Is Rogers right?

January 20, 2011 05:05 PM

Last week we noted here how Jim Rogers pointed out that inflation was a serious problem in the here and now and not some distant problem on the horizon.

Many analysts believe that all the fiscal stimulus over the past few years along with the printing of money, which is the essence of the Fed’s quantitative easing (I and II) will lead to  huge inflationary pressures. But most people expect that in the future, accepting the Fed’s analysis that current inflation is mild or non-existent and are hoping the Fed will rein things in before the inevitable inflation hits in earnest.

 But is it mild? It got us thinking as Rogers made sense and, anecdotally, I have certainly seen the prices of many items rising. So we went to John Williams’ Web site to see what his numbers suggested. Williams has been compiling economic reports with their original methodology — the Feds have altered how they compile things like inflation, unemployment and GDP for decades to produce happier figures — for many years. Inflation as reported by the Consumer Price Index, has been perhaps the most manipulated and most significantly so as it also affects the end result of GDP as well as being used to calculate cost of living increases for government workers and social security payments. Changes in the methodology of calculating CPI have dramatically changed the end result.

Williams numbers (see chart below)  indicates inflation was a robust 8.92% in 2010 not comfortably below the official 2%  target and 7.03% in 2009. You can see going back to 1982, before changes to the methodology, the two numbers in sync. If we measured inflation today as we did back then, this is what the government would have reported and the Fed would not say there is no inflation, they certainly would not be actively trying to increase it. We would be talking about stagflation and probably should be.


The government changed it’s methodology twice, once in the early 1980s and again in the mid-1990s. They also changed the way they measured the cost of  housing, which accounts for a great deal of the discrepancy. They measure housing not by the rising value of a home but by an estimated price of what someone could rent their home. Not sure why. The other changes involved replacement cost and hedonics. Williams doesn't see either of the changes as justified.

 And this is not enough for some as the Fed likes to extract food and energy in its reports to further mask the real number. But if inflation has in fact been extremely high instead of non-existant, where will it be when demand returns and we see a recovery? And what if we don't? Anyone who remembers the 1970s knows that inflation can rise even when the economy doesn't. In fact we really don't need to look that far back. The recently concluded decade showed basically negative job growth, negative market growth, negative progress on our deficit and a lack of veracity from our leaders.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.