The Elephant in the Room- When It Comes To Inflation, You Can’t Measure What You Refuse To Look At

There are a few things that the Fed, Wall Street, the economics priesthood, and the captured financial media consider to be inflation that are not inflation in the original sense of the word.

The two most popular measures of “not inflation” are the CPI and PCE, which measure only the rise in a certain specific set of consumer prices. The Fed and the media loves those measures. Unfortunately they don’t meet the old tried and true definition of inflation. That is an increase in the “general level of prices,” to which monetarists would add “related to an increase in the volume of money.” Milton Friedman said that inflation is “a persistent, substantial rise in the general level of prices related to an increase in the volume of money.” He famously added that, “Inflation is always and everywhere a monetary phenomenon.”

Nowhere does it say that inflation is a rise in the price level of a narrowly defined and arbitrarily weighted index of a specific set of consumer goods and services, which is what the CPI measures. That’s hardly the general level of prices. The Fed’s supposed favorite not-inflation measure is an even narrower and odder assortment of hand picked consumer prices. The oddest thing about the PCE is that it always and forever is lower than CPI. So the Fed sets a “not-inflation” target. It then ensures that the target is almost impossible to meet by focusing on a measure that does not come anywhere close to representing the “general level of prices.”

If we were to compare the total value of consumer goods in the US at a point in time to the total value of assets, it would become instantly clear just how much inflation the Fed, Wall Street, the media and the voodoo priests of economics deliberately choose to ignore. For example, the Census Bureau tells us that US retail inventory value is around $600 billion. That’s a big number. Retail goods are included in their measures of inflation, obviously.

Yesterday the NAR reported the prices of houses sold in the US in January. Housing data research firm Zillow said that the total value of housing in the US is just shy of $30 trillion. Hmmm. Which is bigger? $600 billion or $30 trillion. If my devisory powers are still what they were in 4th grade, I’d say that houses were 60 times more valuable than the total value of retail goods sold in January. Houses are not included in the widely followed “not inflation” measures, CPI and PCE.

Retail goods do not include consumer services. The BEA has a stat on the total value of personal consumption expenditures, which includes services. Personal consumption expenditures total about $1 trillion in monthly sales. Since there’s no inventory of services per se, we can’t put a value on the inventory of services. But the value of retail inventories is around the same as a month worth of sales, according to the Census Bureau data on retail sales and inventories. So let’s say that the total personal consumption expenditures in a month is roughly the same as the value of the inventory of retail goods and services at a point in time. That would be about $1 trillion. That’s 30 times less than the value of housing.

The Fed’s favorite inflation measure is the Personal Consumptions Expenditure value index or PCE. So the Fed’s focus is on a measure of “inflation” that covers prices of items that are less than 1/30th of the value of US housing at a point in time.

Not that housing is the only price Fed and economics priesthood ignore. What about the prices of commercial and industrial property? I did some digging for this one and got the impression nobody really knows. Estimates range from $4 trillion to $15 trillion. Let’s split the difference and say $10 trillion (wink, we appraisers like round numbers). So the value of commercial real estate is about 10 times, give or take, the value of personal consumption goods and services at any give time.

What about ag land? There are roughly 900 billion acres of farmland in the US. According to the FDA, farmland value averages $3,000 per acre. I don’t know what the number for 2,700 trillion is. 2.7 gazillion? Whatever, it’s 2,700 times more than the value of what the PCE measures.

And we’re not even considering the values of mined and extracted goods like oil, gas, coal, and minerals. The value of known oil and gas reserves is about $2 trillion.

Then there are financial assets. The total market value of privately held US Federal debt is about $12 trillion, or 12 times the size of what the Fed considers to be inflation. According to SIFMA, the total value of the rest of the fixed income securities market not including Treasurys is about $30 trillion, or 30 times the size of what the Fed measures.

What about equities? Marketwatch says $20 trillion, or 20 times what the Fed measures.

You get where I’m going here. The PCE and CPI, which economists and the Fed would have you believe measure inflation, account for about $1 trillion of the the value of all the “stuff” in the US that has a market price. Adding together various asset classes we get $2,800 trillion more or less. So when the Fed counts inflation it counts 1/2800 or 0.04% of everything that has a price, that I can think of off the top of my head.

Zero point zero three. Hardly a measure of the general level of prices!

The gall of them! Who do they think they are? And who do they think they’re kidding? It’s bad enough that the government’s measures don’t even pretend to measure inflation. Nowhere in the BLS CPI release is the word “inflation” ever used. What the government measures is not a rise in the “general level of prices.” That would include assets, which make up 2,799/2,800 of the value of things with prices.

Friedman was right. Inflation is a monetary phenomenon. When too much money is printed, the general level of prices rises. There are no exceptions. When we say that there’s been little or no inflation, we’re looking at an infinitesimal slice of the general level of prices. It’s too small a slice to have any meaning whatsoever. It’s not even a rounding error.

But there has been massive inflation. It is seen in virtually every kind of asset that exists, and in which virtually all of the world’s market value is represented. The establishment pretension that CPI and PCE represent inflation is garbage. They are not… even… close.

In an upcoming post we’ll look at the rapid inflation of the things that the Fed and economists don’t count versus the infinitesimal fraction of the general price level that they do count.

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