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Inflation Coming Sooner Rather Than Later

by Gary D. Halbert
November 30, 2010


1.  The Real Inflation Rate

2.  What We Pay Versus What They Say

3.  Federal Workers Making $150,000+ Soars

4.  Obama Calls for 2-Year Federal Pay Freeze


In recent weeks, I have voiced my concerns that investors who have shunned stocks and herded into bond funds in record numbers are headed for an unhappy ending, especially if inflation makes a comeback. Yet most pundits are confident that inflation will remain at bay, probably for at least another year or more.  So, they say, go ahead and buy those bonds, even though yields are at or near record lows.

According to official government statistics, the US inflation rate fell to the lowest level in decades during the credit crisis of 2008 and the recession.  As an example, the government’s Consumer Price Index showed that US inflation rose only 1.2% for the 12 months ended in October. 

The official CPI supposedly represents the prices for all the things we buy, including food and energy, both of which are up considerably more than 1.2% over the last year.  As all of us reading this know, the real rate of inflation is higher than that officially reported for this year.  So as a service to our readers who are bond bulls, we will look at the real inflation rate this week, not what the government reports each month.

Following that discussion, we will take a look at another government report on federal worker pay versus that of the private sector.  The US Office of Personnel Management reported earlier this month that the number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and has doubled since President Obama took office less than two years ago.  Wow!  What, you didn’t hear about this?  No wonder, the media glossed over it.

Finally, President Obama surprised virtually everyone yesterday when he called for a two-year pay freeze for most federal workers.  Some believe it was a token gesture since it is not likely to be passed by the Lame Duck Congress.  Token or not, I believe the president deserves some credit for this bold initiative.  Why?  Because union leaders are up in arms.

The Real Inflation Rate

Two weeks ago, I wrote about how interest rates on medium-term Treasury Notes plunged to record lows the day after Federal Reserve Chairman Ben Bernanke announced that the Fed will enact another $600 billion in quantitative easing (QE2). 

One of the main reasons that interest rates are as low as they are is the assumption that the current official low inflation rate will continue indefinitely.   But as you will see below, the prices of many basic commodities are skyrocketing.  Also, we must all keep in mind that the government is running trillion-dollar deficits and exploding the national debt.  Inflation, even as reported by the government, will be back in a big way at some point.

Most people keep up with the US inflation rate by following the Labor Department’s monthly Consumer Price Index (CPI).  For many years, people have questioned the validity of the CPI and for good reason.  The government’s Bureau of Labor Statistics (BLS) has made changes to the way the CPI is calculated for years – arguably to depress the officially reported inflation rate, for reasons I will discuss later.

When it was originally created, the CPI was supposed to represent the increased income needed to maintain a constant standard of living each year.  Put differently, how much more money would you need to make each year to maintain the same lifestyle?  Sounds pretty simple when you put it that way.

Yet as noted above, the BLS has significantly changed the way the CPI is calculated over the years.  Some argue that these changes have been beneficial, while others believe they have tended to understate the real rate of inflation.  I expect there has been some of both.

Here are just some of the changes and adjustments the BLS has made over the years that tend to understate the CPI: the change in measuring homeownership costs from an asset-based approach to owner equivalent rent in 1983; the use of hedonic regression models, starting in 1988; and   the adoption and use of the geometric mean for averaging prices within narrow categories in 1999.  Each of these changes had the effect of reducing the CPI at the time they were introduced.

Here is a chart that compares the current official rate of inflation (CPI) with what it would be if it were still calculated in the same manner as before the changes starting in the early 1980s.  The difference is stark: 8.51% versus 1.17%!

 Monthly Inflation: 1872 to Present 

The question is, why would the government want to understate the inflation rate?  There are several reasons actually, but chief among them is the fact that it costs the government huge sums of money to pay CPI-linked adjustments in Treasury Inflation Protected Securities (TIPS), I- Bonds, and Social Security benefits, just to name a few.  The higher the inflation rate, the more the government has to pay.

What We Pay Versus What They Say

For many years, John Williams of Shadow Government Statistics has calculated what he considers to be the real inflation rate and publishes the following chart periodically.  He calls the real inflation rate the “SGS Alternate CPI” which is currently about 6% higher than the official CPI from the government.  His website is  Here’s his latest real inflation chart:

Annual Consumer Inflation - CPI vs SGS Alternate

Let’s face it, how can inflation be only 1.2% over the last year when we’ve seen the prices of many commodities rise sharply?  On average, our basic food costs have increased by almost 50% over the last year (as measured by wheat, corn, oats, and canola prices).   Beef and pork prices are up almost 40% over the last year.  Cotton prices are up over 50%.  Your morning cup of coffee with a little sugar has risen by around 35% since last October.

[FYI, I happen to be the chief cook in the Halbert family (I really enjoy it), and I’m in the grocery store at least a couple of times a week.  You can just feel prices rising all over the store.  I rarely go to shopping malls, but once or twice a year I’ll stop in Macy’s or Dillards and buy a few clothes for myself.  I did that one day last week, and I was surprised by how much prices have gone up since this time last year.  Yet the BLS says the CPI rose at the rate of only 1.2% over the last year.]

Energy costs are up 23% on average (heating oil, gasoline, natural gas).  Crude oil is back above $80 per barrel and gasoline prices are near or above $3.00 a gallon in many parts of the US. Meanwhile, precious metals prices have skyrocketed with gold soaring above $1,400 an ounce recently.  Copper prices have spiked up since late 2008 along with most other industrial metals.

