Monday, June 18, 2007

More on Arthur Burns' "Inflation" Numbers

Most of us who live in the America NOT occupied by John Edwards vaguely understand that the BLS' "inflation" statistics don't seem to comport with reality.

And Big Picture lends more credence to that nagging feeling, this time discussing the BLS' "rents" flaws. BP quotes Bill King of Ramsey Securities about the silliness which passes as "statistics" from BLS.

Bill has been dissecting the BLS data longer than most of us have been trading. One of Bill's biggest complaints about the BLS methodology is how they can make "Up" look like "Down."

Consider what happens when the BLS looks at rent/OER: "They supposedly net out utility payments. So if your rent payment stays constant but utility bills go up, that yields a lower net implied rent. In other words, utility prices going up caused rental prices and CPI to go down.”

The theory has some facial cachet--after all, IF the landlord supplies utilities and IF the utility costs rise AND rent does not, the effect is a reduction in rent.

But the BLS method is magnified by two other problems.

1) The 'OER' statistic counts for 40% of cost; and
2) 75% of American households are NOT 'rented,' they are owner-occupied.

"How can any self-respecting economist proclaim that inflation remains contained because less than 26% of the US (% that rent) experience a minor increases in rent? The scheme originated by Fed CEO Art Burns in the ‘70s to propagandize ‘Ex-food & energy’ as the true inflation measure to divert public attention from escalating inflation, abetted by Street shills and the media, has worked spectacularly."

Whereupon Big Picture comments:

Here's the reality about OER: If we wanted to know what inflation really is, wouldn't we be better off measuring the costs that actual homeowners -- that 75% of Americans who own where they live -- actually encounter? You know, things like repairs, property taxes, utilities, interest rates, building materials, etc.?

Of course, CPI has been massaged (to the political benefit of Washington DC) by a lot of people--for example, Bill Clinton re-arranged the stats specifically to reduce Social Security payment increases during his time.

As we have commented before, if you want to measure inflation, it's useful to look at commodity prices measured in USD as a "reality check" against Gummint numbers.

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