Real U.S. Inflation in the Great Recession is About 10%

Real U.S inflation is much higher than reported because the government has changed its calculus. Real U.S. inflation in the Great Recession would match the days of the Carter Administration at about 11% if inflation were calculated the way it was back then. The change in U.S. government’s calculus means the Fed’s quantitative easing could be causing more problems than we know of.

On April 13th, 2011, I received the following article from Stan about hyperinflation, which confirmed my belief that real U.S. inflation is higher than reported:

My opening comment to Stan:

As we have discussed the Fed’s blindness to inflation all around us, we are, in fact, basically in the same state we were at the end of the Carter era. Inflation then was considered a major nemesis and has been called “stagflation.”


Then an excerpt from the article in the letter:


Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February [2011], according to the Shadow Government Statistics newsletter. Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site,

While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter(CNBC)


In other words, as with you and I, Stan, the seat of his pants is telling him something is wrong with the government’s statements that inflation is in check because their numbers aren’t real inflation. I think one factor that is wrong is that housing prices are distorting their CPI figures. While, I suspect housing prices have dropped in the CPI figures, those with mortgages do not experience the benefit of the lower price; so their cost of living has not gone down any in that area and will not unless they declare bankruptcy. [The drop in housing prices may bring the government’s inflationary calculus down, but its not helping anyone by offsetting the cost of real U.S. inflation in other areas.]


Newman uses recent comments from Walmart CEO Bill Simon that inflation is going to be “serious” to back up [his] much higher CPI figures.


In my book, if WALMART says inflation is going to be a significant factor in months shortly ahead, then it is IS because no one has a handle on keeping prices down better than Walmart … even if I do think they are evil in their preditory practices and underpayment of employees. If the champion of low prices cannot keep them down much longer, then no one can.

Those of us who lived through the Carter period, know that inflation stung. [Now that we know U.S. inflation may use some questionable adjustments to reconcile the kinds of things and quality available in different periods, ]we know why we have that sense in the seat of our pants that things are going out of kilter, regardless of what the government is saying.


Going by recent strong comments from Federal Reserve officials, even members of the central bank must believe inflation is being underreported. Dallas Federal Reserve President Richard Fisher said in a speech last week that the central bank was reaching a “tipping point” as far as changing its policy so it can react to inflation.


The Fed, I think, is going to have a much tougher job of exorcising U.S. inflation demons this time around, as the horse is already out of the barn. The money has already been printed and is lurking in bank vaults, ready to flow into the economy. [When it does start to flow into the economy, instead of being hoarded by te banks,] I’m still not sure how much the Fed can do to reverse that, if the Fed finds it has printed way too much money.

And that opens the door to the possibility of runaway inflation … or hyperinflation, since the government is engaged in the same kind of money printing that caused hyperinflation in third-world countries.

Maybe the Fed does have ways [of shrinking the money supply], but I don’t know how fast that can happen or if it even can. The banks aren’t going to give up any money that has been given to them  … so if we have already passed a point too far, how do you back up? Since a lot of the money [created by the Fed] has not been in circulation, I don’t think the Fed (or Treasury) has any clear gauge of whether it has ALREADY passed a point to far with respect to curbing real U.S. inflation. It’s like a slinky, to use another metaphor: the Fed has given a huge pull at one end, and the other end is only now starting to slide.

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