U.S. Inflation Reports – Contradictions and Absurdities If you want to know how trustworthy U.S. inflation numbers are, all you have to do is look at the PPI (producer price index) and the CPI (consumer price index) reports released in November. Both indicated an inflation rate of 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and this helped keep the inflation rate down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). Lots of luck in determining what is really going on based on these numbers. Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item gets more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used. There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the long-term trends in the dollar and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold hit a series of all-time highs in U.S. dollar terms in November, it is also hit all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value. Gold is currently in a correction and the dollar in a bear market rally – proof that no asset can go up or down every day. The dollar started rallying on Fed Chair Bernanke's comment that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably a number of other times as well. Based on the dollar's performance during his tenure, all the Fed has done is watch it go down. Since 2001, the most consistently bullish asset has been inflation-sensitive gold. It will close out 2009 with 9 up years in a row. The dollar’s performance has been almost as consistently negative during the same time period. While government inflation reports may be unclear, the message of the market on inflation in the first decade of the 2000s is not.   Daryl Montgomery Organizer, New York Investing meetup http://investing.meetup.com/21