The Federal Reserve
The Federal Reserve is essentially the Central Bank of the United States, and plays a vital role in the lives of every American. It makes decisions about monetary policy and interest rates that have a direct impact on the market. In fact, they use inflation targets to determine how much they want to devalue the currency by to keep everything in order, according to their own goals. Most recently in a massive money printing scheme cryptically called “Quantitative Easing“.
The Fed regularly issues statements and releases about how inflation isn’t really as bad as everyone says it is. The U.S. Bureau of Labor Statistics (BLS) tracks inflation and publishes the Consumer Price Index (CPI) in a variety of flavors including the CPI-U which is the Consumer Price Index for all Urban Consumers. Many believe that the CPI-U underestimates the level of inflation. See Can We Trust Government Inflation Numbers? One subset of the CPI-U that gets lots of press is the Core CPI.
The Federal Reserve and the Core CPI
In the past, the Federal Reserve used the standard consumer price index to determine how much inflation was occurring in the market. In 2000, they switched over to a different method of gauging inflation, known as the core CPI or “core inflation.” This method aims to compare prices of products from one time period to another, by using a specific formula that they created. In addition to comparing many consumer products, they excluded the prices of food and energy. So although the BLS tracks the full Consumer Price Index the Federal Reserve has chosen to use the smaller subset that excludes food and energy. See: What is Core Inflation and Why Doesn’t It Include Food and Energy?
Within the last few years, this core CPI figure has come under a lot of controversy, and for good reason. This is highlighted in the numerous public conversations between Congressman and Presidential candidate Ron Paul and Federal Reserve Chairman Ben Bernanke. In one such incident, Bernanke mentioned that the Federal Reserve has stayed within its inflation target of two percent annually. When Congressman Paul got the chance to speak to Bernanke, he mentioned that this number is ridiculous as it does not include food or gas prices. He mentioned that anyone who has been to the grocery store in the last few years knows that the prices of everything have gone up significantly. Obviously the prices at the pump have gone up substantially in the last four years.
Impact on People
The conversation between Paul and Bernanke illustrates just how flawed the method that the Fed uses for inflation calculation really is. It completely ignores the two expenses that the average family in the United States allocates a big portion of their budgets to. Besides housing, food and gas are probably the two biggest parts of the budget for most households. The fact that the Federal Reserve completely ignores these two items shows that they have their own agenda and it may not be what is in the best intersts of the American people.
When two of the biggest expenses that every person face are shooting through the roof, how can anyone realistically believe the Fed when they try to tell us that there is no inflation. Almost everyone is tightening their budgets in order to be able to afford even a remotely comfortable lifestyle.
Why The Federal Reserve Excludes Food and Energy
The reason that the Federal Reserve claims that they exclude food and oil from the core inflation figures is because they are subject to wild price swings. Since these items are considered to be commodities, they can move up and down in price rapidly.
While this makes sense at first glance, it doesn’t really hold much weight when it is analyzed a little closer. Much of the reason that these items fluctuate wildly in price is directly due to the decisions that come from the Federal Reserve. When the Federal Reserve decides to print more money through “quantitative easing” this lowers the value of the dollar in relation to other currencies. Since we buy a large portion of our oil from other countries, this means that we are getting less oil in exchange for our dollars that are printed by the Federal Reserve. Oil producing countries are starting to wake up to the fact that there is nothing backing our currency other than the credit of the government and we can inflate our currency at will, which drives down the value of our dollar relative to their currencies.
One of the few saving graces of this system is that all of the other countries are using similar strategies. They are simply in worse shape than what we are at the moment. With “fiat currency” (meaning currency backed ony by law and not physical assets) many countries believe a weaker currency improves their competitive stance making it cheaper to export goods. But at the same time it makes it more expensive to import goods. Since everyone is using paper currency and printing more when they need it, it affects everyone to varying degrees. But this focus on exports creates a “race to the bottom” among exporting countries.
Don’t confuse the FED’s excluding food and energy with the Bureau of Labor statistics. The BLS still calculates the cost of food and energy in their Consumer Price Index (CPI). They also calculate just the inflation due to energy, and inflation just in food and everything minus food and energy, and about every other combination you can think of.
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