CPI Analysis

The talking heads are saying that today’s CPI data from the Bureau of Labor Statistics (BLS) shows tame inflation. And at first glance – the headline number in October was up 0.3% compared to September – they seem correct.

But some simple analysis will show you that inflation is there, just invisible to the BLS. And the longer they ignore it, the bigger the bull market will be in gold and silver.

Let’s lift the hood a bit.

The October level was 3.5% higher than the year-earlier period. In fact, unadjusted year-over-year inflation clocked just 2% in August, then 2.8% in September, and now 3.5% in October. If this same rate of acceleration continues, headline unadjusted CPI should be over 4% year-over-year in November. And there’s every indication that CPI will continue to accelerate.

Why? Well, the BLS says consumer energy prices rose just 1.4% in October. Looking at that number, you have to wonder what country they’re talking about. Energy prices went up more than that. How could they be so wrong from what our eyes tell us?

We’ll have to look at yesterday’s PPI Index for a clue. The PPI showed that gasoline prices fell 3.1% in October, and energy prices fell 0.8% overall. That’s simply not based in reality. Instead, it’s a quirk of how the BLS collects its PPI data.

The BLS methodology for measuring PPI is flawed: It measures prices on a single day of the month. BLS samples for energy prices on the Tuesday of the week that contains the 13th of the month. In other words, BLS’ methodology essentially ignores all energy prices paid except for one day of the month.

Energy prices roared higher late in October, but the BLS missed that. These prices are already passed along and should be incorporated into November's CPI.

The BLS page explaining how it measures price changes for motor fuels in the CPI doesn’t explain how many days it incorporates into the sample. However, considering its flawed methodology for the PPI, the CPI collection data methodology should be suspect until proven otherwise.

This lays the groundwork for rising energy prices to arrive in the CPI in one huge rush. Likewise, food prices, which officially only clocked a 0.3% rise in October, could also be in for a sudden surge. I think December could be shocking indeed. Brace for impact – higher prices are on the way.

More importantly, the CPI data was “tame” enough that it clears the way for the Federal Reserve to lower interest rates again. That should send an already wounded US dollar even lower. Since gold, silver and other commodities are priced in dollars, as the dollar goes down, they go higher. And that should supercharge commodities that are already on a rocket ride.

Check out my new gold and energy blog at MoneyAndMarkets.com