Take a look at how inflation is calculated. There are two measures:
- Core inflation is a measure of inflation which excludes certain items that face volatile price movements. This is the one that the fed reports
- Headline inflation refers to the rate of change in the consumer price index (CPI), a measure of the average price of a standard "basket" of goods and services consumed by a typical family
So the difference between the two is that "Core inflation" excludes food and energy - which are supposedly highly volatile, so including them would mask the underlying trend of what is going on with prices. Now my understanding of the reason these are excluded is that the change in price oscillates +/- zero - so over time the net effect should be close to nil.
However... in reality, since 2000, these change in these components has almost always been positive. Check out the chart below, which shows the impact of these "volatile" goods that has been netted out of the 2-3 percent inflation number we all take as gospel.
Eyeballing this, it looks like, on average, the "headline" inflation rate has been approximately 0.5% per month higher than core since 2000. I'd call that a trend - how do we justify netting it out? Overall, that's six percent a year people - meaning true inflation has been running at 8-9% per year! It makes inflation look like the seventies (when, by the way - they still used "headline" inflation. Those bad old days are why they changed the calculation)
And of course, this doesn't include the hokey housing calculation that is included in the core number. It's based on an "imputed rent" for owned housing. But of course, we all know that the cost of ownership has been rising much more than rents (contrary to the persistent rantings of a few on this blog). And since 69% of households now "own" instead of renting - much of the country is feeling this cost in their pocket book as well. Given that we had several years of 5-10% average housing price increases - I'd guess that 30-40% of "owners" are probably feeling even more hidden inflation there.
The big question is - why aren't we feeling this in terms of interest rates - like back in the seventies and early eighties? After all, aren't interest rates made up of the "real" rate + inflation? I think the answer to that question is dollar deflation. The greenback is sliding against foreign currencies and the fed has the printing presses working overtime. The net impact is that there is less demand for more dollars - so the dollar drops (except for against the Yuan and Yen, which the Chinese and Japanese have effectively pegged because both CBs are willing to stomach sub-market interest rates in order to keep their export economies going). We happily binge on artificially low-priced chinese cr@p and Japanese electronics - while housing, energy, and food shoot through the roof. All the while we are hearing that "inflation is under control" and leveraging ourselves up to invest in inflated housing.
Who knows, maybe in a few years hyperinflation makes all of us saving our money look like fools and the debtors look like geniuses. If that happens, there are probably worse problems. More likely the fed has to put the brakes on money supply in order to support the dollar, and we are back to 1979.
I know many of the regulars on this board know all this - but since I'm just kind of putting it all together, I thought I'd share my thought process.