The panic over inflation is about to begin. That probably seems like an odd statement, given the fact that Washington announced on Friday that the Consumer Price Index rose just 0.2 percent in December. And the day before, wholesale prices were reported to have risen only 0.3 percent in the last month of the year.

But the bond and commodities markets decided on Friday that the government's inflation stats can't be trusted. And as I've been saying for a long time, they are right.

Soon after Washington released its hokey inflation report on Friday morning, the bond market fell so sharply that the yield on 30-year government bonds climbed back to the 6.70 percent level. Meanwhile, the price of a barrel of crude oil rose frighteningly fast to more than $28.

The 0.2 percent rise in the CPI should have had a positive effect on bonds and crude. It didn't, because that number was phony, which I'll explain.

The big problem right now is that the sour mood of bonds and commodities could spread quickly in the weeks leading up to the Federal Reserve's early February meeting. The Fed is expected to raise interest rates at least a quarter point -- a hike Wall Street hopes will be the last for a while.

But don't count on it.

If you look closely at the government's inflation numbers as well as at private statistics and translate Greenspan's words into plain language, it is clear the inflation panic that's coming will cause borrowing costs to rise at least as fast as in '99.

Why are bond traders and the folks over in the commodity pits so nervous?

There are a lot of reasons. Consumer confidence remains very high because the stock market bubble is making people feel giddy. And this "asset inflation," which was first described as a concern years ago in this column, is making even the Fed antsy.

Take the CPI as an example.

Although the inflation number rose just 0.2 percent in December, it increased 2.7 percent for all of 1999. While the 2.7 percent figure isn't all that worrisome on the surface, it is substantially higher than that of the prior year.

And '99's inflation becomes more bothersome when you consider how the figure was obtained.

In order to keep inflation looking that low, Washington had to record a huge drop in the price of computers and telecommunications equipment. And it isn't that these high-tech products are actually declining in price.

What's going on is this: Computers are simply getting more powerful. The government determined that the price of computing power came down.

In order to keep consumer inflation at the 2.7 percent level in '99, the government had to contend that the price of personal computers and peripherals declined 26.5 percent. And it said information-processing was down 19 percent.

Go through the CPI list for last year, and there is nothing that even approached a double-digit price drop.

But there are loads of prices that went up substantially. Energy prices were up 13 percent; fuel oil, up 23.5 percent; gasoline, up 30.1 percent; public transportation, up 6.8 percent and obacco.

Of all the markets, only stocks believed that inflationary pressures were as low as the government said. Even Greenspan questioned the validity of Washington's inflation picture. "I think that the Consumer Price Index is not the particular index which tells the most we need to know about consumer inflation," the Fed chief said after giving a speech last Thursday night in New York. "The reason is mainly that it is weighted very unusually."

You read it here first. Greenspan has been using private inflation surveys that are predicting much higher prices in the months ahead. And because I knew that, I was also able to predict last year's three interest rate hikes.

The outlook this year for rates isn't much better.

The market itself has already pushed borrowing costs sharply higher. And the Fed isn't going to be able to resist several more hikes, all of which will come early in the year.

Worse, if the Fed wants to calm the bond market, it will be forced to drain an enormous amount of the liquidity it put into the banking system in anticipation of Y2K problems. If it doesn't remove the money from the banks, worries about inflation will be even greater than they are already destined to be.

How long will it take before concerns about inflation and rates start poking holes in the Wall Street bubble? That is anyone's guess.

But the months ahead could be very, very tricky.!Please send e-mail to jcrudele@nypost.com

http://www.nypost.com/business/22245.htm

-- Chuck (cestin@aa.net), January 17, 2000

Answers

I FEEL LIKE AN EXCITED PUPPY. CHUCK, GET A LIFE...PAL

-- WES (wes@aol.com), January 17, 2000.

Oh, that explains the Wes spots around your post.

-- Chuck (cestin@aa.net), January 17, 2000.

Thank you. There was a post not long ago asking about the CPI and actual figures for inflation, not Clintonized figures. I appreciated this post.

-- carolyn (carolyn@luvmyhub.com), January 17, 2000.

Thank you, Chuck, interesting information. Does the FDA still do a "market basket" report? If so, do you know where I might find a current one?

-- Old Git (anon@spamproblems.com), January 17, 2000.

Thanks Chuck, according to The Economist in the UK, the ***real*** rate of inflation in the USA is

30

repeat

30%

-- Andy (2000EOD@prodigy.net), January 17, 2000.

Chuck, You're saying that the feds cooked the CPI the same way they cooked the MISSION CRITICALS for Y2K. That ruse has worked so far. but the CPI is much more public. Let's see if the media can figure it out and expose the lies.

-- John (LITTMANJ@AOL.COM), January 17, 2000.

John,

Are you serious???

The media???

Collectively they cant even buy a vowel. They are firmly under control of TPTB. I suppose you believe Y2K was a fine example of balanced investigative news analysis.

Bah!

-- Bill P (porterwn@one.net), January 17, 2000.

Thanks for posting this, Chuck,

I was just talking with my son about this very subject. Both of us have been thinking that prices have been climbing like crazy the last couple of year, and wondering if we were biased (we're both builders, and prices in the industry are NUTS!) or maybe there are enough prices staying low that it's keeping the overall inflation low, even though the prices we NOTICE are going up so fast.

