We’ve often written about how the government’s favored method of measuring inflation, the Consumer Price Index (CPI), is deliberately skewed to keep the official measure of inflation low. By underweighting components such as food and housing or using the substitution method – swapping out higher priced items for lower priced ones on the assumption that consumers will switch themselves – bureaucrats can say, with a straight face, “what inflation?”

Interestingly though, if you dig into the components of the CPI you’ll likely be left wondering what most of the components actually have to do with daily life. Even if you’re in perfect health, it is likely that you’ll go to a doctor, dentist or ophthalmologist in almost any given month. And if you’re like the average American, you probably have at least one prescription filled. For most of the men out there, at least if you’re as vain as I am, you probably also get at least one haircut a month. Given the average frequency of consumption, including those services in the CPI makes perfect sense.

But how often do you purchase a new car? In 1995 the average age of cars and trucks in America was 8.4 years but, as of last year, the average age had risen to 11.4 years. American’s clearly aren’t buying new vehicles as often as they once did if for no other reason than the lingering effects of the recession. Over that same period, the average hourly worker’s wage rose by more than 75 percent while the average cost of a new car rose by just 4.4 percent. Despite the fact that most of us aren’t buying new cars every year, much less every month, the average cost of a new car continues to influence the government’s reading on inflation.

Some other interesting items that you’ll find in the government’s basket of goods and services includes televisions, major appliances such as clothes dryers and refrigerators, video rentals (who still does that?), photographic equipment and living room furniture. While it is true that most of us purchase those types of items at some point in our lives, they hardly impact our day-to-day cost of living. At the same time, the average cost of most of those goods has been steadily falling thanks to increasingly automated manufacturing processes, improving technology and the influence of cheaper imported products.

While the price of any one of those items has any significant impact on the overall inflation measure, in all, about half of the 175 items included in the government’s basket are things which you most likely rarely actually buy. I’m not saying that the prices of those things aren’t important in determining the level of inflation in the economy, but how is the cost of typewriter repair in any way relevant to how much cash I have in my wallet to spend?

The very composition of the CPI is why the government can tell us that there’s really no such thing as inflation today, with it running at just 2.2 percent. And they can say it is just 2.2 percent despite the fact that their own data shows that the average cost of a gallon of gasoline is up by more than 5 percent compared to last year, the price of eggs is up by more than 7 percent, beef prices are up by nearly 10 percent and pork is up by almost 13 percent.

Can’t afford that porterhouse steak? Go buy yourself a dining room table, the average price is down by nearly 14 percent over the past three years. Yet another reason why the CPI is a poor representation of real inflation.

Portfolio Updates

In its second quarter earnings release Wells Fargo (NYSE: WFC) reported that its net interest income rose to $10.8 billion in the quarter as both the housing and mortgage markets continued to improve. Mortgage applications were up from $60 billion in the prior quarter to $72 billion while residential mortgage originations were up by $11 billion to $47 billion, with total loans up $2.5 billion to $828.9 billion. Charge-offs in the quarter came to only 0.35 percent of total loans while a further $500 million in loan-loss reserves were released. Total average deposits also rose 9 percent in the quarter to $1.1 trillion with solid growth in both consumer and commercial categories.

Net income rose from $5.5 billion ($0.98 per share) in the year-ago quarter to $5.7 billion ($1.01 per share). That said, earnings were down on a sequential basis, missing the high-water mark of $1.05 per share in the first quarter of the year, breaking a 17-quarter streak of quarter-over-quarter growth. Revenue also declined by 1.5 percent as compared to the same period last year.

While second quarter results were largely in line with expectations, though slightly weaker on a sequential basis, Wells Fargo is still a terrific bank to hold for the long-term. It is significantly less dependent than its peers on trading as a profit center, has access to inexpensive funding thanks to its huge deposit base and is the clear leader in America’s mortgage market. While the US real estate market continues to improve along with the economy as a whole, Wells Fargo will be able to maintain earnings growth over the long haul.

Continue buying Wells Fargo on dips under 51.