Modern Money Operations

We discuss  modern monetary policy solutions most feared by the Plutocracy.

Social Security COLA Cut: A Benefit Cut Affecting Everyone 

 

Some politicians in Washington are preparing to cut your Social Security COLA for good – even after two years without a cost of living adjustment. This COLA cut has an obscure name – the chained CPI – but it would do real damage by changing the formula used to calculate the COLA. 


The important thing to know is that this change would cut the benefits of all beneficiaries, including current retirees, disabled workers, and others – even after politicians promised repeatedly that any changes to Social Security would not affect current beneficiaries. The COLA cut is a real threat to the financial security of every American who does currently or will rely on Social Security. 


Is The Government Lying To Us About Inflation? Yes!


By Gary Halbert


March 20, 2013


The Labor Department reported that the Consumer Price Index (CPI) jumped an unexpected 0.7% in February. This was above pre-report estimates and was the highest monthly reading since 2009. We should be very concerned, right? Let’s take a closer look.


Upon further examination, we find that if we subtract food and energy from the CPI, the cost index rose only 0.2% last month. It turns out that most of the big increase in the CPI last month was due to the sharp rise in gasoline prices. The experts tell us that due to the volatile nature of oil and gasoline prices, we shouldn’t include energy in the CPI. Ditto for food prices which can also be quite volatile.


I have always argued to the contrary, that food and energy prices do indeed need to be considered in the CPI. Think pocketbook: if gas prices rise $1.00 per gallon, and you have to fill up once a week, and it takes 20 gallons to fill up your car, then you have $20 less to spend on something else that week, or $80 less per month. Not good for the economy.


Some others disagree with me, arguing that you spend the same amount each month, and that if you spend more on gas, then you spend less on other things, but the overall economy gets the same amount of money from you one way or the other. Both points are valid.


But if you are trying to measure the true inflation rate, I maintain that food and energy should be included. Apparently the government agrees with me since they continue to report the headline Index including food and energy, and secondarily report what the Index was without food and energy.

 

The real question is whether or not the Consumer Price Index is really indicative of the actual inflation rate. I will argue that it is not a very good indicator with, or without, food and energy. At the very least, the CPI is controversial.


Why the CPI is So Controversial


The Consumer Price Index (CPI) is produced by the US Department of Labor’s Bureau of Labor Statistics (BLS). It is the most widely watched and used measure of the US inflation rate. For years, there has been controversy about whether the CPI overstates or understates inflation, how it is measured and whether it is an appropriate proxy for inflation.


Originally, the CPI was determined by comparing price changes in a fixed basket of goods and services. Determined as such, the CPI was a cost of goods index (COGI). Over time, however, the US Congress embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. Consequently, the CPI has been moving toward a cost of living index (COLI).


Over the years, the methodology used to calculate the CPI has also undergone numerous revisions. According to the BLS, the changes removed “biases” that caused the CPI to overstate the inflation rate. The new methodology takes into account changes in the quality of goods and “substitution.” Substitution is the change in purchases by consumers in response to price changes, and this alters the relative weighting of the goods in the basket. The overall result tends to be a lower CPI.


Critics view the methodological changes and the switch from a COGI to a COLI focus as a purposeful manipulation that allows the government to report a lower CPI. Most critics prefer that the CPI be calculated using the original methodology based on a basket of goods with fixed quantities and qualities. Doing so can result in a significantly higher inflation reading.


On Friday, the BLS reported that the CPI rose only 2.0% over the last 12 months. Economists using different methodologies (including the original methodologies) estimate that the real US inflation rate over that same period was anywhere between 5% and 8%. That’s a huge difference!


If Inflation is 2%, Why Are Prices Up So Much?


I read a good article last week from TIME Business & Money columnist Michael Sivy. He pointed out that his printer ran out of ink recently, and he was “shocked” to find that the same printer cartridge had gone up in price by 25% in less than a year.


