The Deeper Dive: Even after the Fed's New Rigging, Inflation is Going to Get Hotter and Hotter for Months to Come

Let us lead off with how the Fed is improving the inflation problem for you under the direction of Trump’s newly appointed Fedhead, Kevin Warsh. Warsh is going to ease the burden of inflation on you by dumbing down the inflation gauge the Fed uses for its target to an even lower state of dumbness than it already has attained. He has put together an advisory panel to find a way to get the gauge to show a lower level of inflation all the time than what it would show if it were just left as it is.

That will, at least, sound better for you, easing your mind; but it will also make it easier for the Fed to hit its target rate, since it has not been able to hit that benchmark since it blew itself far off course five years ago when Jerome Powell kept lowering interest rates and buying up all the Treasuries the government could issue to help create more money during a period of inflation that was, according to him, so transitory it would solve itself … so no reason the Fed shouldn’t keep feeding inflation to help the economy, which he kept saying was resilient and robust so it didn’t need feeding! (Ah well, what does sensibility matter?)

This is where we could easily solve the problem of the Fed’s destruction of US money value by stripping away its Johnny-come-lately mandate of fueling the economy for strong job growth, reducing it to a single mandate of governing the currency for “stability.” Along the way, we simply need to redefine “stability” as mandatory zero-percent price inflation on the Fed’s now favored symetrical basis that Powell introduced. In other words, if you run half a percent over zero for half a year, you need to run half a percent under zero for the next half year and keep “zeroing” in on absolutely zero inflation. Kept to that custodial role, the Fed would be harmless, and fiat currency would be stable, and the economy would have to survive by creating a solid economic/business foundation, rather than by endless monetary stimulus.

But Warsh has a better solution. Just change the gauge so that it is slightly weighted like a handy pair of dice to land with the right numbers up slightly more often—never mind that everyone reading here already knows the gauge under-reports inflation already, which is why no one can seem to understand why Americans are so angry about a declining economy when the government’s claim about “real” GDP growth says the economy is still plugging along barely positive and inflation is only somewhat terrible.

Government and Fed-approved economic data has shown that inflation is once again on the rise; but independent data reveals true inflation has been and is much higher than the government cares to admit. (The Winepress)

Trump already made a valiant stab at correcting the inflation problem about a year ago by firing the person whose department was reporting numbers he didn’t like:

Last September, Trump fired the head of the Bureau of Labor and Statistics because the numbers, according to Trump, were not favorable, and installed a new chief to provide more favorable data. Or during the government shutdown last year, when the administration said they were not going to post key monthly information.

I reported on both of those ways of dumbing down the inflation numbers a number of times back when that was happening. Unfortunately, for Trump, the numbers only got worse anyway. Then there was a more recent round of underreporting to report on:

Trump has also requested that corporations no longer be required quarterly earnings reports and instead only do so twice it year, as the economic woes continue to become harder and harder to paper over.

But now we have a completely new round of planned underreporting to report on as the government continues to play the entire populace (successfully it seems) for fools:

Warsh is now looking to manipulate the data some more in the administration’s favor.

These things are always best done incrementally, as has been the case throughout the history of dumbing down inflation data ALWAYS in a direction that looks conveniently better for the government and helps keep those Social Security COLAs lower:

A coming revamp of the Federal Reserve’s preferred inflation gauge could be just enough to tip the scales against interest-rate increases this year, even if it doesn’t dramatically alter the overall picture on prices.

It’s like boiling frogs. Do too much change at one time, and people might cry “foul” and hop out of the pot, but adjust the temperature slowly and bring them to a dead boil over time. (Of course, real frogs are not actually dumb enough to stay in the pot, but US citizens by vast majority clearly are because all of the mainstream media immediately steps into reporting the slightly more government-skewed numbers as being the new more accurate facts, and few there be who question them or their government.)

That’s the early assessment from economists running the numbers on an annual update of the personal consumption expenditures price index that is due in September from the Bureau of Economic Analysis. Several said the planned changes would have likely lowered core inflation anywhere from about one-tenth to nearly three-tenths of a percentage point if they’d already been applied to the latest data.

Just a tweak at a time, as I say…always gradually to the dumber side that makes the government look better. Now, you might think the fact that every tweak over the past forty+ years of tweaking has been to the government’s benefit would be the kind of thing that would eventually raise objections, but you would be wrong. You just have to allow enough time between tweaks for the vast majority to have forgotten all about the last tweak. Certainly, no one in the mainstream media is going to remind anyone, as I faithfully do here.

Fed officials were nearly unanimous at their last policy meeting in June that risks to the inflation outlook remained to the upside. But given how evenly split they were on the need for a rate hike in 2026, a downward revision to PCE at just the right time could help new Fed Chairman Kevin Warsh and the doves hold the line.

