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Funny Numbers


The growth in GDP between Q2 and Q3 on a nominal basis was 2.4%, while on a real basis (adjusted for inflation) it was 1.9% (these are not annualized). The difference between the two (2.4% - 1.9% = .5%) then is the implied inflation rate as reported by the government. We can then annualize this number and come up with the annual inflation rate as reported by the government as (1.005^4) 2.02%.

The Economic Cycle Research Institute during the same period measures the inflation rate as 2.4%; this number annualizes to a 9.9% inflation rate!

How can these numbers be so different?

Well, we have commented before on the government's way of calculating things. For example, one of the largest constituents of the CPI is housing prices. The U.S. government in estimating this component of CPI does not actually use housing prices, but instead uses rental prices, assuming a high correlation between rental costs and housing prices.

The problem is that the Owner Equivalent Rent figures have been going down. The reason is with interest rates so low, people have been buying houses, not renting.

So the housing component in the CPI shows an increase of only 2% for the last year. Does anybody out there believe that housing prices have risen only 2% this year?

A comparison of the ECRI inflation rate to the Fed funds rate reveals something disturbing. The correlation between the ECRI rate and the Fed funds rate is normally very high (the ECRI tracking very tightly the Fed funds rate), that is up until late 2001. Since then the Fed funds rate continued to drop while the ECRI rate has gone straight up. This deviation indicates that the Fed funds rate is being kept artificially low in the face of a much higher inflation rate as reported by an independent think tank.

Either the ECRI has suddenly gone flippant, or the U.S. government is reporting artificially low inflation rates in order to allow it to continue to print dollars at an alarming rate.

Perhaps this is why gold is above $400.
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