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Yesterday the Labor
Department reported that July Consumer Prices rose by .5%. Today we
were informed that July producer prices rose an even sharper 1%. Though
these are very serious numbers, indicative of a chronic inflation problem,
Government officials, Wall Street strategists, and the financial media
tell us not to worry. Excluding
energy prices, the so called “core” CPI rose a benign .1% and the
“core” PPI a somewhat less benign .4%. Measuring inflation
while excluding energy prices makes about as much sense as
dieters weighing themselves while excluding all the fat
around their stomach, hips and thighs. Just how did this
ridiculous concept get started in the first place?
Food and energy prices
have historically been quite volatile, up big one month, down big the
next. To prevent economists from jumping to erroneous conclusions the
concept of the “core” CPI was developed. It has been
argued that by looking at the monthly numbers without these volatile
components, economists get a more accurate read on the true impact of
inflation on consumer prices. Excluding food and energy in no way
implied that such prices were not important components of the indexes, just
that their prices tended to be more volatile, and hence less relevant on a
monthly basis.
In 2002, when oil prices
began their steady ascent from $20 per barrel, the common wisdom
held that the rise was a temporary phenomenon based on global terrorism and the
build up to the Iraq War. As a result,
economists began ignoring the actual CPI in favor of the
“core” as everyone knew that rising oil prices were a temporary
phenomenon. Based on that false analysis, at least it made some sense to
exclude rising oil prices, since the belief was that higher prices would
ultimately be reversed. However today, with oil prices above $65 per
barrel, and more economists having resigned themselves to the inevitability
of even higher oil prices in the future, why is anybody still looking at the
core?
Since 2002, oil prices have
been anything but volatile. They have in fact been quite predictable,
rising steadily for four years. In such an environment, excluding them
when measuring inflation is a farce. Yesterday, CNBC showed a graphic
which revealed the divergence between oil prices and the over-all CPI.
Though historically the two have been highly correlated, recently they have
diverged. CNBC’s conclusion was that the U.S. economy
was now so efficient that oil now has less influence on over-all consumer
prices. Far simpler and credible an explanation is that either the data
is being manipulated, or the lag between rising oil prices and rising
consumer prices in general has lengthened.
In addition to being
advised to ignore higher energy prices when computing inflation, we are also
being told that higher oil prices will not “shock” the economy as
oil is now so much less important to the economy today than it had been
in the past. I have already pointed out why such claims are utter
nonsense (See my commentary form March 9th “The U.S. Economy
is as Vulnerable as Ever to an Oil Shock” on my web site at http://www.europac.net/archives.asp?year=2005&qtr=1# .) Interestingly, the analysts voicing
these claims the loudest are the very people who told us that oil prices
were not gong to rise in the first place. While it may be true that we
do not directly consume as much oil as a percentage of our GDP as we did in
the past, we indirectly consume even more, as oil prices are increasingly
imbedded in import prices in general.
As oil prices continue to
rise, and Asian currencies continue to appreciate, expect higher production
and transportation costs to exert significant upward pressure on U.S. consumer
prices for years to come. However, do not expect such price increases
to show up in official CPI statistics, as the Labor Department has a tool
called hedonic adjustments to fix that.
Therefore, investors seeking legitimate inflation protection will not
find it in Government issued “inflation protected”
securities. As an alternative,
consider building a portfolio of carefully selected, dividend paying, non-U.S.
dollar denominated foreign equities.
Don’t let the fox guard your investment hen house. Down load my free research report
“The Collapsing Dollar: The powerful Case for Investing in Foreign
Equities” at www.researchreport1.com , and get some real
inflation protection.
Peter D.
Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA
92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
 
For those
of you still holding dollars, time is running out to protect the wealth to
which those dollars current represent claims. A good first step is to down load my
free research report “The Collapsing Dollar: The
Powerful Case for Investing in Foreign Equities” available at www.researchreport1.com
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