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Economist: Inflation Understated

December 14, 2006

Tags Legal SystemMoney and Banks

The Candian National Post reports, in an article Gold's rise points to inflation on David Ranson, president of an econometric consulting firm. Ranson

defines inflation as a decline in the purchasing power of a national currency. He prefes that definition to flawed ones like the rising cost of living or increasing labour costs. 

Official government-massaged measures such as the consumer price index (CPI) do not detect the onset of inflation as quickly as financial markets, he says. The latter indicate "current inflation is much higher than policymakers realize and is still accelerating.


These views seems to jibe with those of the average man in the street, who feels prices are rising higher than the benign rate governments portray.

Consumers and investors experience inflation at what Ranson calls "market-clearing prices." As we all know from daily experience, such prices can jump quickly. Some components of the CPI, such as clothing, are accurately picked up but the index is distorted by the way the United States and other countries account for housing.

Shelter makes up 37.4% of the CPI but the U.S. uses what Ranson terms a "mythical figure" based on old historical data. Wainright's Proxy Index of Market-Clearing Consumer Prices eliminates the parts of the CPI that use historical prices. The revised index showed shelter rose 13% in 2005 and energy at 16.7%. Food and beverages rose only 2.3%, transportation 0.4% and food and beverages 2.3%, all in line with the CPI. However, the weighted average was 8.4%, which Ranson suggests is "the true inflation rate; 8.4% is what is happening now, which should correlate with the performance of financial markets, where we always measure what is happening now."

Ranson's views are consistent with the findings of John Williams, reported elsewhere on this blog. Both economists are calling attention to the measurement techniques that produce a politically-motivated unrealistically low rate of inflation.

Ranson also found that "found rising gold prices predicted rising consumer price indexes in [six European] nations.". Ranson believes that the gold market is faster to sniff out inflation in the pipeline than consumer prices. The rising price of gold over the last six years, according to Ranson:

is giving an ominous early warning on inflation. However, it takes time before the CPI fully reflects the trend signaled by gold. Ranson found it takes six years for the CPI to reflect even half the trend signaled by gold.

"This is a serious matter," Ranson said. "It's a very big deal if what I'm saying is correct."

This time lag also creates "the enormous gulf in opinion" between the conventional view of inflation and the minority view that inflation shows up first in the price of commodities.

"One indicator says nothing is happening at all and the other says something very big is happening."

Another indicator of ongoing currency debasement is that the melt value of US currency is now worth more than its face value. This creates a profit opportunity by melting currency and selling the metals as scrap. In response the, U.S. Mint bans melting pennies, nickels

U.S. Mint officials said Wednesday they were putting into place rules prohibiting the melting down of 1-cent and 5-cent coins. The rules also limit the number of coins that can be shipped out of the country.

"We are taking this action because the nation needs its coinage for commerce. We don't want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer," Mint Director Edmund Moy said in a statement.

Officials said they had received a number of inquiries from the public in recent months concerning the value of the metal in the coins and whether it was legal to melt them.

The new regulations prohibit the melting of 1-cent and 5-cent coins, with a penalty of up to five years in prison and a fine of up to $10,000 for people convicted of violating the rule.

The rules also require that shipments of the coins out of the country be for legitimate coinage and numismatic purposes and cap the size of any one shipment to $100 worth of the coins.

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