by Alasdair Macleod, GoldMoney:

If you think that price inflation runs at about 1.6% you have fallen for the BLS’s CPI myth. Two independent analysts using different methods — the Chapwood Index and Shadowstats.com — prove that prices are rising at a far faster rate, more like 10% annually and have been doing so since 2010.

This article discusses the consequences of price inflation suppression, particularly in the light of Jerome Powell’s Jackson Hole speech when he downgraded the importance of price inflation in the Fed’s policy objectives in favour of targeting employment.

It concludes that the reconciliation between the BLS CPI figure and the true rate of price inflation is inevitable and will be catastrophic for the Fed’s policy of suppressing interest rates, its maximisation of the “wealth effect” of inflated financial asset prices, and for the dollar itself.

Monetary inflation takes off

Last week saw a virtual Jackson Hole conference, where Jerome Powell downgraded inflation targeting in favour of the other Fed mandate, employment. And Andrew Bailey, Governor of the Bank of England, claimed “We are not out of firepower by any means…. to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid”.

Both men were tearing up earlier scripts. Since they will likely tear up these as well there is little point in examining them further. For the fact is that all the major central banks are trapped in problems of their own making, and some time ago they lost control of their destinies. Figure 1 below encapsulates the problem.

M1 is the US narrow money indicator. Over 28 years from 1980, it grew at a simple average annual rate of 8.8% per annum. From 2008 to last February, following the Lehman crisis it grew at an average annual rate of 16.6%, From 24 February in six months it has grown by 34%, which is an average annual rate of 68%. What Powell effectively admitted at Jackson Hole was that M1 annualised growth of 68% was not enough to ensure the US economy would recover. He would have had to downplay the effect on prices to create leeway for further increases in the rate of monetary growth.

The Fed is evidently trapped by its inflationary policies. And the US Bureau of Labour Statistics, which calculates US consumer price indices, will have to work even harder to suppress the evidence of price inflation. Over the last ten years they have recorded an average annual rate of price inflation of 1.69% measured for US cities (CPI-U), and for the first half of 2020 they say it was 0.83%, or 1.66% annualised. To maintain this fiction has been a remarkable feat of statistical management, when compared with the unadulterated fifty city figures collected by the Chapwood Index.[i] Figure 2 shows the gap between the BLS’s CPI and Chapwood’s unadulterated estimates.

It is not our purpose to imply that the Chapwood Index of prices is an accurate representation of price inflation. We can talk about the general level of prices in a theoretical sense, but in practice it cannot be measured because each consumer has a different price experience. It is only when one subscribes to the macroeconomics version of economics and talk of unworldly aggregates that a figure is calculated. But if you remove the changes in the BLS’s calculation methods since 1980, you end up with a similar rate of price inflation to that of the Chapwood index, which is confirmed by John Williams at Shadowstats.com.

Now let us reconsider Jay Powell’s and Andrew Bailey’s Jackson Hole speeches in this light. Instead of an average rate of annual price inflation over the last ten years of 1.69%, Chapwood tells us that that average is 10.1%, varying between 13.4% in Sacramento and 7.1% in Albuquerque. It is against this background that Powell proposes to downgrade the Fed’s inflation mandate. Given M1 monetary inflation averaged 16% between the Lehman crisis and last February (see Figure 1) the price effect recorded by Chapwood is not surprising. But it gets worse for Powell. If we accept Chapwood’s numbers as being realistic and use them to deflate nominal GDP, we can see that the US economy has been in a slump for the last ten years: adjusted GDP has contracted by 65% since 2010. This is illustrated in Figure 3.

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