The Federal Reserve has maintained a laissez-faire approach towards inflation, using the lack of “pass through” evidence as the basis in defending their position. After raising prices 20% last month, Dow Chemical (DOW) announced this morning it is increasing prices another 25% next month, and is instituting freight surcharges beginning in August. A survey of Chief Financial Officers released by Duke University last week* showed that nearly half of the CFOs surveyed intend to pass through higher commodity and energy costs their companies incur onto consumers. The CFOs expect prices for their products to rise by 4.1% over the next 12 months.

The Fed and their partners in the art of illusion over at the Bureau of Labor Statistics (BLS), have come up with some pretty creative ways over the years to mask the true rate of U.S. inflation. For readers interested in understanding more about what those methods are, I highly recommend Bill Gross’ June Investment Outlook.** Gross correctly asserts that if it wasn’t for statistical manipulation, the U.S. headline inflation rate would be inline with the global inflation rate which is currently 7%. The Fed and the government tries to brainwash us that we’re just so much more productive than other nations when the reality is that other countries take a straightforward approach in calculating inflation.

“Improving” inflation statistics has its roots in the Nixon administration with the debut of “core” inflation in the Consumer Price Index (CPI). Core inflation removes “volatile” food and energy costs – the things we must consume on a regular basis. The problem is that just like one Saturn cycle ago, there’s nothing “volatile” about food and energy costs that only go up. Of course the 1970s is the era that Bernanke does not recall, preferring like Don Quixote to focus his quest on things not applicable to today’s circumstances. As if core inflation was not ridiculous enough, the Fed has a “preferred” gauge of inflation, Core PCE (Personal Consumption Expenditures).

Core-ing out inflation wasn’t cutting enough of it, so in January 1983 the BLS began Owner’s Equivalent Rent (OER). OER comprises about 33% of the CPI. To quote the BLS: “It is Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.” OER is as real world ridiculous as core inflation. If you rent out your home, where do you live? Besides, a property has more value to an owner, both emotionally and economically, than it would be to a renter.