Government Says 4.1%, But General Mills Reports 10-11% Inflation

by: Avery Goodman

According to its news release last year (pdf), the U.S. Bureau of Labor Statistics (BLS), calculated the unadjusted producer price index (PPI) for crude food products, in February 2011 at 183.6. According to the most recent BLS news release (pdf), the crude food products index stands at 191.2. In other words, based upon the work of statisticians working for our government, crude food prices have risen by a theoretical 4.14% over the last 12 months. That's just slightly more than the increase in their calculation of the alleged overall increase in consumer prices.

But, General Mills is one of the world's largest food companies and its experience is in reality, rather than theory. It buys crude food products of all types, processes and prepares them, producing a myriad of real life consumer products. Company trademarks include Pillsbury, Betty Crocker, Green Giant, Nature Valley, Yoplait, Progresso, Totinos, Jeno's, Hamburger Helper, Haagen Daz, and a host of other brands.

According to General Mills Chairman and Chief Executive Officer Ken Powell,

Our third-quarter results reflect strong worldwide sales growth for our business, but the 10-11 percent input cost inflation we're experiencing this year pressured our margins...

Accurate statistics are very important. Many manufacturers, economists, investors and almost everyone else doing business in America put great stock on statistics coming out of the government. Such statistics often determine where and how they are going to place scarce resources into production. False or misleading data leads to bad policy choices, impaired industrial production, malinvestment, economic inefficiency and less prosperity. The net result is a smaller pie to split among the members of American society.

The General Mlls numbers fly in the face of what is coming from the BLS. A 6-7% discrepancy between reality, as expressed by General Mills, and the theoretical crude food products index cannot be easily explained away. But, this is not news to economist John Williams. He runs a subscription website, known as (to which I have no relation). He says that the government has changed the way it calculates inflation, since 1980, and this has led to a vast understatement of the inflation rate.

Williams takes the same base numbers generated by the U.S. government, and plugs them into the 1980 government inflation formula. The number that comes out is what he calls his alternative consumer price index, or "SGS" CPI. According to that, consumer prices are increasing at around a 10% per annum rate. That is remarkably close to the PPI numbers being reported by General Mills.

The two types of inflation are not the same. General Mills is reporting crude food prices, which is a part of the producer price index, whereas Williams is concentrating his attention on the CPI. But, we are not talking apples and oranges. The PPI and CPI are closely related. Increased producer costs must eventually be passed on to customers.

It is not likely that the BLS would be wonderfully correct in its calculation of the CPI, while being massively incorrect about crude food prices. The General Mills data tells us that the BLS and its methodology is off base. Meanwhile, the incredible similarity between the alternative CPI, as reported by and crude food prices, as reported by General Mills, tends to indicate that the government was calculating inflation more accurately in 1980 than it does today.

Once we realize that government statistics are badly flawed, or altogether bogus, we can use our empirical knowledge to understand the real situation. People who go to the store and buy things know that the deflation has never affected anything other than financial assets and real estate. The price of stocks (after inflation) and home values are dropping, while the price of everything else is soaring.

Inflation appears to be much higher than the U.S. government admits. Investment instruments, such as TIPS bonds, are tightly linked to flawed BLS numbers. For that reason, they are unlikely to be true inflation hedges. To survive what is obviously an era of strong stagflation, investors will need to focus on tangible assets such as, but not limited to, precious metals. This will become more important with time, as the full effect of a near-quadrupling of the U.S. dollar monetary base, is going to make matters much worse, as it works its way through the system.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.