Bond Outlook May 14th

In a week of “more of the same”, i.e. a continuing series of bad news with little impact on the rather sanguine mood of financial markets, we have an opportunity to consider the reliability of the economic data given to us, or should we say, “served up”? We have long criticised the focus on core inflation as a means of producing lower inflation data by excluding food and energy. It appears however that creative manipulation of US data is broader and goes back nearly 50 years. Kevin Phillips, a US writer and commentator, has written at length on this subject in May’s Harpers Magazine. He identifies the following:

• “discouraged workers”, those who would like to work but have given up looking, have been excluded from unemployment numbers since 1961
• The “unified budget”, dating from 1969, combines the current cash surplus of Social Security with general tax receipts without any consideration given to the huge future liabilities of the Social Security system
• The separation of core from headline inflation took place in 1973
• “Owners’ equivalent rent” was introduced in 1983 and takes a large share of the blame for the current housing crisis

The Phillips’ article ends by suggesting that, without the above changes, unemployment would be over 9% and inflation over 7%.