The Misleading Consumer Price Index

Investors are trying to figure out why the Fed continues to raise interest rates. The most important job of the Fed is to contain inflation. That is what they target their actions to. Why then, with the most recent CPI index coming in flat year-over-year, does Greenspan and Co. continue to boost short-term rates?

This contradiction could very well be explained by many folks’ distrust of the government’s reporting of the CPI statistics. A flat CPI index seems strange given that prices for many goods and services are rising at a very fast rate, squeezing lower and middle class workers.

Let’s take a closer look at the components of the CPI index. The largest are housing (42%), transportation (17%), food (15%), and medical care (6%). These four categories of goods and services account for 80% of the consumer price index, which is showing flat to slight increases in recent months.

Does anyone see anything suspicious about this? Real estate is seeing its biggest boom ever. Oil prices are at 20-year highs on an inflation-adjusted basis. Commodity prices are rising substantially, impacting food costs. Healthcare costs have been rising at double digit rates for years now.

Are these facts being accurately recognized in the government’s CPI data? I, along with many others, would argue no. And perhaps Chairman Greenspan and the FOMC feel the same way, causing them to raise the Fed Funds rate higher than some think is warranted.