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Have you heard of PCEPI?

Probably not.

This is the Fed’s biggest and dirtiest secret and it doesn’t want you to know.

But it’s important to understand what “PCEPI” is because it will have important implications for your investment portfolio and what you have to do to protect yourself.

The Fed last week said it will most likely keep interest rates near zero until late 2014. In other words, you won’t earn anything if you keep your money in U.S. money market accounts.

And “PCEPI” is largely behind this latest Fed move.

Let me explain…

How Bernanke Creates the Illusion of Low Inflation

Bernanke thinks “zero interest rates forever” is appropriate because he has a “subdued outlook for inflation in the medium run.”

And that’s where the PCEPI comes in. It stands for Personal Consumption Expenditures Price Index. And it’s what the Fed uses to measure inflation.

The PCEPI tracks the price of some goods, just like the Consumer Price Index (CPI). But there’s a big difference. The PCEPI assumes that consumers switch spending from higher priced goods to those that are stable or falling.

For example, if the price of steak goes up, the PCEPI assumes you will start eating ground beef. So it replaces steak for ground beef in its basket of goods.

Isn’t that a nice trick? No wonder inflation is always low for the Fed.

A Long History of Lies

The Fed has become quite an expert in creating this illusion of low inflation.

In 1980, it changed the way it calculated the CPI. The new methodology made the new CPI rise at less than half the original measure. If the Fed was using the original methodology, the official inflation would be much higher today.

Don’t believe me? Take a look at the chart below from the website, Shadow Government Statistics. This is one of the few organizations that still keep track of the original CPI. Based on that metric, inflation is actually above 10% today.

 

And it gets worse. Tinkering with the CPI wasn’t enough for the Fed.

So it created the PCEPI in 2000. Because of the substitution effect I mentioned above, this index rises at about one-third less than the CPI.

The Fed’s official inflation is a big lie. That’s like adjusting your clock just to make it look like you’re not late for a meeting. Or tinkering with the balance just to make it look like you lost a few pounds, when in fact you gained.

Inflation should be used to measure the loss of purchasing power, and the resulting decline in standard of living.

But by replacing goods that rise in price for cheaper ones, the Fed is able to keep the official measure of inflation low, despite the dollar’s clear loss of purchasing power.

So here’s a question for you…

If you suddenly have to start eating ground beef because you can no longer afford steak, doesn’t that really mean your standard of living is declining?

The Fed’s measure of inflation is essentially meaningless.

How to Protect your Assets from the Fed’s Lies

The best way to shield your assets from inflation is by having solid exposure to commodity currencies. Those are the currencies that will rally the most when the true inflation is rising.

And the reason is simple. Because commodities are priced in dollars, when the buck loses value, the price of these hard assets increases. So by investing in commodity currencies, you can protect your wealth against inflation.

In fact, commodity currencies have already taken notice of the Fed’s latest move to destroy the dollar.

They have surged out of the starting gate in 2012, posting hefty gains in the first month of the year. Take a look at the performance of some of my favorite commodity currencies below.

Commodity Currencies Love the Fed’s Inflationary Policy

Based on the Fed’s calculations, we will never have inflation. But that’s a big illusion.

The truth is that you are losing purchasing power as the Fed continues to attack the dollar.

The best way to protect your portfolio is to invest in commodity currencies, such as those I have shown above. I would buy those on any dips.

Best Regards,


Evaldo Albuquerque

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