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Thursday, May 15, 2008

Govt on Inflation: Who you going to believe, me or your lying eyes?

The Labor Department gave us the latest reading on CPI and it was a little tamer than market expectations. Analysts were looking it to come in at 0.3% and it was reported to be 0.2%. Oh, hurray! What's more, core inflation (excluding food and energy was pegged at 0.1%.

Here are the year over year changes.

It is obvious that people are cutting back where they can (computers, clothes and furniture) to pay for rising prices on necessities -- food, fuel and health care.

Does the Labor Department cook the books? In a word, yes. The Labor Deparment says that gasoline prices dropped 2%. Now, our "lying eyes" say that just ain't so. But the government says that seasonally, gasoline prices tend to rise by 8% in April as driving season approaches. This year they only rose 6%, so the government does a stupid math trick and says gasoline prices are DOWN 2%.

Is it rational to say prices are 2% lower when prices in fact are at higher level? No, it is a farce.

The real risk here isn't inflation (okay it's a risk, but one we're used to). The real danger is that the government statistics will no longer have the faith of investors and consumers. If we end up following the lead of the Soviet Union, this drama will not play out well.

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