In CPI: Camouflaging Price Increase I voiced some shrill words about the official US inflation numbers. Billmon has been on this several times. Now we have the honor to be joined by Bill Gross, Managing Director for PIMCO, who oversees nearly $400 billion in fixed income assets. In his current Investment Outlook he opines on the government officials who produce the official numbers and looks at the real ones.

“Inflation under control” – (ex food and energy of course) shout the carnival barkers. “The CORE is running at just under 2%,” .. No matter that a gallon of gasoline is over 2 bucks or that a half gallon of milk will set you back $3.69; the CORE is under 2%.

.. prices of desktop and notebook computers declined by 8% a year during the past decade, The WSJ reports but because the machines’ computer power and memory have improved, their hedonically adjusted prices have dropped by 25% a year since 1997. No wonder the core is less than 2% with computers dropping by that much every year. But did your new model computer come with a 25% discount from last year’s price?
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In addition, when “substitution bias” (a BLS maneuver that follows your preference for Chicken McNuggets vs. a Quarter Pounder) is eliminated, the gap gets even worse.
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The CPI as calculated may not be a conspiracy but it’s definitely a con job foisted on an unwitting public by government officials ..
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[These statistics] might serve [Greenspan] well, but they do a disservice to those grounded in the reality of stretching a paycheck for new cars, laptop computers, and cell phones that somehow haven’t gone down as much in price as the government says they have.
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High productivity? Nonsense, in part – statistical, hedonically created nonsense. My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less.

Mr. Gross does not mention the home owner equivilant rent, the biggest chunk in the CPI calculation, where increasing housing costs for home owners are substituted by decreasing statistical apartment rents. This alone makes for 1% unaccounted inflation. Add that to Mr. Gross’ 1% and the official numbers and the true picture comes to light. Inflation is around 5-6% and GDP growth at maybe 1%. The official high productivity growth is and has been no growth at all.

As more international recognized money managers go public with these facts, international investors will take note. When they start to pull out their money, the real state of the US economy will be unveiled. Sell your US treasuries and bonds now and buy some value in Euroland, Australia or elsewhere.