More Evidence Governor Palin Is Correct About Rising Food Prices; UPDATED: Others Following Governor Palin’s Lead on QE2
In a speech on Monday in Arizona, Governor Palin correctly noted that food prices were rising, and that QE2 would lead to even more inflationary pressure on food, oil, and other commodities. This prompted Sudeep Reddy, a Wall Street Journal reporter to question Governor Palin’s asserting that food prices were rising. Governor Palin then put Reddy in his place with a well-crafted smackdown, pointing out that Reddy’s own newspaper noted that food prices indeed have been rising faster than overall inflation. Yesterday Governor Palin tweeted an article which contained yet more evidence of rising food prices.
The article to which she linked, by John Melloy of CNBC, indicates commodity prices have been rising, and in some cases rather dramatically:
A new pricing survey of products sold at the world’s largest retailer [WMT 54.13 -0.21 (-0.39%) ] showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate.
The “inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket,” said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands.
Prices of cotton, silver, wheat, soybeans, corn are all up big this year. Cotton futures are up the most, climbing 90 percent so far in 2010. The price of silver is up 63 percent.
Melloy also notes that since Bernanke announced his latest plan to stimulate the economy with easy money, QE2, interest rates have actually gone up, not down as he had planned (something I predicted last week):
On November 3, the Fed announced its much-anticipated purchase of $600 billion in Treasury securities. An effort to keep market rates low since the central bank’s benchmark rate is already at zero. The Federal Open Market Committee’s statement said, “Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.”
But since that statement, interest rates have actually gone up, backfiring on a Fed chief who wants his quantitative easing to spark inflation of 2 percent annually. A moderate amount of inflation would be considered good for the economy. The problem is that inflation is already running well above a healthy level, investors said, Bernanke is just not looking in the right place, like a Walmart.
Again, this underlines the disconnect between those who formulate policy and those who have to live with it. In actual grocery stores, where Governor Palin and the rest of us ordinary barbarians shop, that food prices have been rising is no surprise. Only in the ivory towers of New York and DC has this fact, apparently, gone unnoticed. This also, I believe, highlights the pitfalls of relying solely on reports released by government bureaucrats. It’s not that they are intentionally trying to mislead the public but, let’s face it, there are systemic problems with the information in those reports. The official BLS unemployment report, for example, is widely known to understate the true unemployment rate since it excludes discouraged workers from its calculation. Reddy relied solely on official BLS inflation data regarding inflation but that too is thought to be flawed. For example, the consumer price index (CPI) is increasingly believed to either understate true inflation or lag far behind it.
In the mid-90s Congress was concerned with out-of-control spending on entitlement programs (sound familiar?). Beneficiaries of these programs receive annual increases in benefits tied to the CPI. At that time, most economists thought the CPI overstated actual inflation. Therefore, in order to limit these annual increases, a commission headed by Michael Boskin was convened to eliminate the upward bias in official CPI data. This would result in lower stated rates of inflation and, therefore, lower annual cost-of-living increases to beneficiaries of such government programs as social security, for example.
As a result of the recommendations made by the Boskin Commission, changes were indeed made in the methodology employed to compute inflation and, as desired, the official CPI statistics calculated under the new system were significantly lower than under the old system. Since that time a significant number of economists have suspected that stated inflation actually understates true inflation. Indeed Economist John Williams believes the numbers are dramatically lower, as Moe Tkacik noted in a piece last Tuesday:
If the CPI were still calculated the way it was in 1994, Williams says, the CPI would have been about 3.3% higher each year, which by the magic of compounded interest means it would have shown prices to have increased by 145% since 1994, as opposed to the 47% the CPI currently shows.
That’s a rather conspicuous change in stated inflation, but not totally surprising since the change in how inflation was calculated was undertaken specifically to lower it. Mission accomplished. Other economists believe that it’s not that CPI is being manipulated, but that CPI is a flawed measure of inflation to begin with, and that it lags actual inflation. Economist David Ranson expressed this point of view in a piece by Fred Kaifoshin:
David Ranson, another U.S. economist, also questions the official CPI’s viability as an indicator of inflation. Unlike Williams, Ranson doesn’t espouse the viewpoint that the CPI is being manipulated. Instead, his view is that the CPI is a lagging indicator of inflation and is not a good indicator of current inflation. According to Ranson, increases in the price of commodities are a better indicator of current inflation because inflation initially affects commodity prices and it may take several years for this commodity inflation to work its way through an economy and be reflected in the CPI.
This certainly explains how we can have low stated inflation in the official CPI concurrent with dramatically rising prices for corn, soybean, wheat, and other commodities as the article to which Governor Palin linked indicated. Whether CPI is manipulated, or simply lags inflation, it’s clear that it and other “government certified” measures of inflation have their flaws, and should not be taken as gospel as Sudeep Reddy evidently does. The rising food prices we’ve been experiencing over the past year are all too real, published government statistics to the contrary. Assuming that CPI figures do in fact lag commodity prices, we can expect a belated jump in the CPI over the next several years, and ill-conceived plans to print more money such as QE2 will only exacerbate the problem. I’ll leave you with this great, albeit simplistic, video which explains QE2 in a creative manner (h/t Cubachi):
Update: (h/t John.Frank) In an interview last week, the Wall Street Journal’sPaul Gigot noted that Governor Palin is “leading the pack” against QE2 and a return to sound monetary policy. In an article in today’s Journal, it appears that many prominent policical leaders are beginning to follow her lead:
A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.
Criticism of the Fed broke out amid the unpopular bailout of Wall Street and the Senate fight over Mr. Bernanke’s second term early this year. The critiques had ebbed until its new move to buy bonds. But last week, potential GOP presidential candidate Sarah Palin delivered a stinging speech on the move and then, in a Facebook post, criticized Mr. Obama for defending the Fed.
Note: one of the above article’s authors is none other than…Sudeep Reddy.