Three Reasons the Fed is Lying About Inflation
Why would the US federal government purposely underreport or flat out lie about the current rate of US inflation? Below are three specific reasons given during a recent interview of Robert Zuccaro, CFA, Founder & CIO of Golden Eagle Strategies.
He actually cautioned about inflation last February in an earlier interview, and published his findings the following July, accurately reporting that transitory inflation was wishful thinking! He is pessimistic on inflation and explains why the Department of Labor has continuously under reported it for the past year.
Four Examples of Inflation Being Higher Than What the Feds Are Reporting.
- The latest report shows inflation is up on an annual 12-month basis of 8.3%. Over last year, the reported rate increase is 5.1%. The apartment list, national survey of brands over the past 12 months, show an increase of 17%. And realtor.com has inflation going up 16.8%.
So rent is a very important component of the CPI, it constitutes 32% of the overall index.
- In terms of energy, the government claims that energy prices are up 23%. However, natural gas has doubled in price this year, gasoline is up 55% over the past 12 months, and home heating oil is up 70%. So, there’s no way in a world that we get to the numbers that are being reported.
- In addition, food inflation is reported to be up 9.1%. The major food supplier Tyson Foods reported that it has raised prices on pork 38% over the past year and beef, 33%. The United Nations reports food inflation worldwide over the past 12 months is running at 33%.
- So inflation is a lot worse than we’re being led to believe. And we are now in the worst environment in history for bond investors. As of this morning, 10-year bonds were yielding 2.8%.
The government reports inflation has been running at 8.3%. We think it’s closer to 14 – 15%, which means there is a loss in real terms of at least 10% taking place. In the current environment Bond investors are being eaten alive.
True Current Inflation Rate?
Mr. Zuccaro estimates actual current inflation to be approximately 14 to 15%. Consumers know this just watching food prices increase. They go to the market once or twice a week, and they see prices going up before their eyes.
From a personal experience, Mr. Zuccaro relates that he recently purchased a case of water for $7.49. The exact same case of water, one month prior, only cost $5.78. So in only one month, the price of that commodity/product increased more than 25%!
Inflation’s Silver Lining?
Yes, for many stockholders in large companies there is a silver lining. During the 1970s there was a high inflation period. In that environment, companies raise prices to keep up with inflation. In this environment, something entirely different is taking place.
Not only are companies raising prices to protect margins, but they are also raising prices to expand margins.
For example, in the first quarter early estimates for corporate profits for the S&P 500, specifically earnings per share, were expected to expand by 4.7%. But with 95% of S&P companies reporting, the first quarter growth right now stands at 11.1%.
Many businesses have done a good job in dealing with the adversity of inflation in dealing with higher fuel and labor costs.
The American businessman and businesswoman can adjust to all kinds of economic conditions, high inflation, low inflation, change in soybean prices, oil prices, strong dollar, weak dollar and so forth.
And they are doing this today and doing a good job of it.
Why Would the Fed Lie? Three Reasons.
- In Mr. Zucarro’s opinion, the CPI has been purposely under reported, because if the true rate of inflation was reported, the government would have to pay out more cost-of-living allowances. As of September 30, the government calculated the 12-month inflation at 5.9%; it was probably running double that.
Social Security recipients are pegged to the increase of the CPI in their payouts. If the government had to pay the actual rate of inflation, it means that they would have had to fork over $75 million to millions of retirees.
- In addition, higher Social Security payments, which exceed $1 trillion. There are at least five other programs that are geared to COLA, better veteran benefits, the SNAP program, which we used to refer to as food stamps, and others. They are all indexed to inflation.
If the government reported the true rate of inflation, the federal deficit would be a lot greater than it is.
- Finally, the national deficit. We’ve been running a multi trillion-dollar deficit for the first time in history, and higher inflation would only aggravate the egregious problem we have. At the end of the Bush administration in 2000, the national debt was $5 trillion. It took us 225 years to amass a national debt of $5 trillion.
Today, the national debt exceeds $30 trillion.
In 21 short years, we have created additional national debt of $25 trillion. If at some point down the road interest rates go up, the federal government is going to have great difficulty in financing their debt. Regardless of difficulty or cost, they will finance the debt because they have no choice.
They must protect the obligations to credit holders. Unfortunately, that means paying more interest to service the debt, resulting in less money for social programs, Social Security, Medicaid, Medicare and all the other government programs some individuals rely on to survive.
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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
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