ex-Inflation, There is No Inflation
If that title has you confused, than you are probably not a fan of the CPI ex- food and energy, occasionally referred to as the core inflation rate. That’s the measure some Economists have been using to track the rate of inflation. It’s a foolish game played by those whose grasp on economic reality is tenuous at best.
Ostensibly, removing the more volatile elements of inflation data points avoids having a single outlying month disrupt data. Some of the more numerically literate of you might note that a simple moving average would do the exact same thing, yet allow any simultaneously rising prices to be revealed for what they are.
For whatever reason, some choose to ignore this approach. Instead, they select the “ex-” methodology of looking at inflation “ex-” inflation. This “ex-” method ignores too many inconvenient facts, i.e., that the CRB Index has been in a strong uptrend since October 2001. Yet despite 4 years of rising prices, the core rate has been remarkably stable. One wonders what the appeal is of such a misleading indicator.
Mind you, this is not the first time the Dismal set has
purposefully shifted inflation data downwards. As The Economist
reminds us “when oil prices surged in 1973-74, then Fed chairman, Arthur Burns
asked the Fed's economists to strip out energy from the consumer-price index
(CPI).” This was to get a “less distorted measure of inflation.” Unfortunately,
they couldn’t stop with just oil - food prices were stripped out too, followed
by used cars, children's toys, jewelry, housing and so on, until around half
the CPI basket was excluded because it was supposedly 'distorted' by exogenous
It is no surprise that those who have been overly reliant on the core rate have been unpleasantly shocked recently. The “ex-” group insisted the Fed would pause; after all, why raise rates, if there is no inflation (not once you back out all the inflationary data). Their distress at the most recent hike is directly proportional to their failure to understand the difference between smoothing a data series to reduce volatility, and simply removing inconvenient data that suggests something one does not like. If that reminds you of the recent shenanigans of the Conference Board with their LEIs, than good - you have been paying attention.
Those who live in a seasonally adjusted, hedonically altered, optimized world have to occasionally confront the unpleasant reality of a universe that doesn’t care for their artificial constructs. Ignoring energy - the inflationary data in the CPI - is less than pointless; It shifts the focus away from exactly where it should be: On the part of CPI that has been rapidly increasing in price.
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The Core CPI is useful when juxtaposed to the total CPI, to measure relative rates of change. The disagreement is regarding interpretation.
Ratio of ROC Core to ROC Total. Is it positive or negative, and how far from 1 is it.
What does this value mean for monetary policy.
That's the way to look at it, no?
Posted by: SoCal Chris | Sep 26, 2005 10:21:45 PM
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