On the Daily Reckoning website, there is an interesting article about how the Federal Reserve motivated the Bureau of Labor Statistics to systematically remove tracking any prices that show volatility as part of the Consumer Price Index in order to somehow prove that it is managing inflation.
The problem with the Fed’s theory in removing energy and food prices from the CPI is that those two expenses in the average consumer budget are the tail that wags the dog. Even though most Americans spend less than 7 percent of their budget on food, food expenditures are highly variable, and when combined with always volatile energy prices, they can randomly grow to consume as much as 50 percent of an average budget at any arbitrary time.
What’s worse is that ignoring energy prices ignores that energy is the single most significant driving force in the increase in prices of any good. Name a good that does not consume energy during every part of its creation and delivery process in the modern marketplace. If we ignore the effect of energy prices on the CPI, aren’t we also ignoring the reason why the CPI is unstable to begin with?
Of course, all of this witchcraft on the part of the Fed is designed to create a sense of stability and security when neither state actually exists in the marketplace. The markets are unstable because they are based on an incredible pile of national debt and fueled by reliance on a finite and dwindling resource. The smart money is on resecuring your personal economy by actively dumping both.