In other words, a tweak in time will not save nine, but it will save seven. It will save the seven members of the Fed’s board of governors from hostile ridicule by their presumptive orange boss. It will give them just enough leeway to not throw him into a tantrum over an immediate interest-rate increase. It’s a pacifier for the playpen, but it is, of course, more than that. It’s a way to help the government keep its interest on the debt down and push Social Security’s insolvency problem off by a few more months.

“The case for the Fed remaining on hold has strengthened substantially,” said Stephanie Roth, the chief economist at Wolfe Research. In addition to the planned PCE update, she also pointed to the recent slump in oil prices from the height of the Iran war in April and May and the latest jobs report, which showed momentum in the labor market over the last few months may have been overstated.

Well, she’s right about the overstated jobs reports, as always reported here. That’s where the government walks a fine line because if jobs are too strong, government loses the argument for lowering interest rates, which includes the hope of lowering them on government debt, though that hope is now mostly illusory as real market forces have started to dominate the bond market, which we refer to as the “bond vigilantes” taking control of interest rates away from the Fed to where the best the Fed can do is run to keep up with its own rate increases to maintain the illusion that it remains under control. Lose confidence in the Fed’s independent control of the monetary system via interest rates, and then the whole fiat system crumbles as trust in the Fed is the only real thing the Fed has to sell if it is going to maintain trust in its currency.

Of course, we already know she is dead wrong about inflation continuing to get any help from declining fuel prices. That misguided and highly opiated hope should have been thoroughly put back to bed by the huge heating up of the war, by Iran’s latest refusal to negotiate at all with Trump when it flatly turned down his end-of-the-week schmeasefire #40 (or is it #41?) proposal as not worth discussing because he is untrustworthy. That didn’t stop Trump, AGAIN, from telling the whole world that Iran was begging to make a deal (which they just flatly walked away from because they were never begging for a deal). Iran is happy with the pain their expanded oil embargo is certain to bring). None of that endless repetition apparently stops his supporters from believing he’s telling the truth and that Iran is simply unpredictable (even though it always does exactly what it says it is going to do).

The BEA in a recent article gave a preview of the tweaks, which will include changes to how prices are measured for certain categories — including legal services, computer software and investment advice — which have drawn scrutiny because of their outsize impact on the index. Economists at Citi, in a June 30 report, described the pending updates as “a big deal.”

When you are tweaking the system, you always want to make sure you are focusing your incremental changes on the numbers that have the strongest impact on the overall inflation rate.

In the past, [Warsh has] also signaled a preference for a “trimmed mean” measure of inflation that excludes the most volatile components at any given time.

The Fed already does that by using “core inflation” as the gauge by which it measures its 2% inflation goal. It doesn’t merely trim the mean. It completely excludes the most volatile components of food and energy. But I guess total exclusion of those two items is not good enough. They need to trim the extremes out of all the other numbers, too. Never mind that you cannot readily trim many of those items out of your budget.

The always willfully complicit mainstream financial media reports the whole thing this way:

Flaws in the PCE index are set to get a fix. (Morningstar)

They are not tweaking the system to get more favorable numbers. They are fixing flaws. Oh, the fix will be in all right, but we know the real meaning of that.

Up-and-down-and-up-again gas prices have a big effect on inflation in the short run.

Yes, they have a big effect on all of us. That’s why the Fed completely ignores them already, and has for years.

The upshot: The redo to the Fed’s favorite price gauge, the so-called core PCE index, is likely to show inflation rising a little more slowly this year than previously reported.

There is nothing quite as predictable as government corruption of its own data.

The estimated reduction could range from 0.2 to 0.3 percentage points. So the current 3.4% yearly increase in the core PCE index for the 12 months that ended in May could be reduced to 3.2% or even 3.1%.

See! You’ll be able to feel better right away because reported inflation will go down. Or, if the reported number actually goes up a little, it will, at least, hold the same in the government reports in order to ease your mind. This is a service the government provides for the inebriated masses that should make it easier to remain on your floating lounge chair as the populace does in the movie Wall-E. Sadly, you have to come to sites like The Daily Doom to get your head cleared and have it explained why things were starting to feel a little fuzzier again. (And, if I’m blessed, maybe you’ll consider supporting that effort if you don’t already, but I digress.)

Drilling deeper:

Fed officials and Wall Street investors especially focus on what’s known as the core rate, which omits food and energy costs and is viewed as a better predictor of long-term trends in U.S. inflation.

How come? Energy prices in particular can gyrate wildly in the short run, making the underlying inflation rate look higher or lower than it really is.

But now omitting food and energy costs from its target rate is not enough. You might see the oft’ reported overall inflation rate and that might be upsetting to you. So, they would like to soften that number a little, too, just to help keep you from thinking they are not doing their job well enough, even though they already ignore all food and energy inflation anyway, in spite of the fact that you don’t get to. They don’t even attempt to find a way to average in those volatile prices.

The main PCE price index leaped to a three-year high of 4.1% in the 12 months that ended in May, up from 2.9% in February.