While the government’s CPI has averaged only 2% since the end of the Great Recession in early 2009, many basic commodities have soared since then. Gold was $930 an ounce when the recession ended, and today it’s just over $1,600. That’s an increase of 70% in four years, or an annualized rate of over 14%.


Of course, that’s just one commodity. How about a broader measure? The Reuters CRB Commodity Index, which tracks the prices of energy, coffee, cocoa, copper, cotton, etc. is up 38% over four years, or 8.6% at a compound annual rate.


The price of gasoline has gone up from $2.60 a gallon when the recession ended to around  $3.70 today nationally. That’s a 41% increase in four years, or an annualized rate of 9%. Taxes have gone up almost as much. Federal, state and local income taxes have risen 35% over four years, an annualized rate of 7.8%.


Then there’s the so-called “Big Mac Index” that was popularized by The Economist some years ago. McDonald’s hamburgers are available in many countries and their prices reflect the cost of food, fuel and basic labor. The price of a Big Mac, therefore, can be yet another indicator of inflation in a particular country. Since the recession ended, the cost of a Big Mac in the US has risen from an average of $3.57 to $4.37, or 5.2% a year.


As the main grocery shopper (and cook) in our family, I am reminded several times a week how food prices continue to go higher. Take a look at this chart from the St Louis Fed.


And while we’re on the subject of food, have you noticed how many manufacturers reduce the size of the containers and/or packages so as to reduce the enclosed amount – but still charge the same price as before? I know I’m not the only one!


Severe Drought Led to Higher Food Prices


Forecasters lay much of the blame for higher food prices on the drought that swept through much of the US last year, and is continuing this year. Last year’s severe weather put nearly 80% of the continental United States in drought conditions – the worst in 50 years. Particularly hard hit areas include the Midwest states of Illinois, Iowa, Minnesota, Nebraska, Kansas, as well as Oklahoma, Texas, Arkansas and many parts of Colorado and California.


The drought damaged key crops like corn, wheat and soybeans while driving up commodity prices and forcing farmers to scramble to find feed for livestock. Farmers and ranchers have had to cut back on the number of livestock and poultry in order to limit their own costs, which created a shortage of beef, chicken and pork.


Although conditions have improved in some areas, roughly 61% of the country still suffers from drought, which is remains at its worst levels in more than a decade, according to the US Drought Monitor.


On a personal note, we are fortunate to live on beautiful Lake Travis, just outside Austin. Lake Travis is a Corps of Engineers man-made lake, and it supplies water for hundreds of thousands of area residents and countless businesses in Central Texas. As such, the lake level varies significantly, depending on the amount of rainfall we receive each year.


The drought in Central Texas is in its third year. Lake Travis, which is 65 miles long and over 200 feet deep in places, is now only 40% full (or 60% empty). As the water level falls, we have to push our dock out further and further to keep it in the water. A trip down to the dock is over 125 steps (one way)!


So How is the CPI at Only 2%? It’s Not.


As we’ve seen above, the prices of many things that consumers buy on a regular basis have risen much faster than the CPI. So how can the CPI be at only 2%? And how could it have averaged just 2% since the end of the Great Recession four years ago?


Some argue that it’s because wages are down, and with the economy so weak, workers can’t demand higher pay to make up for their increased cost of living. Indeed, that’s one of the factors causing the decline in real after-tax household income.


Household Income IndexReal median annual household income in January of this year was $51,584 – or 92.7% of the level in January 2000. Incomes inched up early in 2012 but have been treading water since May, according to the Household Income Index. While household income ticked up slightly in the past year, it remains well below the $54,008 level seen at the start of the recovery roughly four years ago.


These are all factors influencing the economic recovery (or lack thereof) and thus the inflation rate. But they don’t explain why the headline Consumer Price Index has hovered around 2% for the last four years, or why other inflation measurements are in the 5%-8% range. How can this be?


 

Quite simply because it’s a government report that’s been frequently manipulated over the last 35 years. Whether by design (my bet) or coincidence, these revisions have served to reduce the official inflation rate.


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