BY JIM ROGERS

They Are Lying to Us Again

This August, the Bureau of Labor Statistics will begin publishing a new version of the consumer price index -- the widely watched barometer that tracks inflation. The new CPI won't replace the old basket of goods and services, but instead will serve as a supplement.

Proponents advocate the step as a way to address concerns that the current CPI routinely overstates inflation by as much 0.2 percent. The new index, called a chained or superlative CPI, goes beyond the complex existing instrument to include such subtle factors as consumers' tendency to stock up when a product is on sale.

This may seem like a positive move, but it worries me. The supposed "death of inflation" has gotten a lot of press of late. Alan Greenspan's Federal Reserve is credited with helping to achieve price stability in our economy. At least that's the party line these days, the one I come across whenever I read the newspaper or listen to government pundits and economists patting themselves on the back.

The numbers released by the Bureau of Labor Statistics appear to support this view: Inflation rose only 2.6 percent from January 2001 to January 2002, excluding the volatile food and energy sectors; and only 1.1 percent with food and energy added back in. Occasionally, economists even speculate about the possibility of Deflation, something the U.S. hasn't experienced on a broad scale since the Great Depression.

I may have a unique, time-lapse perspective, but having just returned from three years abroad I can't help but notice how much more expensive things have become. I got a physical from my doctor and the price was over twice what it was before I left. Who can afford to dry clean their clothes any more? A can of soup for nearly $3? Movies for $10 and popcorn priced like gold nuggets?

Granted, I live in New York, but New York was an expensive place when I left. Indeed, when I checked I found that from 1998 to 2001, the average movie-ticket price grew an average 6.4 percent annually, according the National Association of Theatre Owners. My wife and I have been stunned at how much prices of nearly everything are up since we left. Who can heat a house or buy insurance?

When I point out the high prices to other people, they are almost always quick to agree. I broadcast recently that prices were actually a lot higher and received a deluge of email from people thanking me for bringing sanity back to their lives. A CEO of a major company tells me he hears daily how there is no inflation, but the costs of his supplies keep rising quickly. "Evidently," he writes, "my suppliers don't watch the same TV I do."

Yes, he meant the TV networks and Wall Street which kept telling everyone to buy stocks because it was a bull market and a New Economy. There actually was no New Economy and the bull market had ended.

1998 1999

Advancing Stocks 3,928 4,224

Declining Stocks 5,879 5,467

Sixty percent of U.S. stocks were down in 1998 but Wall Street and the press either missed it or ignored it.

Did you believe them then?

Everyone now seems to accept that college tuition rises at generally twice the rate of inflation. Every university in the country complains of experiencing its own cost pressures. The U.S. Postal Service is suggesting an 8.8-percent increase in the price of a first-class stamp this June after 15.6% in increases while we were gone.

The raw materials index fund I started makes me suspicious as well. It is based on an index that tracks the price moves of 35 different raw materials on commodities exchanges. I started it on Aug. 3, 1998 and it has risen about 45 percent through mid-March 2002. There's nothing subjective in the measurement -- it's just a gauge of the jump in prices for items like wheat, cotton, oil, or copper. (It's also an argument for investing in commodities: Over the same period the S&P 500 is up about 4% percent.)

The BLS may quibble over the difference in the price of a tie at Marshall Fields versus one at K-mart but it can't argue with the price of silk on the open market.

Such disparities make me question whether inflation isn't a little more slippery than the government's numbers show. The CPI has been a point of contention for many years, but only one side of the story has gotten much attention. In 1996, a Congressional panel, headed by Michael Boskin, the former chairman of the Council of Economic Advisers, concluded the CPI overstates inflation by 1.1 percent a year. Other studies, typically commissioned in part by the BLS and Department of Labor, came to a similar conclusion. The BLS has since "hedonically" modified the CPI several times during the past six years bringing the CPI down even further.

I'm still not convinced we can trust the numbers -- new or old. Remember the CPI is used to determine cost-of-living increases in things like Social Security benefits and union contracts. A lower CPI obviously means lower increases. So there has been and will be great pressure to adopt the new version of the CPI as the standard.

Even if my experience is wrong and inflation has been as low as the government has reported, I guarantee it hasn't been licked for good. Inflation is what happens when too much money chases too few goods. It's a simple supply and demand equation: increase the supply and the value goes down. Monetary economists, like Milton Friedman, make a good argument that inflation is what happens when the growth of money exceeds the growth in the economy.

In fact, M3, a measure of the money supply that includes money market funds, certificates of deposit and dollars held in European accounts, jumped 12.8 percent last year, the most since 1981. M2, the most commonly used gauge of money supply, grew 10.3 percent last year, the biggest spike since 1983.

The 11 interest-rate cuts made by the Federal Reserve last year will also have an inflationary effect. With more credit available, the system creates even more money, which in turn, drives prices up. Many believe Americans aren't spending as much in the shadow of Sept. 11, but in the 1970s we had serious inflation even in a bad economy. It was called stagflation. There has been little invested in the productive capacity of raw materials in the past several years so supply is down now as it was then.

And let's not forget war. War has always lead to inflation because it raises the very cost of being alive. President Bush is, understandably, spending a lot of money to defend us. He is doing this in both traditional (bombs and bullets) and non-traditional (tighter airport security) ways. This isn't the same as spending more money on new highways and schools and advances in technology. The costs of fighting a war are, for the most part, used up the moment the money gets spent. Military expenditures tend to go towards preserving the status quo, as opposed to improving upon it.

I don't believe inflation is dead. The government may tell you otherwise but if you get your financial advice from the government, you deserve what you get. Inflation can become a problem whenever conditions warrant it. This may not always be apparent in the ledgers of autocrats, but I suspect you see it wherever you shop, just as I do.