Bloomberg: CPI Inflation Data is a "Lie"
We have long railed against the absurdity of the CPI data. The ridiculous adjustments, the lack of correlation between CPI prices and reality, as well as the Fed focus on the core (inflation ex-inflation).
For the most part, the media has dutifully reported the nonsensical CPI data as if it were scripture. This drumbeat of criticism -- both here and elsewhere -- has begun to penetrate the MSM. We've seen a few critical columns over the past year or so. But I never expected to see this kind of critical reporting in a mainstream outlet: CPI's Lie on Household Inflation Doesn't Wash.
Perhaps the era of uncritical reporting is waning.
Here's the Ubiq-cerpt:™
"The U.S. consumer price index continues to be a testament to the art of economic spin.
Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.
Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.
Millions are falling behind inflation because wage increases aren't keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation.
And there's also a goliath looming in the U.S. economy that makes the government's consumer gauge more deceptive. Even with the stinging reality that housing values are dropping in many markets, homeownership costs such as taxes, maintenance and financing are still rising much faster than the index."
We've already discussed the increases in energy, and other commodities. And we have painfully detailed the specifics of Agflation. Let's expand on some of those examples from the Bloomberg column:
• Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
• Housing is the single-largest expense for most Americans -- as much as a third of total cash outlays. The Labor Department's Bureau of Labor Statistics only tracks "owner's equivalent rent" (OER). Housing costs/Owners’ Equivalent Rent is 23.158% of CPI.
• During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% -- about half of its actual price increases.
• Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That's more than double CPI inflation rate).Oh, and ‘Owners’ Equivalent Rent’ doesn’t account for real estate taxes.
A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs.
~~~
Those of you who are fellow tri-state residents (NY, NJ, CT) will be as thrilled as I was that BLS shows transportation costs are declining; especially since the MTA (NY) said it will be increasing NYC subway fares .25 (12.5%) to to $2.25 per ride. Commuter railroad fares on both the Long Island Rail Road and Metro-North rail lines are rising 8% to close its budget gap.
This is now far, far beyond spin - its simply outright lying to present a version of reality that radically differs from the "Real" one (pun intended).
So why haven't we gotten a more realistic version of inflation -- one that has a high correlation with the construct known as reality? Well, it would wreak havoc with GDP, and potentially, the stock market. An accurate cost of living increase -- in theory, what CPI is supposed to measure -- would’ve eradicated a whole lot of GDP gains over the past 5 years.
That "Real Real' GDP figure -- adjusted for CPI inflation, which was adjusted for ACTUAL inflation -- would be far more in in line with the lack of growth in real income and ‘real’ jobs . . .
As reflected in the plummeting dollar, many of the gains of the past few years were purely inflation driven, nominal asset price increases -- not real (after inflation) gains.
>
Source:
CPI's Lie on Household Inflation Doesn't Wash
John F. Wasik
Bloomberg, September 24 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2SUCQ3Bslk0
Wednesday, September 26, 2007 | 07:20 AM | Permalink
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Tracked on Sep 30, 2007 8:14:59 AM
Comments
Barry,
Why not start your own CPI index? You have breakdown of data and you can easily construct one. As long as it is realistic then realist people will follow it. Once a few people start their index then people will ignore the gove data.
Posted by: Vic | Sep 26, 2007 8:05:22 AM
So Yahoo has a headline that reads "Stocks set to rise on interest rate cut hopes." The gist being that durable goods orders will be so bad that "investors" will be able to bank on another Fed rate cut and therefore stocks will be opening higher.
Didn't we just get a rate cut? Wasn't it already bigger than some thought it should be? Should we really be hoping things get worse so that we get more rate cuts--is that really the kind of market driver we want? Sheesh!
Posted by: Global Savings Slut | Sep 26, 2007 8:14:58 AM
"would’ve eradicated a whole lot of GDP gains over the past 5 years."
100% correct. This is the crime of the recent goverment numbers, that we are living in a recession for all but the top 10% or so ( I am one of them) but the official numbers don't show it. I would think that inflation would be in the 5.5-6% range. I hate to go all DaVinci Code on you, but the inflation numbers were more accurate under other administrations.
