For Education and Research Purposes Only!

WHY THE FED HEAD HAS GIVEN UP ON CPI

By JOHN CRUDELE

ALAN Greenspan said a lot yesterday. Most people paid attention to his views that the economy was growing, that he was worried about inflation and that interest rates will be going higher. That's all old news for readers of this column. So I'll move on to an obscure mention that the Federal Reserve chairman made about no longer paying attention to the Consumer Price Index that's put out monthly by the government.

Actually you've read about this here also.

I've been telling readers for years that Greenspan didn't trust the consumer inflation reports being produced by the highly-political Labor Department. And in fact, Greenspan doesn't believe the producer price index (PPI) coming out of that same agency.

And he's been opting instead for private inflation reports that right now are showing that prices have been rising much more quickly than Washington would like to admit. These private reports are also telling the Fed that inflation in the months ahead will be going up even faster.

There are a number of problems ahead, these private surveyors say, not the least of which is that the Japanese economy appears to be improving enough so that there will be a further strain on things like oil prices in coming months.

And the bubble money coming out of the stock market along with the rise in real estate values are making Americans so giddy that they've lost sight of what things should cost.

So, if you are one of the Wall Street gurus or media pundits who've been trying to predict interest rates --- and stock prices -- based on these faulty government numbers, it isn't surprising that you've been wrong.

Which gets me to a case in point.

Washington yesterday reported that prices on the producer level were flat in the month of January. No inflation. Zero. Good news, you'd think.

But take a close look at the numbers.

In the first place, the PPI data were kept low because the government claims that tobacco prices declined 4.2 percent in the month. Does anyone who smokes really believe that figure?

And even if tobacco did drop in price, is that really meaningful for the millions of Americans who don't enjoy cigarettes and who aren't benefiting from this decline?

More importantly, Washington thinks that home heating oil prices rose just 6.2 percent for the month. Again, where do they get these figures? Heating oil prices are reported to be up significantly more than that throughout the country, and certainly in areas like the Northeast.

In fact, all the tabulators of the producer price index had to do was call over to the White House and they'd find out that Bill Clinton is so worried about heating cost increases that he's willing to help pick up the tab.

This morning the government will report consumer prices for last month. The experts are expecting an increase of 0.2 percent. Ignore whatever number comes out. That's what Alan Greenspan will be doing.

From now on the Fed has officially said it will be monitoring something called the "personal consumer expenditures" figure that comes out with the national Gross Domestic Product calculation. That number is a product of the Bureau of Economic Analysis, which is also politically-motivated but which can't possibly screw up as much as Labor has.

The truth is that Greenspan will continue to look at private inflation surveys. And the one he tracks most closely shows inflationary expectations at a 10-year high in the U.S. and Britain, at a seven-year high in Germany and deflation coming to an end in Japan.

And that's sort of the ominous message that came out of the Fed's own Philadelphia survey yesterday, where the price component rose to an astounding 40 on its index from 21.9 the previous month.

Greenspan has already tipped the markets off to the fact that interest rates will be going up again in March. If you want to know what will happen beyond that you should do what the Fed chairman and I are doing -- look beyond Washington's nonsense economic statistics and focus on what is really going on out in the real world.

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-- Farouk Madjurian (fmadjurian@hotmail.com), February 18, 2000

Answers

I said it before and I'll say it again. Once our esteemed Federal government started issuing inflation indexed bonds, they now have a monetary reason to misreport inflation to add to all the other reasons.

-- Chris Tisone (c_tisone@hotmail.com), February 18, 2000.

What are the other inflation indicators? Who does them? Any web sites I can go to to review any of them? Or are they for paid subscribers only? Thanks!

-- Inquiring Minds (want@to.know), February 18, 2000.

There is an indicator of future inflation at the site below. which has been up sharply in recent months. The people in that organization are well known and highly respected. http://www.businesscycle.com/

-- Dave (dannco@hotmail.com), February 18, 2000.

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-- Farouk Madjurian (fmadjurian@hotmail.com), February 18, 2000.

Hmmm..good post Farouk.

-- Hokie (Hokie_@hotmail.com), February 19, 2000.

Don't forget, too, that increases social security are keyed to these CPI numbers. That's one more incentive for the number to be low.

-- rocky (rknolls@no.spam), February 19, 2000.

When fedgov doesn't like the numbers they use the seasonally adjusted lifeline.

Or, simply change the index as in drop WPI goto PPI.

The most difficult inflationary changes to identify are those caused by the sum of tax revenue from localstatefedgov.

We compete against every one of those tax dollars in the open market auction. Want to rent an apartment? You're bidding against welfare subsidies. Bread? Bid against food stamps. Dell computer? Bid against fedgov.

Fight inflation with higher interest rates? Nonsense. Interest rates are the single greatest non productive expense that trickles down into price inflation of every product and service we bid on.

Thanks FM for the eye opening article.

Regards,

-- Tom Beckner (becknert@.xout.erols.co), February 19, 2000.

A few more interesting figures, from the Bureau of Economic Analysis:

BEA's Overview of the Economy

-- I'm Here, I'm There (I'm Everywhere@so.beware), February 19, 2000.