How Inflation Could Be 66% Higher Than the Fed Reports

Global food prices are at an all-time high, U.S. gasoline prices are at the costliest level ever for this time of the year and yet inflation, in the words of Federal Reserve Chairman Ben Bernanke, remains "quite low."

By official reckoning, that's certainly the case. On Thursday we'll get the latest monthly inflation figures in the form of the consumer price index, which, to the Fed chief's chagrin, is running too close to disinflationary levels. Economists, on average, expect January prices to increase at just a 0.3% rate. So-called core inflation, which excludes volatile food and energy prices, is forecast to rise just 0.1%.

As Bernanke testified before Congress last week, economists exclude food and energy prices because that core inflation rate "can be a better predictor of where overall inflation is headed." By that measure, inflation was only 0.7% in 2010, compared with around 2.5% in 2007, the year before the recession began, the Fed chief explained.

Too bad those numbers don't jibe with with most folks' experience at the gas pump or checkout counter. As economist Ed Yardeni, president of Yardeni Research, told clients Tuesday: "I share the growing concern among the Fed's critics that the official measures of consumer price inflation may be understating actual inflation and that excluding food and energy from these measures is OK as long as you don't eat or drive."

Alternative measures for inflation show a far more alarming picture of price increases than the official data suggest. One of the more intriguing approaches is The Billion Prices Project at the Massachusetts Institute of Technology, which collects daily price changes on about 5 million items sold by approximately 300 online retailers in more than 70 countries.

For U.S. price data, MIT tracks 550,000 products from 53 retailers. By this measure, annual inflation is currently running at a rate of 2.5% -- or 66% greater than the official CPI figure. See the chart above.

Core inflation may have run at just 0.7% in 2010, as Bernanke says, which is the lowest reading on record gong back to 1960. Even if you add back in those pesky food and energy prices, the number rises to 1.2% -- still no big deal. But by the Billion Prices Project's reading, inflation in 2010 more than doubled to 2.5%. "The Billion Prices Project @ MIT is finding plenty of evidence that consumer prices are rising faster than the official price data," Yardeni notes.

Whatever the latest data show Thursday, there's a big difference between inflation as a guide for monetary policy and its real-world impact on conusmers' pocketbooks.

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May 29 2011 at 1:19 AM Report abuse rate up rate down Reply

To my knowlege, there has never been a % or number the politians could'nt manipulate any way they needed to. Ask any senior citizen about inflation and low interest rates. Why is it that we have all lived this long and still haven't learned that as long as there are politions and two party systems we don't have a chance to change anything. What a joke.

March 12 2011 at 9:54 PM Report abuse rate up rate down Reply

The inflation number generated by the federal government is 40% housing. Since housing is still in a deflationary spiral, the official government number for inflation is low. The inflation in goods and commodities is now offset by the deflation in housing. When housing bottoms out, inflation will show up in the government number.

February 17 2011 at 1:33 PM Report abuse rate up rate down Reply
1 reply to bansijeff's comment

Housing HAS bottomed, largely because a portion of housing expenditures include rents, which are rising. This is why we ae beginning to see rising CPI inflation numbers. Of course, the PPI has been greatly outpacing the CPI, meaning at least some portion of those rising producer prices will eventually make it through the pipleline, and increasingly show up in consumer prices.

February 17 2011 at 1:52 PM Report abuse rate up rate down Reply

The politicans are afraid to take on the oil companies of this country as they own most of the politicans in Washington!!! That's both parties folks, it is they in Washington that don't have to spend a dime out of there pockets for anything as We The People pay for them and their families? Why is this, because we don't do anything about it. This country is so wraped up in worring about offending someone that the real problems are just not that important to people of today?? I guess pass generations are spinning in their graves to see what has happened to this Great Country of our? Well keep worring about who you ofend and don't worry about inflation???

February 17 2011 at 11:47 AM Report abuse rate up rate down Reply
1 reply to hman570's comment

How and why would you like the Foggy Bottom goons to "take on" the oil companies?

February 17 2011 at 1:25 PM Report abuse rate up rate down Reply

I don't understand how half of the people commenting on this could turn this thread into a debate on politics. Most politicians don't even understand the economy. Inflation is going up slightly because the supply of money has dramatically increase. The reason we aren't wiping our asses with dollar bills is because the banks, fully aware of the consequences, aren't allowing most of this money to go into circulation.

February 17 2011 at 9:06 AM Report abuse -1 rate up rate down Reply

OK - RIGHT! - so if we retirees (no COLA for 2 years) - sit inside and don't eat - our rate of inflation is .3 .... yeah - I feel better already - anyone got some Breyers left over?

February 17 2011 at 6:09 AM Report abuse +3 rate up rate down Reply
1 reply to harley2063's comment

Actually, the .3% estimate for the January CPI to which you refer (later reported as .4%) assumes you DO eat.

February 17 2011 at 9:58 AM Report abuse rate up rate down Reply

Don't look at the unemployment percent. Look at the number employed. Its about 130 million off the high of 137 million in 2007.

February 16 2011 at 11:58 PM Report abuse +1 rate up rate down Reply

Things are actually worse than the Wall Street funded media are presenting it there is a Revelation....LOL!!!!!!!!!!

February 16 2011 at 10:30 PM Report abuse +5 rate up rate down Reply

I will talk to my close pals, Gore, Pelosi, Reid and Rangel, get the true accurate non-biased information from them on inflation and will fill all of you in later. As always, the info I share with you guys will have to be kept amongst us girls and can not leave this room. Agreed?

February 16 2011 at 9:54 PM Report abuse +2 rate up rate down Reply

Thank God for dems save us every time

February 16 2011 at 9:23 PM Report abuse -1 rate up rate down Reply
1 reply to bufortharmon's comment

Thank God there is no inflation. I must have been dreaming when I saw my house payment go up $111.01 last month due to increase in taxews on my de-valued home. Oh and gas, the station owner must have put the decimal point in the wrong place, and groceries, nuff said about that. Health costs, no inflation there either, just prices conforming to Obamacare. Can't wait for another 6 years of this, not to worry though, the Gov't will take care of my every need, and proving every citizen with a brand new Islamic and Mexican flag to fly in the front yard

February 17 2011 at 11:26 AM Report abuse rate up rate down Reply