CPI: 2008 vs 1980
Almost overlooked in yesterday's mess was the CPI data. It was a classic:
"Consumer prices were forecast to rise 0.3 percent, according to the median estimate of 81 economists in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.5 percent. Prices excluding food and energy were forecast to rise 0.2 percent, according to the survey median.
From a year ago, the cost of living rose 4 percent, compared with a 4.3 percent 12-month increase in January. The core rate was up 2.3 percent in the 12 months to February, the smallest year-over-year gain since October.
Today's report showed energy prices dropped 0.5 percent, the most since August, after a 0.7 percent increase in the prior month. The cost of electricity dropped by the most since December 2005. Gasoline and fuel oil prices also fell, while natural gas expenses jumped."
Why? Despite Record gasoline prices, CPI was flat on falling gasoline prices -- and that caused futures to spike until the Bear announcement).
The usual suspects claimed that the CPI data was the beginning of the end for inflation. Hey, maybe. But remember, a single data point -- especially a suspect one -- does not make a trend. And note that the folks calling for the end of inflation here are, by and large, the same ones who insisted there was no inflation over the past 5 years. These clueless pundits are the "inflation-enablers."
If you want to know why the CPI data was applauded, look no further than Tuesday's Fed meeting. The odds "the Fed will lower its benchmark rate by a full percentage point" jumped to 60% from zero. This may further pummel the dollar, and could help drive Oil to $125 (or even $150); Gasoline at over $5/gal is a very real possibility. And Gold? Your guess is as good as mine.
~~~
Why has the CPI lagged actual inflation for so long? Its one of the things I haven't seen discussed too much -- outside of John Williams' Shadow Stats.
The short answer: Changes have been made in how we measure and account for inflation.Not only do we understate inflation, but we do so in a systemic manner which has led to the current disconnect between government stats and reality.
Have a look at the chart below, via Tim Iacono. Its pretty clear that by BLS' prior methods of measurements, inflation has been running much hotter than officially recognized.
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What does this official falsification of data lead to? Big Trouble.
Here is what happens when we deny reality, purposefully misstate the truth, and try to hide beneath a series of obsfucations and misdirections: We make policy based upon this false reality.
The drumbeat of bad data, with the imprimatur of legitimacy, provided an undeserved credibility for the "low inflation meme." That creates a level of acceptance of elevated inflation that eventually lead to disaster.
We took rates down to levels that responsible people -- who if they were aware of reality -- would never even do.
There are obviously many many factors that are coming into play in today's credit crisis -- but I can draw a direct line from the Boskin Commission (who IMO, falsely claimed CPI overstated Inflation by 1.1%) to the Greenspan 1% FOMC rate, to the residential mortgage backed derivatives, to the Bear Stearns collapse.
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Pre Boskin CPI
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Actions have consequences. Denying reality, falsifying data, gaming the numbers, cooking the books, making believe inflation is more modest than it really is -- has real world, unintended consequences.
(This latter discussion is worthy of more pixels, and if time permits, I will pull together a more comprehensive analysis).
>
Sources:
US Manipulated CPI Inflation Statistics- Stagflation 1980 and Now
Tim Iacono
Mar 14, 2008 - 03:25 PM
http://www.marketoracle.co.uk/Article4018.html
The Consumer Price Indexes
U.S. Department of Labor, Bureau of Labor Statistics
http://www.bls.gov/cpi/
U.S. Economy: Consumer Prices Unchanged Last Month
Shobhana Chandra and Bob Willis
Bloomberg, March 14 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=at2gzTFCHXQk&
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Barry, does it worry you that you are no longer very lonely on the oil-gold up call and dollar down forever pep squad? I am getting nervous that gold and oil are way overdue for a sharp correction/profit taking week and nothing I see in the daily candlestick charts of individual stocks in these two sectors is reassuring to me at all. Lots of folks have piled into these trades and perhaps some early birds may decide to ring the register next week????
