It’s Three-Card Monte—And You’re the Mark

The problem with the government—well, one of the problems with the government—is that it always feels like you’re the mark in a game of three-card monte you can never walk away from.

The latest hustle: The Bureau of Economic Analysis on September 30 will roll out a new methodology for the Personal Consumption Expenditures price index — the PCE.

I know… snooze fest already.

But stick around for a minute because there’s a bigger story at play.

The PCE is the gauge the Federal Reserve actually watches when it comes to tracking inflation and setting interest rates. So that right there says it’s relevant to your life because what the PCE shows plays into the interest rates in your life, as well as what Wall Street does.

The BEA is changing how it prices three items inside the PCE formula: portfolio-management fees, legal services, and computer software. When the dust settles, economists at Goldman Sachs and JPMorgan expect “core” PCE to land as much as two-tenths of a percentage point below the 3.4% the government reported for May.

My sardonic translation: Uncle Sam’s economic-tracking minions are mucking about with the inflation formula the Fed uses to push and pull on interest rates so that the rate of inflation appears lower… thus compelling the Fed to lower interest rates sooner.

In fairness, some of this is probably defensible. Still, money management and legal fees feel like that’s something only the top of America’s E-shaped economy cares about.

More important to today’s dispatch is this: Since the 1980s, the government has tweaked the inflation formula three times now. And I am certain there are economists out there who will tell me that’s a good thing and there’s nothing nefarious going on … and yet, every time the government does this, inflation is miraculously lower.

Yet, how many friends and families do you know who talk about how happy they are with prices in America?

Academic inflation the way the government tracks and reports it does not seem to match real-world inflation the way your wallet feels it.

What this recalibration does is help the government, not you. Shocking, I know.

By jiggering with the formula to make inflation seem lower, the government, as I noted, is lowering the primary data point that drives the Fed’s actions. If that pushes the Fed to lower interest rates sooner because inflation doesn’t appear to be a problem (even though it is) then that lowers the rates Uncle Sam has to pay to sell the trillions of dollars of debt he has to continually sell to keep the ventilator running.

In short: Monkeying with PCE is a backdoor way to reduce America’s debt-repayment costs.

Great for the government… but your grocery bill will never get the memo.

When the official gauge says inflation is cooling but your wallet says otherwise, policymakers get to declare victory over a fire you can still feel.

As I hinted at, this tomfoolery isn’t new.

In 1983, the government stopped measuring housing the way real people pay for it — actual home prices and mortgage interest — and substituted a hypothetical estimate of what your house could rent for.

Conveniently, that arrived just as Paul Volcker’s sky-high interest rates were inflating the old measure. So, along comes the new math to paper over reality.

Then, in 1996, the Boskin Commission pronounced the inflation index – CPI—overstated reality by about a point a year.

Great news, the federalistas exclaimed. “Now we can re-engineer the math again for our benefit,” which is a direct quote I’m assuming was once uttered, but who knows?

The upshot: A new formula that assumes when one product gets pricey, you, the consumer, trade down to a cheaper one… and you count the downgrade as though nothing was lost. Chicken fingers instead of steak? All the same!

Every one of the jiggerings is a quiet transfer of wealth from your pocket to a government that is now spending more than $1 trillion servicing its debt, and which is desperate for any way to lower the interest rates it’s having to pay. A lower inflation number makes that math of debt hurt less for the government, while sticking you with the bill.

So, when PCE comes in surprisingly lower this fall, and the media start talking about the need to cut interest rates, take a look at your last grocery bill and ask yourself: Who really benefits?

Guaranteed it’s not you.

And it never has been.