Weakness against the euro was less important than the fact that the dollar’s “real value against the currencies of important U.S. trading partners, weighted by trade shares, has fallen only about 12 percent from its peak in the first quarter of 2002.” Bernanke’s remarks in total formulate the rationale for the Fed’s easy money policy.

“The achievement of price stability must not and will not be jeopardized. We at the Federal Reserve will closely monitor developments in prices and wages, as well as conditions in the labor market and the broader economy for any sign of incipient inflation. We will also look at the information that can be drawn from surveys and financial markets about inflation expectations. For now, I believe that the Federal Reserve has the luxury of being patient. However, I am also confident that, when the time comes, the Fed will act to ensure that inflation remains firmly under control.”

By now, any literate investor knows there are too many dollars held by Asian central banks, but nobody can figure out what happens next. It is obvious, for example, that if they were to sell, or even stop buying, the ever-increasing supply of treasury debt, interest rates in the United States would rise substantially.

This leading analyst of the CPI questions whether the information conveyed by the series is as meaningful as the financial markets take it to be. In a very effective sound bite heard by this listener on Bloomberg radio, Banerji said that a person with one foot in boiling water and the other in a bucket of ice is on average perfectly comfortable. So it would seem that the tranquility of the CPI does not capture underlying turbulence. The thematic cross current would be one of rapidly escalating price levels for goods and services that are in scarce supply or have some measure of pricing power such as health care or raw commodities. On the other hand, price deflation is evident in many consumer goods.

Thanks to Asian outsourcing, the BLS was able to report declines of 83% in computers, 56% in televisions, 18% in women’s dresses, 7.8% in sports equipment, and 1.7%-5.1% in other apparel categories for the period 1990-2003. For the same period, the all-item average rose 46%. Over the same period, college and tuition fees rose 171%, cable television plus 114.7%, bank services up 104.5%, motor vehicle insurance up 85.2%, and movie, theater, and sporting event tickets plus 81.8%.

But there is more to this than simple crosscurrents, according to Banerji. Several years ago, the very important housing component of the CPI was increasing at an annual rate of 4%. Today, that number is 2.2% and heading lower. Housing is weighted at 40.85% of the total CPI. How is it falling when house prices are rising? Simple. The BLI calculates this important component on the basis of “imputed rent” rather than the capital cost of buying a new home. The BLS gathers the information for imputed rent, or the “Owners’ Equivalent Rent Index” by asking “each homeowner (surveyed) for their estimate of the house’s implicit rent and what the occupants would get for their rent …. if the owner did rent their home.”

We can surmise that Big Brother is alive and well at the BLS where a computer is not a computer is not a computer. In other words, added features, memory capacity, and random bells and whistles are not captured in the straightforward list price of a computer. To expunge all continuity of meaning, the BLS brought forth “hedonics”, the science of measuring the value of a product or a service after allowing for qualitative improvements. A laptop with twice the memory as last year’s model sold at the same price this year is counted as a 50% price reduction. This sort of analysis was applied initially to computers and IT equipment. More recently, a broad range of consumer goods including electronics and automobiles has been subjected to hedonic measurement.

The myth of price stability conveyed by the CPI would shatter upon contact with freely floating exchange rates.

For the substantial holders of dollars outside of the US, the notion that a benchmark so flawed as the CPI should be the preeminent measure of value is laughable. Extra territorial dollars are held not for consumption but for investment. The more astute holders of these dollars must look beyond the CPI to the future supply and demand for the currency. In assessing those fundamentals, they must take into account the integrity of the issuing authority. They must also evaluate the suspect reliability of the principal and the only readily available measure of the currency’s value, the consumer price index.