The IRS Is Hip to Inflation

Friday morning, we had two interesting economic data points: Personal Income & Outlays, and the University of Michigan's Consumer Sentiment reading.

The related theme throughout all of this is Inflation. It is the thread that runs through the tapestry of the economy. The interconnected psychology of the populace, the behavior of consumers, the revenue and profits of corporate America and therefore the equity markets, are all hanging on the Inflation factor.

It has to be one of, if not the single most influential economic factor these days.

The US lags the world in what Bill King terms "Inflation Angst." King blames the CPI's lack of correlation with the real world experience of consumers. The rest of the globe is teeming with inflation angst. When we look at other official inflation measures, we understand why. Russia and China are running double digit inflation; Most of European governments are measuring inflation at 5-7%.

Only the United States, with our debased currency and our enormous twin deficits -- balance of trade and fiscal budget -- has moderate inflation ~~under 3~~ 4.2% (see chart below).

Funny how that happens.

But the man-in-the-street is all too aware that the official inflation data fails to reflect their real world experiences, their actual cost of living increases. They understand that their wages are failing to keep up with prices.

But its more than a bunch of whiny consumers, vicious, lying short sellers, pajamed bloggers -- and PIMCO's Bill Gross -- that have recognized the absurdity of our inflation rate. Even the IRS has finally thrown in the towel:

"The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year."

As the table below shows, deduction of gasoline expenses was 44.5 cents in 2006; this deduction increases to 58.5 cents by year's end. As measured by the IRS, we have a 32% rise in energy costs over two years.

The IRS measure of energy inflation is far outstripping what the BLS has stated is happening with fuel prices. No seasonal adjustments, no hedonics for better, cleaner, ethanol tinged fuel -- just a whopping big price increase.

How is it that the government division in charge of collecting money has a better handle on Inflation than then the government department in charge of measuring inflation?

IRS Mileage Deductions