See, that sounds nasty! We cannot have the overall number breaking the four handle! It alarms people. If you could even get it down by that mere 0.2 percentage points they are talking about, that would put that number back on a 3 handle, and anything that starts with a 3 doesn’t sound as upsetting as something that leads off with 4. The new price is no longer $1.01; it’s 99 cents.

Let’s be clear: The core PCE index also shows inflation rising - and rising too fast for the Fed’s taste. That’s true under the new method and the old one.

Yes, it does. So, even with the tweak, the news will not be good, but it will sound a touch better than the old number in the guise of greater accuracy!

Regardless of which PCE index is used, the Fed has fallen way short of its goal. The central bank is aiming to bring the annual rate of inflation down to 2%.

That brings us to the pending changes in the PCE index.

And, it turns out there is actually more here than just 0.2% decrease in the overall inflation rate. They are actually going to get the core rate down, which will really help them with getting back on target:

The Bureau of Economic Analysis, author of the report, plans to change how it measures prices in three categories that influence the core PCE rate:

-- Portfolio-management fees

-- Computer software

-- Legal services

Most of those things don’t affect many of us much, but reducing them means reporting a core rate that is just that much closer to being back on target.

The cost of these services go up and down depending on whether stocks go up or down, hardly a sensible way to measure price changes. When the S&P 500 surges, so does the estimated inflation arising from investor fees for financial advice.

The new formula to determine these investment prices will be less dependent on swings in stock markets.

I always say, “Why report the truth about what is actually happening in market prices when you can fix that with an adjustment in the math?” So much easier and more permanent. None of us want to be bothered by seeing prices that are constantly bouncing back and forth in the metrics just like they really do in our lives. We need to trim that mean reality!

Under the old formula, the government estimates that fees for financial advice have jumped 22% in the past year. But how many people are really paying investment advisors 22% more now than they paid last year?

The new approach will reduce the yearly rate of increase in portfolio-management fees to around 13%, Oxford Economics estimates.

Well, that’s a welcome change! Now, if only they could get it to happen in the actual fees.

The old computer-software index is due for a refresh, too. The new price measure will give more weight to gaming and information technology for businesses, two categories that have grown in importance.

OK. Fair enough if they’ve grown in importance, but …

Both of these categories show computer-related inflation running more slowly than previously reported.

Well, that’s convenient. Give more weight to the thing that has grown in consumer importance, but only if it also is a thing that has slowed down in inflation. That way, its already lower inflation will have more importance.

The old computer-software index showed prices rising at a record 17% yearly pace, dwarfing any prior increase. Historically software prices tend to decline.

The new way of measuring these prices would show an annual increase closer to 10% to 11%, but that’s also unusually high. Some analysts caution the new measure might still overestimate inflation tied to computer software.

How come?

Much of the spending is on artificial intelligence, a technology that improves the quality of software. Qualitative improvements in any product or service are deflationary - that is, they reduce inflation over time.

And there is where the mainstream media helps with a little white lying. Qualitative improvements don’t reduce prices over time. They reduce the reported inflation rate because the government always subtracts from inflation for any quality improvement on the basis that you are getting more for your money. So, they are going to further reduce a category that they are already adjusting downward for quality improvements because some analysts say they are not going far enough.

While there is some logic to adjusting prices for quality improvements, there is also a problem with that methodology. True, you are not buying the same product you were ten years ago, especially with cars and electronics. You are buying a lot more. With the car, things that were options are now standard. You’re getting built-in GPS and built-in phone connections. So, how can you compare to prices of old if you’re actually buying a lot more stuff with that purchase that is now just built into the purchase?

However, the problem with adjusting for all of that is that YOU CAN’T. You are locked into the better iPhone or the better car. You HAVE to buy all the upgrades. So, your real budget costs expand. So, you are getting better toys at what may be a barely higher price. Nevertheless, your budget takes a hit. It becomes harder to live on the same amount of money, even if the toys have more bells and whistles.

So, thank goodness for a government (or a central bank) that is going to make some of that look a little better for you. (Keep your tin-foil sarcasm hat buckled on around here.)

Considering Trump’s own words, we have plenty of reason to think overall inflation should start getting bad … right about now:

Back in June, at the closing press conference for the G7 summit in Évian-les-Bains, Donald Trump explained why he had called a halt to hostilities with Iran. Continued bombing would not reopen the Strait of Hormuz, and as long as the war went on, commercial ships would stay away while emergency oil supplies dwindled.

“We run out of reserves in about FOUR WEEKS,” he warned, conjuring up images of shortages, bedlam, surging prices, and a market collapse on the scale of 1929. Trump told the press that he had studied presidents, and “the one president I did not want to be was the late, great Herbert Hoover.” (The Atlantic)

With that, we move on to the part of this Deeper Dive that is for my paying subscribers where we’ll dig deeper into the real wartime forces of inflation that are going to be impacting you in the manner Trump warned should be arriving right now, and not just talk about the government’s meager attempts to appoint people in the Fed who will work with the government to find ways to adjust the gauges so they look a touch more respectable as the hot numbers start pouring in…and boy are they ever going to come pouring in.