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Conclusion: Despite the ongoing pantomime that is government officials pretending not to see inflation, the Bernanke dollar debacle has not made its way into the official inflation numbers as yet but it is on the way.  

The recently reported lack of inflation (on a seasonally adjusted basis) outside of the energy sector should not last long, as evidence continues to support that it will be reflected in upcoming data.  Nonetheless, annual inflation started creeping higher in October, albeit slowly, in both the CPI and PPI and I expect a continuing sequential acceleration over the next few months.

Illogically, the inflation that consumers are seeing day-to-day from the effects of Quantitative Guessing is the type of inflation the Fed chooses to ignore, focusing instead on "core" inflation. The effects of volatile food and energy cost cannot be ignored; certainly those who consume food or energy (everyone) do not have the luxury of being able to ignore their costs.  The food index rose 0.1% in October after a 0.3% increase in September.

As Keith said in today’s Early Look, “Over the course of global economic history there’s never been a world power that’s devalued its way to prosperity".  While commodity prices can be volatile, the long-term weakness in the U.S. dollar and increased purchasing-power of gold and stronger global currencies are here to stay despite the credibility-devalued rhetoric of the government.  As the sovereign debt dichotomy migrates to the USA in the coming months, the only option being put forth by the mainstream view is the spending or creation of whatever money is needed in order to prevent systemic failure. 

In October, the softer-than-expected CPI was dominated by rising gasoline prices and, although somewhat ignored in the overall calculation, food prices.  Over the years, the BLS has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard, to a compromised metric that no longer reflects the reality of consumers’ daily needs.  Within the core CPI calculation, housing represents 42% of the calculation.  Included in the housing calculation is “rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence).”

Shockingly, the estimates for each of the five components of the Shelter Index are “estimated” directly from data reported by sampled households in the Consumer Expenditure (CE) Interview Survey.  The bottom line is that Ben Bernanke is basing what he sees (or does not see as the case may be) on a household survey that has, at best, a tenuous link to real time prices.

The Hedgeye call on housing is for a decline of 15-20% over the next 12 months.  Given that, it is unlikely that the Fed will turn off the spigot any time soon.  To justify that, Bernanke and friends will need to continue the pantomime act of not seeing inflation.

Howard Penney

Managing Director

INFLATION – BEHIND YOU! - cpi components