Could you imagine if the true level of inflation was actually recorded and reported to the markets?

Over the past few years, there has no doubt been serious question of the accuracy of US inflation as reported by the Consumer Price Index.  This subject was raised to a much higher degree given last month’s report on inflation in the US economy, to the point that much of the market and public at large simply have lost confidence in the reported indicator.  Those numbers have reported US inflation to be in the area of about 3%, however even the least economic savvy consumer could probably tell you that it is almost double that over the past year. So why the discrepancy?

Ponder this scenario.  If inflation in the realm of 5% was reported, there would probably need to be drastic financial market adjustments to the prices of securities.  Shorter dated Treasury paper at current levels would be pricing in a negative 300 real basis points, which would imply a need for much higher rates.  The US$ would probably be adjusted significantly lower on a real interest rate differential basis.  Another catastrophic problem would be cost of living increases in salaries and government subsidies to the public.  Simply put, there would be serious turmoil on a number of fronts for an extended period.  Regardless of this scenario, there is no excuse for numbers to be so far off base.