Talk about money: Inflation is a fact in today’s economy
by Mark Rosenberg
Mar 10, 2011 | 1856 views | 0 0 comments | 7 7 recommendations | email to a friend | print
The leader of the U.S. banking system, Fed Chairman Ben Bernanke, tells us that inflation isn’t a problem – that Americans’ cost of living is rising by less than 2 percent a year. I don’t believe it.

My cost of living is rising by more than 2 percent a year, especially at the gas pump and on the grocery aisle. From 2000 to 2010, according to The Burning Platform Web site, the price of a gallon of gas soared 118 percent, a dozen eggs rose 93 percent and a 10-pound bag of potatoes went up 67 percent.

This inflation is being caused by two factors:

- 80 percent of the world’s population lives in emerging economies like China and India, where after decades of poverty people are aspiring to middle class lifestyles. As they buy cars and refrigerators and better quality food, they are driving up global prices.

- Bernanke’s Fed and other central banks are taking extreme measures to flood our financial system with easy money to help the U.S. and other economies avoid another financial crisis. All of that money drives up inflation.

An expert I follow closely is Swiss-born economist Marc Faber, who now lives in Asia. He says inflation in the U.S. is running between 5 and 10 percent. He asked his large subscriber base to e-mail him if they thought their cost of living was rising by less than 5 percent – and he didn’t receive a single e-mail.

If inflation is higher than 5 percent, why does Bernanke say it’s less than 2 percent?

- Partly because he wants to keep his job. If he acknowledged that inflation was higher than 5 percent, the Fed would have to raise interest rates. That would kill the economic recovery and anger the politicians in Washington who gave him the job.

- Partly because Bernanke is a student of the Great Depression of the 1930s, when tight monetary policies worsened the nation’s financial woes. He doesn’t want to repeat those mistakes.

- And partly because if inflation is high, cost-of-living increases for many government programs, including Social Security, would go up rapidly, worsening the federal deficit.

How can Bernanke get away with understating inflation? Is he just lying?

Not exactly. Inflation is calculated much differently today than it was in the 1970s, when Americans’ cost of living was rising by double-digits. Today, when Bernanke says inflation is less than 2 percent, he is talking about “core” inflation, which excludes costs of energy and food because they are volatile.

Yes, those costs are volatile, But, unless you are person who doesn’t drive or eat, the costs of energy and food must be included in your cost of living.

Even excluding energy and food, costs are rising by more than 2 percent a year. Look at the costs of health insurance or education or virtually any government service.

Another way inflation is understated is through the “hedonic adjustments” that were added to the official inflation calculation in 1996. Let’s say last year’s model of a computer cost $500. This year’s model also costs $500 but has added features (which most of us won’t use). Under the hedonic adjustment formula, the price of that computer dropped, and that supposedly lowers our cost of living.

The 1970s’ bout of inflation was finally tamed in 1981 when then-Fed Chairman Paul Volcker raised interest rates above 20 percent. This time, I don’t think Bernanke will do that because U.S. debt levels are much higher than in 1981, and high interest rates could plunge us into depression. I think we’ll be seeing higher inflation for the foreseeable future.

Next month I’ll write about considerations for investing in a high-inflation world.

Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or mrosenberg@fwg.com.
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