What a scam. Low prices for COMPUTER POWER. Gee, imagine how well we must be doing; think of the money I saved by having low price COMPUTER POWER (never mind that I haven't bought a computer in five plus years)

-- jumpoff joe a.k.a. Al K. Lloyd (jumpoff@ekoweb.net), January 17, 2000.

The CPI has had the necessities removed form it because they are really very much more expensive. Energy and food come to mind.

Chuck

-- Chuck, a night driver (rienzoo@en.com), January 17, 2000.

Mr Cestin, we're gonna have ta figger out which one of us is Chuck.

HTNL at 50 paces??

errr HTML.

;-)

Chuck, a Night Driver

-- Chuck, a night driver (rienzoo@en.com), January 17, 2000.

I love this "core rate" of inflation crap that Reagan, Bush, and Clinton have sold to the sheeple. Prices are prices. How much more did it cost you to live in 1999 than in 1998?. You can bet that it's a lot more than 2.7%. After you take out food, energy, and housing, you have much less than half of after-tax income to spend.

-- Mr. Adequate (mr@adequate.com), January 18, 2000.

Food and energy prices are still included in the official Consumer Price Index. The figures are also released, however, not including food and energy for those that want to look at the figures that way as well.

http://www.abcnews.go.com/sections/business/DailyNews/economy000114.ht ml

[Fair Use: For Educational/Research Purposes Only]

Consumer Prices Up for 99

Core Inflation Rate Lowest Since 1965; Industrial Production Meets Expectations

By Jeannine Aversa

The Associated Press

W A S H I N G T O N, Jan. 14.  A big jump in energy prices helped push consumer inflation up 2.7 percent in 1999, the biggest increase in three years. But prices were relatively contained in most other areas, posting the best performance since the mid-1960s.

Outside of energy and food, the core rate of inflation rose just 1.9 percent last year, the smallest annual increase since a 1.5 percent rise in 1965, the Labor Department said today.

Lasts year core rate was even better than a 2.4 percent increase in 1998 and suggests that inflation remains under control.

For December, the Consumer Price Index, the most closely watched inflation gauge, was up 0.2 percent, less than many analysts were forecasting. The December advance came from a leap in gasoline and other energy prices.

[snip]

The 2.7 percent advance in last years consumer prices was the largest annual gain since a 3.3 percent rise in 1996. It reflected a 13.4 percent increase in energy costs, which had fallen sharply in 1998 as the Asian financial crisis severely dampened global demand.

[snip]

Modest Increases in December

The advance in Decembers overall consumer prices reflected a 1.4 percent rise in energy prices, boosting the total increase for the year to 13.4 percent, the largest annual gain since an 18.1 percent increase in 1990.

Gasoline prices rose 4.1 percent last month. That pushed the total increase for 1999 to 30.1 percent, the highest since a 36.8 percent increase in 1991.

Food prices, meanwhile, rose a tiny 0.1 percent in December and 1.9 percent for all of last year. Rising prices for beef, pork and vegetables in December offset falling prices for poultry and dairy products.

Outside energy and food, the core rate of inflation rose a scant 0.1 percent in December, reflecting a smaller increase in shelter costs. This was lower than most analysts expected.

The small, 1.9 percent advance in the core inflation rate for all of 1999 stemmed from moderating prices for shelter, tobacco and other smoking products.

Shelter costs rose just 0.2 percent in December and 2.5 percent in 1999, the smallest annual increase since a 2.4 percent gain in 1982.

Copyright 2000 The Associated Press. All rights reserved.

----------------------------------------------------------------------

-- Linkmeister (link@librarian.edu), January 18, 2000.

Chuck, This could be problem. I'm a night driver (of sorts) as well.. Hmmm. But HTML at 50 paces doesn't sound like a good option for either of us. I'll figure out something.. Maybe I'll have to start using a fake name like the rest of these characters in this place..

-- Chuck (cestin@aa.net), January 18, 2000.

Right....see what Clinton's AP writer emphasized?

He mentioned the official 2.7%, then repeated several times the "better" figures if food and energy are removed.

NEVER said how the 2.7% rate itself was "cooked" by introducing the supposed -26% cut in the computer prices.

Sure the article appears to be correct, but is totally misleading.

-- Robert A Cook, PE (Marietta, GA) (cook.r@csaatl.com), January 18, 2000.

Since they started adjusting the CPI for quality improvements, the index has become completely subjective. The quality adjustments don't make sense to me. Technology has been improving throughout history and it is not logical to try to incorporate these improvements into a price index. The important question is what a consumer has to pay for a typical PC today vs. what they paid in the past. There is no logical justification for adjusting current prices downward because the processor runs faster.

-- Dave (dannco@hotmail.com), January 18, 2000.

Adjusting the CPI for quality improvements has been a pet project of all of the conservative and libertarian economists for some time. Milton Freedman and others in the Chicago School claimed that inflation was overstated because the index did not take quality improvements into account. I believe the House Republicans (under Gingrich) pressured the Department of Labor to revise the index - a lower reported CPI means lower cost of living adjustments, lower increases in Social Security, lower wage increases to unionized workers - and therefore overall less of a budget deficit, more money for Congress to play around with, without anyone realizing it.

-- kermit (colourmegreen@hotmail.com), January 18, 2000.

If the government gets more and more powerful, does that mean we can pay less and less taxes? If the "power" increases, the "cost" should fall right? Same deal, right?

-- Nathan (nospam@all.com), January 18, 2000.