There are two government stats that are presented to us to measure inflation, and both need to be taken with a grain of salt:
1) Core inflation: It is a measure of inflation which excludes certain items that face volatile price movements, notably food and energy. The preferred measure by the Federal Reserve of core inflation in the United States is the core Personal consumption expenditures price index (PCE), based on chained dollars (previously, the Federal Reserve had used the US Consumer Price Index (CPI) as its preferred measure of inflation). That being said, most people look to the CPI as the better measure of inflation, because energy and food are important considerations.
2) The Consumer Price Index (CPI): It is defined by the United States Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The annual percentage change in a CPI is used as a measure of inflation. Ideally, a CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
Even if you accept the official CPI numbers, you should be looking the cumulative effect of each year’s CPI percentage instead of narrowing in on the percentage change for each year.
The CPI official story for the last 10 years is that we reached our inflationary high of 5% around 2008, that there was a huge drop in 2009, and that we are now in a modest 1% inflation period. It is like we can breathe more free and easy, for the monster of inflation has left the room.
However, if you zoom out to the larger context, the cumulative CPI, you can see an entirely different picture of inflation:
From this cumulative CPI chart since 1950, you can see consumer prices have risen from 20 in 1950 to 220 in 2010 (or a 1000% increase). Sure, the low CPI of 2009 and 2010 represents a small stall in the upward inflationary momentum, but in the big picture, inflationary momentum is still intact and exponentially rising.
If you zoom out to an even larger picture of CPI, from 1800 to 2005, you can see the CPI has been rising steady upwards since 1913, the birth of the Federal Reserve, and that it has exploded upwards since 1971, when gold was removed from the momentary system.
You can see from the above chart that the Federal Reserve and its Monetary policies are heavily involved with inflation. That is because inflation is ultimately an increase in money supply rather than rising prices, which is one of the effects of inflation. The policies of the US government and Federal reserve are inflationary. The effects of inflation can always be seen in the long run in consumer prices, i.e., the dollar looses value as a function of monetary inflation, and thus prices tend to rise.
Here is another chart that shows the decline of purchasing power tied in with the dates of broad Federal Reserve policy:
You can see from this chart that from 1933, when Roosevelt makes gold illegal for U.S citizens to hold, the Federal Reserve was free to expand the money supply as it saw fit, and this started the long decline of the Purchasing power of the USD, falling 94% from 1933 to 2009. From 1944 to 1971, there was the Bretton Woods “gold standard, ” but it was an illusionary gold standard because the Fed could expand the money supply as it saw fit, with the result that in that period the dollar lost 56% of its value. Between 1971, the year that marked the end of Bretton Woods and the start of modern day fiat paper regime, till 2009, the Fed has been expanding the money supply each year, and thus in that 28 year period (1971 to 2009), the US dollar lost 81% of its purchasing power.
So what has happened recently, for 2009 and 2010?
Interestingly enough, the monetary base has more than doubled in 2009:
You can see from the above chart that the monetary base rocketed upwards from $850 billion in 2008 to 1.8 billion in 2010.
If we zoom out to 1960 till now, you can see the distortion even more clearly:
As I have indicated before, inflation is ultimately an increase in money supply, and rising prices as seen by CPI is one of the effects of inflation. Yet it seems that in 2009, the Fed has been printing money faster than ever before.
With a doubling of money supply in 2009, why was there not a sky-rocketing annual CPI 2009 and 2010 instead of the negative CPI for 2009 and anemic 1.17% for 2010 that was reported to us?
Well, one reason is there is currently a delay in the hyper-inflation that is destined to surface in the CPI index: though the Fed has dramatically increased the monetary base, the banks are not as yet lending out, and people are not as yet borrowing, as fast as the Fed wants them to. Moreover, the US economy has significantly contracted.
The other reason is perhaps more insidious: that the CPI numbers have been deliberately scewed since their alternations in the early 1980s and again in the 1990s, and that they grossly misrepresent real inflation that is taking place.
Shadow inflation numbers suggest 8.53% inflation for 2010
Shadowstats.com, operated by respected U.S. economist John Williams, publishes an alternative inflation number based on the formula used prior to the alterations. Williams performs his calculations using the exact same methodology used by the U.S. government a generation ago, before the U.S. government intentionally incorporated various statistical lies into this measurement.
As you can see from this chart (click on the chart to see a larger version), those changes had the impact of making inflation appear much lower than it would have been had the changes not been made.
According to the above chart, inflation is running at 8.50% rather than the 1.17% that the BLS is publishing. Talk about a divergence. It is a spread more than 7%!
Two immediate victims of the spread are retirees and government employees: both are getting a Cost of Living Adjustment (COLA) for 1.17% when the actual inflation rate is 8.5%.
More generally, we the people are affected by the lies told about inflation. We are living in an alternative reality of high inflation numbers (4% yearly inflation average, as seen in the CPI), which is very uncomfortable when you compound these numbers over time.
But that reality is so much more comfortable than the real “shadow”: 4% was the golden time of 1990, but since then inflation has been on a steady climb upwards, peaking at 12%, but remaining strongly bullish at 8.5% today. When you factor in the cumulative effect of these high rates, we are currently living in super high (if not hyper) inflationary times. We are being eaten alive. Everything we earn and save is blowing up in smoke in just a few years, and nothing we can invest in can produce yields high enough to offset the beast (except, perhaps, certain commodities like gold and silver).
If you want to see where prices are heading, watch the commodity futures markets. And if you’re lazy and want to really boil that down – just watch the price of gold and silver. Gold and silver are hitting record highs.
For the last 76 years, since 1933, the Federal Reserve has been free of any real gold standard, and thus free to manipulate interest rates and expand the money supply through the fiat banking system and shadowy printing presses. Bretton Woods was just an illusion of a gold standard, without any real restrictions on the Fed, and thus Nixon was forced to abandon the illusion when France wanted gold redemption on dollars in 1971. Since 1971 the fiat banking system could continue unchecked, and the dollar has suffered a long decline, losing 81% of its value up to 2009.
The doubling of the monetary base in 2009 to $1.8 trillion represents an intense inflationary pressure that will continue to devalue the US dollar internally and internationally.
History will show that 2009 marks a turn for the worst for the US dollar. We are already in a steep decline and the decline will get steeper still. From 2011 to 2015, the dollar can easily lose another 30-70% of its value.
Official CPI numbers are making inflation look under control at 1.17%, when the reality of “shadow” inflation numbers suggest that we are already suffering through 8.5% inflation rate, which is quite grim when you see it in a cumulative perspective. Inflation is going to get much worse before it gets any better. The really massive monetary expansion of the past 2-3 years is being held at bay by the lack of lending and the debt pay down that’s been happening, along with the the collapse in both housing and stock prices.
The root problems in the US economy is excess levels of debt. Since monetary inflation is tied in lock-step to debt levels, an inflationary policy response (as we have seen) can only produce unsustainable economic distortions. Remember, managed deflation was rejected as a policy option from the start, thus indicating that the Fed and Government are willfully blind (or “idiotic”) as to excessive debt being the root cause of the problem. At this point it is too late to change policy, to stop the inflationary policy response, and thus there is no fundamental way to stop the slide of the US dollar.