Reading the business section this morning I was greeted with this headline: Consumer-Price Report Propels Dow Up.  From the article:

The Labor Department’s report that consumer prices advanced 0.2
percent in April after rising 0.3 percent in March seemed to alleviate
investors’ worries that the recent surge in energy costs would force
prices throughout the economy to spike higher. The moderation in prices
comes despite the largest jump in food prices in 18 years.

Wall Street has been concerned that higher food and energy costs are
cutting into consumers’ ability to spend. Any pullback is an unnerving
prospect for investors because consumer spending accounts for more than
two-thirds of U.S. economic activity.

Marc Pado, the U.S. market strategist for Cantor Fitzgerald, said
that the tame consumer-prices reading, along with recent figures on
productivity, indicate that businesses are swallowing some of the
rising costs they face and not passing all of them to consumers.

I love people who take the long view.  Right next to the "good news" article was the following headline: Price of Gas Exceeds $3.75.  In that article energy analysts predict that we could see $4.00 gas within weeks.  I wonder how the CPI might look next month or the month after?

But of course the CPI itself is rather flawed according to this article by Kevin Phillips.  It seems that our friends working in DC have been monkeying with the numbers for decades:

Nothing, however, can match the tortured evolution of the
third key number, the somewhat misnamed Consumer Price Index. Government
economists themselves admit that the revisions during the Clinton years worked
to reduce the current inflation figures by more than a percentage point, but the
overall distortion has been considerably more severe. Just the 1983
manipulation, which substituted "owner equivalent rent" for
home-ownership costs, served to understate or reduce inflation during the recent
housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has
been subjected to three other adjustments, all downward and all dubious: product
substitution (if flank steak gets too expensive, people are assumed to shift to
hamburger, but nobody is assumed to move up to filet mignon), geometric
weighting (goods and services in which costs are rising most rapidly get a lower
weighting for a presumed reduction in consumption), and, most bizarrely, hedonic
adjustment, an unusual computation by which additional quality is attributed to
a product or service.

The hedonic adjustment, in particular, is as hard to estimate
as it is to take seriously. (That it was launched during the tenure of the Oval
Office’s preeminent hedonist, William Jefferson Clinton, only adds to the
absurdity.) No small part of the condemnation must lie in the timing. If quality
improvements are to be counted, that count should have begun in the 1950s and
1960s, when such products and services as air-conditioning, air travel, and
automatic transmissions—and these are just the A’s!—improved consumer
satisfaction to a comparable or greater degree than have more recent
innovations. That the change was made only in the late Nineties shrieks of
politics and opportunism, not integrity of measurement. Most of the time,
hedonic adjustment is used to reduce the effective cost of goods, which in turn
reduces the stated rate of inflation. Reversing the theory, however, the
declining quality of goods or services should adjust effective prices and
thereby add to inflation, but that side of the equation generally goes missing.
"All in all," Williams points out, "if you were to peel back
changes that were made in the CPI going back to the Carter years, you’d see that
the CPI would now be 3.5 percent to 4 percent higher"—meaning that,
because of lost CPI increases, Social Security checks would be 70 percent
greater than they currently are. (Emphasis mine)

It should come as no surprise to anyone who looks at their annual Social Security report that by the time someone my age (42) gets to retirement age we might be able to squeak out four cups of coffee at Starbucks with our monthly checks.  But that’s assuming we’ll be able to retire before the age of 80.  Let’s not forget that when Social Security was created the average life expectancy was much lower so they really didn’t expect many people to draw on their Social Security for very long, if at all.  Now many folks are living long enough that they could go to college and earn five degrees after they retired if they wanted to. 

When you think about it the average wage earner has been getting hosed for years.  How many times did people get just "cost of living" increases to their wages?  Every year that happens and the employer uses the governments artificially low numbers to determine the increase the wage earners get screwed.  And just as compound interest has an amazing effect on investments the loss of those wage increases actually grows when you calculate the lost opportunity to earn interest on those dollars if they were saved or invested.  Of course that further diminishes the potential retirement income for workers.

So here’s what you should know:

• Fudging numbers always catches up to you, whether you’re a business, a country or even a despot.  The separation between actual inflation and reported inflation has been on a widely diverging track for too long and at some point reality will have to set in.  For instance if you used pre-1983 criteria to calculate inflation this year it would be 12% vs. the reported 4%.  At some point people are going to demand that the numbers match their daily reality and when they do it’s going to be ugly.
• If you’re under 55, are an average middle class earner and play by the rules I wouldn’t count on being able to retire comfortably until you’re at or past 70.   Inflation is going to eat your fixed income alive and with the problems in the financial institutions the growth opportunities for funds aren’t looking good for the near future.
• Don’t go totally "Chicken Little" here.  Things don’t look good for people in my generation partly because of demographics.  That evil, massive "Boomer generation" is already starting to retire and they are going to eat a disproportionate piece of the retirement pie.  If they’d die at the same age their parents and grandparents did, and if their generation of leaders hadn’t monkeyed around with the numbers so much then we wouldn’t be in this position, but they won’t and they did so here we are.  We still have time to fix things for our children, the so-called "Millenials" but we better start doing something fast or they’ll be hosed too.
• Another reason to not completely lose hope is that Americans have historically shown an ability to adapt.  For instance one driver of our current difficulties is higher fuel costs which impact other costs like food and goods because it costs more to bring them to market.  On the flip side higher fuel prices mean that there’s now an economic incentive for the development of alternate fuel sources.  So energy companies will invest in developing alternative fuel which will result in short term development costs, but those will be partially offset by new jobs created and eventually will lead to lower energy prices as more supply is created.  In other words we might someday look back and say "Remember when gas was just $3.50 a gallon" but not in a longing way because we’d switched to a hydrogen car years before, the same cars developed by the once struggling GM that now dominates the market in "alternative fuel" vehicles.
• Yes, I’m a "glass half full" kind of guy.
• You should never forget that old saying, "There’s lies, damn lies and statistics."
• If you want to see what goes into calculating the CPI the Bureau of Labor Statistics’ FAQ page for the CPI is here.