These dramatic price increases are partly offset by deflating prices for other goods and services we consume, most especially in the area of housing prices which have plunged since the credit crisis and the recession began – and may yet go even lower due to foreclosures.  Keep in mind that most people only buy a house a few times in their lifetime, whereas we all buy things like food, gasoline, etc. on a weekly basis.

The point is, there is some serious inflation already in the pipeline, and it’s only a matter of time before it will start to negatively affect the bond market, in my opinion.

This should be especially troubling to anyone who is over-exposed to bonds and bond mutual funds or ETFs in the months ahead.  Remember, you read it here first!  Now let’s move on to a couple of other topics.

Number of Federal Workers Making $150,000 Soars

In my August 17 E-Letter, I wrote about a new study from the Commerce Department’s Bureau of Economic Analysis (BEA) which confirmed once again that the average federal employee makes over twice that of his/her counterpart in the private sector, if you add in benefits.  Here is the chart I reprinted in that E-Letter.

Average Total Compensation, Federal Civilian vs. Private Industry

You will notice that the chart above came from the Bureau of Economic Analysis, not me.  I point that out once again because I had a lot of negative responses to my August 17 E-Letter.  Some readers claimed I simply made up the numbers and that they couldn’t possibly be true.  Others said they had worked for the government in the past, and there’s no way federal employees make that much.

Well, earlier this month, we got yet another report on federal worker compensation that was also surprising.  The US Office of Personnel Management reported that:

The number of federal workers earning $150,000 or more per year has soared tenfold in the past five years and has doubled since President Obama took office less than two years ago.  [Emphasis added.]

This news was first reported in USATODAY on November 10 and was subsequently picked up by dozens of news sites and TV networks.  In the chart below, you can see how the number of federal employees making $150,000 or more has exploded in the last five years.

Top PayThese numbers seem unbelievable, but these data came straight from the US Office of Personnel Management, as noted above.  I’m guessing that those who didn’t believe the numbers in my August 17 E-Letter won’t believe these either.  But the facts are the facts.

Generally, those making the higher salaries are those who have been working for the government for 15 to 24 years.  On the surface, it would seem to make sense that workers who had been there the longest would get the higher pay – but it shouldn’t work that way.  The federal compensation system doesn’t primarily reward performance or productivity, but rather how long you’ve been there.  A Heritage Foundation researcher noted:

“On average, the government is paying a typical employee 30 to 40 percent more in total benefits -- both wages and salaries -- than a similarly educated and skilled private-sector worker would receive. But ... there are, in fact, some federal employees who are getting underpaid because the federal pay system doesn't reward experience or hard work – it’s basically entirely seniority based.” [Emphasis added.]

No wonder we have so much waste in the federal government!!

The point of revisiting this topic again is to bring you this latest data which further proves that US government employees continue to get above-market pay no matter what happens in the private sector, and no matter whether the economy is growing or contracting.

And just to be clear, this is not a criticism of President Obama only.  The chart and data above go back to 2005 when former President Bush was in office.  It seems that federal workers are immune to the economic cycle no matter who is in office.

Obama Calls for 2-Year Federal Pay Freeze

In recent months, President Obama has been requesting a 1.4% across-the-board pay raise in 2011 for federal workers.  Government workers were already on track to receive a 0.9% automatic pay raise on January 1, but Obama wanted it increased to 1.4%.

Yesterday afternoon, however, President Obama reversed course and called for a two-year pay freeze for most (but not all) federal employees.  The proposal came as a shock to many Democrats and outraged union labor leaders who vow to fight the decision tooth and nail.

The spending freeze proposal, which must be approved by Congress, would not apply to the military, but it would affect all others on the Executive Branch payroll.  However, it would not affect members of Congress or their staffs (of course not!), defense contractors, postal workers or federal court judges and workers.

Obama’s surprise move can only be seen as an attempt to get in front of Republican plans to slash federal pay and the workforce next year, when they will flex more legislative muscle than they do today.  Many questioned why yesterday’s surprise announcement came the day before Obama’s meeting today at the White House with both Republican and Democratic leaders – his first with Republicans since the midterm elections – and two days before the deadline for recommendations by his so-called Debt Commission.

The president said the economy and federal spending would be at the top of the agenda for today’s meeting, one he said he hoped “will mark a first step towards a new and productive working relationship” between the two parties.  That, of course, remains to be seen, and I wouldn’t bet on it.

I want to be on the record as applauding President Obama for making the proposal he did on the federal pay freeze.  Yes, it can be said that he would not have made the decision had it not been for the Republican landslide in the mid-term elections.  And yes, he could have gone even further and cut pay for federal employees as the Republicans suggest.   Yet it took a great deal of political courage to buck the federal union leaders and call for a two-year pay freeze.

Now there are those who say that this pay freeze will never pass in the current Lame Duck session, and that could very well be true.  Given that, some believe the pay freeze announcement was only a political ploy.  For now, I’m willing to give the president the benefit of the doubt – at least until I see if he signs off on a similar bill next year, if it doesn’t pass this year.

In closing, please keep in mind that I always welcome your comments and suggestions – positive or negative.  This weekly E-Letter is sent to over one million people all across America.  We get lots of e-mails from people each week who agree or disagree on the issues I write about, but rarely are there suggestions on how I could make the letters better.  So let me hear from you.

That’s all for this week.  I hope everyone had a great Thanksgiving!  We certainly did at the Halbert home, with lots of family and friends in and around over the four-day weekend. 

Very best regards,

Gary D. Halbert



What’s America’s real inflation rate?
(a bit dated, but still good)

More federal workers’ pay tops $150,000

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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