Vic, that is a great idea. There are other people out there doing their own versions of CPI, but Barry has a both credibility and a megaphone, so his numbers would be believed, esp if they included a clear explaination of the changes. Barry, if you need/want help let me know, will be glad to help you on this. I might workup an intro spreadsheet this afternoon.
Posted by: Mike Sankowski | Sep 26, 2007 8:25:32 AM
The money quote in the ubiqui-cerpt (:))) ) unfortunately, is the part about how housing is pushing inflation up un-fairly. I'm surprised you didn't catch this. Now that owners equiv. rent is no longer functioning to mask the doubling in 7years of housing costs (which thanks to OER never appeared in CPI -- somehow houses were rising in price at 1-% a month in places but inflation was 3 % a year), now that rent is rising, the ex-imflation crowd is pumping up the volume on how unfair OER is. Next time they say how it should be removed, ask if they want to use actual house prices instead, which would show the economy to be in recession with deflation happening all round. wanna bet they claim 'commie plot'?
Posted by: VoiceFromTheWilderness | Sep 26, 2007 8:32:11 AM
wups, meant to type house prices up 10 % per month (in places, at times)
Posted by: VoiceFromTheWilderness | Sep 26, 2007 8:33:59 AM
Barry - take your points but think you've got a few problems. Constructing an index is hard, expensive and data intense for one thing. If somebody can do better let them. A key issue is what basket of good and services go into the thing (& data of course). While line items may go up what's the aggregate impact ? If rising healthcare is offset by lower sneakers then indeed overall inflation isn't rising. There's also (2nd major problem) a lot of noise in the data. If, given data problems, it were my job I'd focus on core and look at whether F&E were impacting it. Our friends at the STL Fed will do all that for you (try this graph - http://research.stlouisfed.org/fred2/series/CPIAUCNS/chart?cid=9&fgid=&fgcid=&ct=&pt=&cs=Medium&crb=on&cf=pc1&range=Custom&cosd=1980-01-01&coed=2007-08-01&asids=CPILFENS+&same_scale=1&cg2=Refresh+Graph )
The 3rd/4th major problems is that taking your thesis as gospel means the Fed shouldn't have cut rates on two grounds, maybe three. With F&E it's higher and given energy structural likely to remain so - so what's your choice between employment and inflation ? You don't want to build in future expectations which starts to happen in the 2% range (a recent mantra). And, as Uncle Allen has been at points to point out, he inherited a long-term secular decline; we are, central to your argument, at risk of a l.t. secular rise, particularly now that China is beginning to export inflation instead of deflation.
All in all the existing price indicators are not badly done but you have to interpret them; and they are better than likely alternatives. What would you recommend instead ? That's affordable and workable ?
Posted by: dblwyo | Sep 26, 2007 8:41:25 AM
So we have the age old lie of false CPI reporting . So Gov't sez, lets try a few more lies , Like not admitting we are in Iraq for Oil . And another one ,Ethanol ,the dream cure for our energy problems ( Oh ..don't try to figure how much this has raised CPI due to food inflation ). Why do we vote in or trust any of these charlatans . Some forthright honesty would be very refreshing. Anyone..... ? Anyone... ?
Meet the new boss, same as the old boss.
Posted by: Bill | Sep 26, 2007 8:42:25 AM
"KB Home Teaming With Disney Division"
I wonder what the scaled-down princess castle will go for? Or maybe I'll just get one of those 1-bedroom oversized shoes that are so popular....substitution at its finest.
Posted by: Winston Munn | Sep 26, 2007 8:44:02 AM
About time that some MSM components get real about the real world inflation.
In the meantime, down in DC, things are going sooooo well that, according to the Moron-in-Chief, children without health insurance don't need it. All they have to do is to go to the Emergency Room is they get sick.
The only thing I don't get is why don't the Republicans, who are supposed to be "fiscally responsible", cut every public health insurance program in the country? After all, if someone get sick, they could go to the ER. That would save a ton of money for further tax cuts ("we deserved it" as per the VEEP) AND it would NOT appear as inflation.
What's not to like?
Francois
Posted by: Francois Theberge | Sep 26, 2007 8:44:25 AM
Hedonic adjustments, substitution effects, and geometric vs. arithmetic averaging all contribute to the sham we call CPI. Shadow Stats is always a depressing read if anyone wants to learn more.
