given car at a lower price, if they are getting a check from the government for qualified transactions. But if you pay, say, $15,000 for a car, and the dealer gets a $4,500 check from the government because of your clunker trade-in, I understood Reed to say that the BLS counts that car’s price as $15,000.
Now, you can see why someone might want to do this. If the purpose of the CPI is merely to show us what consumers are paying for things, this is the right way to go. But we use CPI for a lot more than that, and the Fed is watching it for signs about the appropriateness of our zero-interest rate policy. And that makes this kind of maths dangerous. Actual higher prices for things won’t get reflected in the CPI so long as the amount of the increase is paid by the government. This allows the government to put more money into the economy while claiming that inflation is still low.
So does this mean inflation is actually worse than the numbers read? We’re not sure how to measure the effect of this voodoo inflation maths. Inflation may well be “subdued” thanks to the ailing economy. But it’s very dangerous to have the government providing the market with an inaccurate signal about prices.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.