10.28.2011 0

Pay no attention to the inflation behind the curtain

By Bill Wilson — According to legend, in Czarist Russia, Grigory Potemkin constructed fake villages to make Catherine the Great believe that the countryside was tranquil and prosperous, when in fact it was chaotic and stricken with poverty.

Such it is with government economic statistics, as evidenced by the latest release of the Gross Domestic Product (GDP) showing a 2.5 percent increase for the third quarter of 2011.  “U.S. Economic Growth Accelerates,” blared one media headline.  “Economy expands 2.5 percent in the third quarter,” heralded another.

But below the headlines, one finds the spin.  The Bureau of Economic Analysis claimed the increase “primarily reflected positive contributions from personal consumption expenditures”.

To be certain, consumption increased by $127.4 billion out of the $185 billion increase, a peak behind the numbers finds that only $10.1 billion was for durable goods.  $28.9 billion was for non-durable goods: $8.1 billion was increased gas and energy consumption, $9.6 billion for food and beverages, and $3.1 billion for clothing.

The lack of increased good purchases is also indicated by the $24.3 billion shrinking trade deficit.  While exports increased $31.6 billion, imports only increased by $7.3 billion.  Slower imports indicates slowing consumer spending on actual goods, not accelerating.

Another portion of the increase was $88.4 billion for services.  But, again, the increases come in necessities: $25.2 billion for housing and utilities, $31.2 billion for health care, $11.5 billion for food services and accommodations, and $6.7 billion for financial services and insurance.

With existing home sales taking a plunge and prices flat to falling, the increase for “housing and utilities” can largely be attributed to the increased cost of utilities.  The same can be said for the $8.1 billion increase for gas and energy, and the overall $21 billion increase for food and food services.  In short, prices are increasing.

Other data bears this out.  The Consumer Price Index (CPI) is up 3.9 percent at an annualized rate overall for all items, including food by 4.7 percent and energy by 19.3 percent.  If one takes out food and energy, the CPI is only growing annualized by 2 percent.

As for producer prices, those have been way up, too, growing at an annualized rate of 6.9 percent in September — it was 7 percent and 6.5 percent in July and August, respectively.  All of which accounts for the $46.1 billion increase for equipment purchases.

Meanwhile, when government reports “core” inflation, they leave out food and energy price increases, and as a result, when it reports GDP it leaves those numbers in.  This results in prices appearing to be relatively “stable” while the economy is “growing,” when in fact, prices are fluctuating and growth is slowing.

That is the real story behind the numbers that will go underreported in the mainstream media.  This is not growth accelerating at all.  It’s inflation.

America’s equivalent of the Potemkin Village was L. Frank Baum’s “Wizard of Oz” tale criticizing monetary policy, in which famously the “Wizard” urges Dorothy and her friends to pay no attention to the man behind the curtain.

True to form, Federal Reserve Chairman Ben Bernanke is probably hoping nobody peaks behind the GDP press release curtain.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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