Posted by: vega | Sep 26, 2007 8:50:48 AM
In addition, true CPI reporting would trigger increases in a government benefits (e.g. SS), private contracts with escalator clauses (e.g. commercial leases), and increased payments to dopes like me who invested in TIPS. Should've known better.
Posted by: Lex | Sep 26, 2007 8:55:25 AM
FLUSH: Durable goods.
Non-defence capital goods -12.6%
Thank god for war!
Posted by: Stuart | Sep 26, 2007 8:59:46 AM
More NYS transportation costs - NYS Thruway Tolls going up as well.
http://timesunion.com/AspStories/story.asp?storyID=624677&category=REGIONOTHER&BCCode=HOME&newsdate=9/25/2007
Posted by: 12th percentile | Sep 26, 2007 9:03:08 AM
The reason the government tries to hide the real inflation picture is because they want to keep the "expectations" dilema of the 1970's at bay? Now as time has past and information flows in multi-serial mode, hiding the truth about true inflation, becomes laughible. Still, our Economic High Priest - Bernanke, Mishkin, Plossner, et. al., sermons carry more clout than any layman's ever could. Perhaps this is a good thing, but perhaps only time will tell?
Posted by: Justin | Sep 26, 2007 9:05:11 AM
dblwyo,
www.tinyurl.com
It's your friend.
Posted by: Pool Shark | Sep 26, 2007 9:06:16 AM
"This is now far, far beyond spin - its simply outright lying to present a version of reality that radically differs from the "Real" one (pun intended).
So why haven't we gotten a more realistic version of inflation -- one that has a high correlation with the construct known as reality? Well, it would wreak havoc with GDP, and potentially, the stock market. An accurate cost of living increase -- in theory, what CPI is supposed to measure -- would’ve eradicated a whole lot of GDP gains over the past 5 years.
That "Real Real' GDP figure -- adjusted for CPI inflation, which was adjusted for ACTUAL inflation -- would be far more in in line with the lack of growth in real income and ‘real’ jobs . . . "
Very well stated. You had a blog post some time ago debating whether a conspiracy exists to distort the figures. Regardless of what anyone wants to call it, there is no doubt that a deliberate effort is made to understate inflation. One can naively brush off as a modeling bias only for so long as I would point out, who maintains the models. It's like an accountant blaming the excel sheet for the faulty calculation. Damn Microsoft!!!
Posted by: Stuart | Sep 26, 2007 9:09:59 AM
I have a better shocker headline for Bloomberg. Profit is being privatized while debt is being socialized. We are about to be hosed big time in the name of helping out the little guy. Nothing could be further from the truth.
Posted by: SPECTRE of Deflation | Sep 26, 2007 9:15:10 AM
Doesn't the States have an equivilant to the UK's RPI measure?
The UK chose the CPI for the 'official' measure of inflation a decade ago because it was 'internationally comparable', but the Office of National Statistics (ONS) still also reports the RPI (Retail Price Index) which does include mortgage and other things conspicuously absent from the CPI.
The RPI has been also conspicuously 2%+ higher than CPI for a few years.
http://www.statistics.gov.uk/cci/nugget.asp?id=21
Though public sector pay is being measured against CPI (and the unions are currently fighting this - poss strikes to come), most sensible people demand at least RPI from their pay increases. Because most people do pay to live somewhere.
There's also a personal inflation counter run by the ONS:
http://www.statistics.gov.uk/cci/nugget.asp?ID=22
Again, isn't similar available to you guys over the pond?
The MSM here still primarily and diligently report CPI rather than RPI. The ex-chancellor/prime minister claims 'inflation is under control'... Plus ca change.
Posted by: Jim K | Sep 26, 2007 9:16:13 AM
As the resident BLS defender. Constructing a price index is brutal, BLS collects prices and quantity and quality measures on tens of thousands of items every month from tens of thousands of locations. The staff and hours invested are huge.
Are there plenty of problems with the CPI yes for certain. I complained bitterly to the BRAC and to folks I know at BLS about missing a little outlet I call Wal-Mart in the CPI formulation. It's totally insane but effectively the BLS says the price difference on a box of Cheerios sold at Wal-Mart and Acme is entirely due to the inferior experience of shopping at Wal-Mart and the bother of having to make two trips for your groceries.
