Today, as the Labor Department reported that April consumer prices rose at a faster than expected .5%, which follows yesterday’s release of a .6% rise in April producer prices, Wall Street and the financial media once again celebrated the irrelevant fact that core consumer prices were unchanged. To focus attention on the seemingly benign “core” CPI despite ever increasing actual CPI is as meaningless an exercise as a company focusing on continuously strong pro-forma earnings despite consistent actual losses. In my opinions, “core CPI” would be more accurately referred to as “Pro Forma CPI.” Bond investors foolish enough to buy into the “core CPI” propaganda, will likely be just as disappointed as dot.com era stock investors who fell victim to the same scam with pro-forma earnings.

The reality is that year-over-year consumer prices are up 3.5%. Thus far, during 2005, CPI is rising at an annualized rate of 4.8%, its fastest pace since 1990, and .3% higher then the 4.4% rise in 1971, the year in which inflation was so bad that Richard Nixon imposed wage and price controls to contain it. Perhaps had President Nixon been a little more “tricky,” he might have come up with the concept of “core CPI” himself, rather than resorting to such draconian and misguided measures.

In fact, those arguing that inflation is not a problem often point to low bond yields to support their conclusion. This makes as much sense as the arguments relied on in the Internet boom who said that high stock prices reflected the present value of all the future earnings such companies were sure to generate. The reality is that just as stock investors of the 1990’s were wrong about future earnings, today’s bond investors are wrong about future inflation. There is no legitimate investor demand for a ten year bond yielding 4% with CPI inflation running at an annualized rate of 4.8% and heading higher. As a result it should come as no surprise that many of today’s bond buyers have no intention of holding their bonds to maturity, and the fact that they are buying does not necessarily reflect a benign outlook for inflation. With the market dominated by leveraged hedge funds, mortgage hedgers, and foreign central banks, today’s demand for treasuries has much more to do with speculation, hedging, and politics, than it does with actual investment merit. Once these forces reverse, expect bond prices to plunge, and interest rates to soar.

For a more in depth analysis of the fraud of “core CPI” please read my previous commentaries on this subject dated Oct. 18th 2002 and March 17th 2004.