Dan Spillane: Fed's Main Economic Yardstick Broken

(SEATTLE) 02/11/04 - The primary measure of US inflation used by he US Federal Reserve, known as the Personal Consumption Expenditure Price Index ("PCEPI") is increasingly at odds with actual costs paid by US consumers, due to a complex interaction between the index and ultra-low US interest rates. The actual "every day" costs paid by most people are really much higher than the overall PCEPI index shows. On the other hand, things that people actually don't need every day--primarily, large things bought by corporations or on credit--are causing problems in the index. This leaves most people paying more for many things, which they are not truly aware of. And it leaves US banks loaning money out, based on incorrect budgetary assumptions.

These findings extend points raised recently by economists. The problems in the PCEPI mirror problems found in the US Consumer Price Index("CPI"), which were reported on previously by CNN, and subsequently, by research from Citizens for Corporate Accountability. This PCEPI is used by the US Federal Reserve as a basis for testimony to Congress.

Fed Chairman Greenspan recently cited inflation indicators in February testimony to Congress, suggesting low inflation--but failed to mention any problems or dangerous interactions in the inflation indexes. This a serious matter, because consumer loans are doled out by banks, based on budgetary assumptions related to the indexes. And of course, US citizens have to pay for every day items, which have gone up markedly in price, but are concealed by problems with the PCEPI and CPI.

The PCEPI is calculated based on spending in US Gross Domestic Product (GDP). It is considered more dynamic than another measure of inflation, the US CPI(1). However, according to tables from the US Bureau of Economic Analysis ("BEA") which produces the PCEPI, shifts brought on by low interest rates have influenced the overall inflation rate calculations, to make numbers appear lower. Specifically, large amounts of GDP activity show concentration in a few credit-related sectors, in a pattern which has no precedent. One worrisome indicator shows the ratio of residential fixed investment to non-residential fixed investment recently increasing by fifty percent--disturbingly out of line with historical norm(2). Stated simply, an unhealthy level of activity in GDP is tied to the value of people’s homes or purchases made with loans against their homes, at a time when the economy isn't generating incomes to pay for these.

The longer this goes on, the closer the US is to the edge of a cliff.

Related to the problem with home investment numbers, is a similar problem related to vehicles. BEA tables show an intensity and pattern of price fixing in the PCEPI, similar to that in the CPI (as reported on previously, see: "Whistle Blown on Fancy Auto Loan Racket", CFCA). Due to this racket by auto credit companies, the PCEPI, as well as the CPI, is lower than the true rate of inflation.

At the same time, tables show a marked decrease in computer prices affecting the PCEPI index, given increased GDP dollar volume related to recent Bush corporate tax break(3). This so-called "deflation" hides cost increases for things like fuel, energy, and medical costs. But most people don't buy computers based on tax breaks(which they can't get, since they aren't corporations)--instead, people do rely on fuel, energy and medical every day. The result is an inflation index which is an artifact of corporate finance, instead of one which reflects what the Federal Reserve claims.

In a report published by the Federal Reserve, they admit the indices have problems--stating inflation measures are "indirect" and "consumers may deliberately understate spending."(4)

Taken together, the above facts suggest reliance on these broken inflation measures is dangerous. In fact, it may well be that economists have mistaken recent unusual GDP-related price and credit activity in homes and vehicles to be an indication of an economic recovery--without considering unique and unprecedented factors. In fact, the White House has trumpeted large GDP numbers which really don't make sense without job growth. This confusion, more than anything else, explains the marked lack of new employment described by Mr. Greenspan on February 11. To wit, what has really occurred in the US economy is not a recovery at all--but rather, is a unique and unprecedented credit cycle showing up in GDP numbers.

The Federal Reserve has to acknowledge the unhealthy circular credit cycle in the economy, before it is too late. It has to admit that without strong job growth, it should not encourage reckless low-interest lending. And it has to reconcile the major inflation indexes with actual consumer budgets, which are out of whack, according to its own report. In doing so, the economy can be put on a sustainable track.

Footnotes:

(1) The PCEPI uses a chain weighting "dynamic basket of goods" -- which makes it more vulnerable to unpredictable shifts in the economy associated with short-term momentum.

(2) US BEA Residential/Non-res "Private Fixed Investment' and "Chain Type Price Indexes", quarterly comparisions - to 2003/IV; note concentration extends further into household items.

(3) Tax benefit for cap invesment applies to corporate purchases. See trend to Q3 03, US BEA tables, price indexes and GDP totals

(4) US Federal Reserve Bank, Kansas City, "A Comparison of the CPI and PCE Price Index", Clark, Todd

- Citizens For Corporate Accountability is a 'Think Tank' non-profit, dedicated to public interest and the detection of corruption which endangers the basics of democratic society. It was founded in 2003 by Dan Spillane. The first major issue identified by Mr. Spillane, Electronic Voting Reform, has received significant national media attention subsequent to Mr. Spillane raising concerns to Congress and a number of activists since the summer of 2002. It was recently revealed that significant problems exist nationwide in this area--as a result, several new bills are pending for the 2004 Congress.

http://www.libertywhistle.us

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