And I've already written about movie prices.
And yes the govt has a vested interest in keeping inflation low, thank you Mr. Boskin and your 1996-97 commission.
But at the end of the day we have to work to make the BLS better, not kill it.
Posted by: Michael Donnelly | Sep 26, 2007 9:22:20 AM
"Profit is being privatized while debt is being socialized."
Earlier reports and articles on naked shorting commonly use a similar phrase when discussing one of the primary principles of the Sr. Investment firms such as GS.
"Centralize benefits, distribute costs"
Joe public is merely cannon fodder to be preyed upon regardless what savvy marketing firms would otherwise assert.
Posted by: Stuart | Sep 26, 2007 9:28:15 AM
It's all in the monthly cash flow. As long as rates are low, debtors see no inflation. Those who pay cash have seen inflation but what do they care... if they pay cash that means they have money in the markets and over the last decade houses have more than doublend, equities have ballooned and so have bonds.
If rates go up, for all those who chose variable rates, inflation will be truly felt. Even if asset prices decline, their past purchases' monthly payments will start to look quite expensive.
Now I guess we have to see what kind of flation we're going to get. I think our leaders are aiming for inflation because we need to deflate the debt. But it might not work. Maybe Helicopter Ben will be faced with the simple fact that at one point, a total loss of confidence can be triggered. You could throw all the money you want at consumers but if they're maxed out, they're maxed out. And if I, the fiscally responsible citizen, do not benefit from my conservatism because I need to pay for others' excesses, I won't dance any more. I'll just tighten my purse strings even more to shake the system. We all know the system does not work well in debt repayment mode and us fiscal conservatives will force a shakeout the Fed is not letting happen by propping up the banks.
There are a lot more well managed households out there than excessive ones. The Fed is playing with fire.
Posted by: D. | Sep 26, 2007 9:29:33 AM
Barry, I'm going to have to echo Vic and Mike Sankowski's comments here. It's not enough to simply criticize how CPI is calculated and to note its deficiencies - you also have to demonstrate that an alternative method would provide a substantially better measure.
Another question to answer - the US' CPI is consistent with inflation rates reported in other nations - are they all under-reporting it together?
Posted by: Ironman | Sep 26, 2007 9:31:52 AM
The deceptive CPI numbers are part and parcel of the Bubble psychology. They have consistently made inflation look more benign than it is and encouraged people to have a buoyant outlook. The economic structure is filled with this fizz, more vapor than substance. The indefatigable consumer is running on those vapors, disoriented and detached from prudent practice. Our consumers are literally going to shop till they drop.....when they are truly and totally out of gas. Only then, not far off, will we see the carnage wrecked by the legion of lies.
Posted by: zell | Sep 26, 2007 9:36:23 AM
Barry, I'm going to have to echo Vic and Mike Sankowski's comments here. It's not enough to simply criticize how CPI is calculated and to note its deficiencies - you also have to demonstrate that an alternative method would provide a substantially better measure.
Another question to answer - the US' CPI is consistent with inflation rates reported in other nations - are they all under-reporting it together?
Posted by: Ironman | Sep 26, 2007 9:31:52 AM
I have an idea. Go back to reporting the truth. As an example, the Birth/Death Model is pure bullshit, and we all know it's pure bullshit. With the CPI, it's Hedonics and other goodies that make it pure bullshit. You getting the picture yet?
Posted by: SPECTRE of Deflation | Sep 26, 2007 9:48:39 AM
Aug Durable Goods fell a greater than expected 4.9% headline and 1.8% ex transports vs the consensus of down 4% and 1%. July ex transports were revised down by .3%. The headline # was dragged down by a reduction in auto spending following the ramp up in June and July ahead of the UAW meetings. Non defense capital goods ex aircraft, the pure cap spending component, fell .7% after a .9% gain in July. Y/o/Y it's down 1.2% and is down 3 of the last 4 months. Spending on computers, electronics fell 2.1%, machinery fell 5%. Electrical equipment was the upside, rising 2.9% but after falling 2.7% in July. Bottom line, cap spending at the core is still very sluggish and with consumer demand slowing, there is little reason to ramp up cap ex any time soon.
Posted by: Peter B | Sep 26, 2007 9:54:22 AM
