
Ah, one of my pet peeves of indicator measuring, and extremely common. With this type of indicator, the arm needs to be
parallel (or as close as possible to parallel) to the surface being measured or you get the dreaded "cosine error". In the screen capture above, the arm is about 45 degrees to the surface being measured, and hence a change in the surface of say 0.010" will read about 0.007" on the dial, i.e. 0.010" times cosine 45 degrees = 0.010" times 0.7071 = ~0.007".
With the "other type" of dial indicator (plunge type), a similar error can occur if the plunger isn't
perpendicular to the surface being measured, but this is less commonly abused to a great extent.
You can confirm my analysis by sticking a 0.010" feeler gauge under the arm or plunger and see what reading you get.