Economic Sleight of Hand? The Deception of Low Inflation

A commentary written this month by Bill Gross of PIMCO, the most respected bond fund manager on the Street, has been the talk of the professional investment community (link here). According to Gross, the federal government has been "fudging on inflation" by adjusting many of the prices that go into its calculation for improvements in quality. In a brief five page article, he accuses the federal government of having artificially adjusted down key measures of inflation and of having overstated productivity levels and more importantly, overall GDP growth. He has very strong words for the government and in particular, Greenspan's Fed. He writes: "No I cannot sit quietly on this one, nor as I’ve mentioned, have other notables in the past few years. The CPI as calculated may not be a conspiracy but it’s definitely a con job foisted on an unwitting public by government officials who choose to look the other way or who convince themselves that they are fostering some logical adjustment in a New Age Economy dependent on the markets and not the marketplace for its survival. If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line. If real GDP growth is so high, tell me why this economy hasn’t created any jobs over the past four years. High productivity? Nonsense, in part – statistical, hedonically created nonsense. My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less. You are witnessing a 'haute con job' and one day those gorgeous statistics just like those gorgeous models, will lose their makeup, add a few pounds and wind up resembling a middle-aged Mom in a cotton skirt with better things to do than to chase the latest fad or ephemeral fashion." Looks as though the era of Greenspan worship may be coming to an end as this commentary undercuts everything the Fed has achieved, or rather, claimed to have achieved, in the past half decade, most notably of having kept inflation in check.