In 1971, inflation had gotten so out of control that President Richard Nixon
felt he had no choice but to resort to the draconian, and foolhardy, imposition
of wage and price controls. What level of CPI inflation was so severe that
it produced such a radical reaction? 4% percent! The nation was so concerned
about 4% inflation that Nixon felt compelled to impose wage and price controls!

Today, the labor department reported a.6% rise in May CPI, the biggest increase
since January 2000, with dairy prices rising at their fastest pace since 1946.
So far this year, consumer prices are rising at a 5.1% annual rate, compared
to a 2.3% increase at the same time last year. Year-on-year, the rate of inflation
has increased by 120%, to a level 25% higher than the rate which resulted in
wage and price controls in the past. If May’s increase were annualized, it
would produce an inflation rate of 7.2%

Yet Wall Street celebrated
today’s release because the so-called “core??? CPI only increased
by.2%. This “good” news allowed Greenspan, in his testimony before
the Senate Banking Committee, to shed his recently adopted hawkish tone,
and once again proclaim that interest rate increases are likely to be “measured” and
that inflation is “not likely to be a serious concern.” It’s
too bad that no one told Nixon about the core CPI.

By 1974, inflation,
as measured by the CPI, reached 11%, which caused then-President Ford to
label inflation “public enemy number one??? and launch his famous “Whip
Inflation Now” campaign, under the advice of his council of economic
advisors, chaired by none other than Alan Greenspan. I wonder what core
CPI measured back then? If Greenspan only knew then what he knows now,
Ford could have been more patient, and maybe rethink the need to order
all those WIN buttons. At the rate U.S. inflation is presently accelerating,
we could be at 1974 levels by next year.

However, comparisons between
how the CPI measured inflation in the 1970 how it does so today are apples
to oranges. Back in the 1970’s, housing prices were a component of the CPI.
Not so today, with the housing price component having been replaced by the
highly subjective and interest rate sensitive, “owners equivalent rent.” Given
the incredible recent run-up in housing prices relative to the modest increase
in rents, this change alone has no doubt reduced CPI measured inflation considerably.
Also, back in the 1970’s the numbers were more unflinchingly accurate. Today,
approximately 60% of the numbers used to calculate the CPI are “hedonically
adjusted,” a concept which allows government statisticians to arbitrarily
reduce price increases based on highly subjective assumptions of improved
quality. At what rate would today’s CPI be increasing if it were still being
calculated using the same methods which existed in the 1970’s? I called the
Department of Labor Statistics, and their spokesperson said that they no
longer keep the methodological formula they used to calculate the CPI 30
years ago, as it is no longer relevant. As the Church lady used to say: “How
convenient!”

Today’s ‘benign” core
CPI is just the cover that Dr. Greenspan, and other newly-converted Fed “hawks” ordered.
They can continue to talk the talk about fighting inflation, knowing that
the “benign” core CPI means they will not have to walk the walk.
In this way, the Fed can have its cake and eat it too, its just that the
rest of us are going to have to pay a lot more for ours.