Ben Bernanke, are $5 Wheaties a fluke?
Ben Bernanke and the Fed are trying to figure out if there is any funny business with price increases. But Ben Bernanke should see that the problem lies with Fed monetary policy.
We’ve always wondered why there is so much debate about the rate of inflation. It seems like such a simple thing to track. You go in the store. You buy a box of Wheaties. You write down the price. Next month, you do the same thing. What’s so hard about that?Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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But what if the box is smaller next month? What if the Wheaties are twice as good? What if you can get the same enjoyment from a box of Wheatie-Puffs at half the price?
What’s the real rate of inflation? It depends on how you figure it. The Labor Department shows consumer price inflation at barely over 2%. John Williams’ ShadowStats puts the figure close to 8%.
We say “close to” and “about” because the numbers are never more than approximations; no point in dressing them up with decimals as though they were precise and reliable.
But comes now MIT University with a project to track prices by monitoring them on the worldwide web. Instead of creating a small sample of prices and checking them periodically, the Billion Prices Project looks at a huge number of prices from all over the web, in real time.
The resulting numbers may not be perfect, but there sure are a lot of them. Using such a huge volume of price information, the Billion Prices Project is probably the most reliable measure of consumer price inflation developed so far.
So, you’re probably wondering… Well, what’s the story? How much consumer price inflation is there?
But get this, the rate of consumer price inflation is speeding up. Annualize the data from the last 3 months and you get 7.4%.
We don’t need to tell you, Dear Reader. If that rate sticks, today’s financial world comes unglued.
By the most recent calculation by the Billion Prices Project, US government bond yields measure only half the rate of consumer price inflation. How could that be? Why would investors buy a bond yielding only half the inflation rate? Are they idiots?
Maybe they are betting that the latest inflation numbers are a fluke. Ben Bernanke said so himself.
“I think the increase in inflation will be transitory,” said the man more responsible for the price hikes than any other living human being.
Mr. Bernanke says gasoline at $4 a gallon…and a box of Wheaties at $5…are features of “global supply and demand conditions.”
Fair enough. Perhaps they are. But what about $1,500 gold? The supply of the yellow metal is barely any greater than it was when it was priced at $1,000 an ounce.
You may say that demand has increased by 50%…but that only introduces a string of other questions. Gold has no uses – other than ornament and money. What happened that would increase demand for it so suddenly? And if something has increased the demand for gold, perhaps that same thing might have affected oil and wheat too.
The feds are insincerely trying to figure it out. They’ve been asked by President Obama himself to look into price increases and report any funny business. Of course, the real funny business is right in plain sight. The Fed has tripled its holdings of private and public debt – and added nearly $2 trillion in extra cash to do it. Most of that money is still frozen in the banking system. But what will happen when things heat up…and it’s multiplied, maybe ten times over? Won’t that cause prices to rise even faster?