Why the CPI is a 'massive shell game'

Investors in Treasury inflation-protected securities should be aware the “government is playing games with the CPI numbers” in an attempt to keep inflation low, said Robert Arnott, chairman of Research Affiliates LLC. At a speech in Newport Beach, Calif., Mr. Arnott recommended TIPs as an attractive investment even though there are problems with the consumer price index. The principal amount of TIPs is adjusted upward as the CPI rises. The markets might see a “serious jolt” of inflation in the next three to five years, he said, but until then a “massive shell game” by the government to keep the economic numbers looking good will mask some of the impending problems, he said in an interview with InvestmentNews. The most recent misuse of the CPI was the August/September number, Mr. Arnott said, when the Bureau of Labor Statistics used car prices that were net of the “cars for clunkers” program. That program gave qualifying automobile buyers up to $4,500 in rebates, which the BLS calculated as a price drop. “That's pure fraud” in the CPI, Mr. Arnott said, adding that low inflation figures also tend to overstate real GDP growth. Mr. Arnott, whose firm subadvises some PIMCO funds, gave an otherwise gloomy assessment for the economy and financial markets, advising attendees to avoid growth stocks and commodities, at least until later this year when lower inflation numbers will spook the markets. “That's the time to buy inflation assets,” he said He also recommended deep-value stocks, investment-grade bonds and some leveraged loans.