Posted by: lurker | Mar 15, 2008 8:40:11 AM
Barry, you know as well as I do that mis-stating the CPI is a thinly veiled attempt to reign in entitlements.
I recently gave a presentation to a group of executives on the American automotive industry, and a fair portion was dedicated to discussing the real, as opposed to nominal, price of cars over the last twenty five years. Mind you, this was a group populated by a CFO, a CEO, senior VPs, etc, but not one of them even knew that the CPI had been recalibrated over the years, much less just how much it had been manipulated.
I know: anecdotates are nothing to build hard data on, but my strong suspicion is that a vast majority - maybe 98%+ - of the working population has no idea this manipulation is going on. What's worse is that so many policy makers think (rightly so) that screwing senior citizens on their social security checks is a better alternative to allowing the deficit to mushroom.
What I find just as interesting, though, is that retirees are painfully aware of just how poorly their retirment checks are keeping up with the price of bread, milk, gas, etc. And, I know its anecdotal, but I've seen a ground swell of anger build recently, and I'd bet you a dozen Dunkin donuts we get a reality check on the CPI in the next two years due to a coming wave of political pressure from the largest voting block in this country.
Posted by: Byno | Mar 15, 2008 8:43:14 AM
Great post Barry.
Posted by: TheDudeofLife | Mar 15, 2008 8:49:19 AM
The only problem that I have with Shadow Stats is how he recomputes the CPI. As far as I can tell, he is not actually computing using the old CPI methods. What he has done is taken some official (perhaps internal) report that says "the new CPI understates the old one by X%". He then adjusts the graph by X%. That's why the curves follow each other so closely.
In general, this is not a bad rule of thumb, provided that those estimates of X% were correct. However, I would much prefer that he actually computed the CPI using the old means. This would better allow us to see the effects of disproportionate inflation (e.g. greater change in oil, food that nonessentials).
Posted by: Walker | Mar 15, 2008 8:51:02 AM
Currently, denial of reality is at the core of our National psyche.
Everyone should understand this: All of the "official" numbers are fiction. Unemployment, inflation, budget, revenue, trade balances - all of it. Fiction. I'm not saying it's intentional (I suspect much of it is), but it is the reality. If the numbers weren't made up, we wouldn't need revisions.
It's "the numbers", after all, that keep telling us we're not in a recession.
Posted by: Marcus Aurelius | Mar 15, 2008 9:00:44 AM
This was a decent, meaty post...and I appreciate the thought that went into it. (Kind of compensates for the a la Cramer "SHE KNOWS NOTHING!" derision of the WSJ video piece the other day, which I'm hoping was a fluke--the Howard Stern youth brigade already has its heros.)
Posted by: dukeb | Mar 15, 2008 9:01:54 AM
inflation has been running much hotter than officially recognized.
Louise Yamada has been telling clients this for years. And, yes, the govt. does it so as to avoid cost-of-living increases for Social Security.
Posted by: Will Divide | Mar 15, 2008 9:04:38 AM
What I found crazy about the reaction to the inflation numbers is that people think it is under control. However, when you look at a lot of commodity prices over the last month(oil, natgas, silver, copper, wheat), they have all moved up at least 10-15%. This doesn't bode well for future reports.
One of the favorable items recently has been a significant decline lately in meat and cattle prices. However, there were two investors/analysts (different firms) on CNBC a couple of days ago saying that there is a glut of meat coming onto the market currently through inventory liquidation due to various processors scaling back operations or going out of business altogether. This is suppressing short term prices but at the expense of long-term cattle production. Once the current excess inventory is worked through, there will be inadequate future production at which point you should expect to see a future spike in cattle prices.
If the Fed does cut by 75-100bp, I can't see how inflationary pressures won't continue to build. If they cut by 50bp or less, this won't bode well for the markets.
Posted by: wedwards | Mar 15, 2008 9:05:06 AM
Even the nonpartisian 600,000 member business association that is NFIB has taken a side on this argument. They also believe the BLS is screwing up.
http://pbp.typepad.com/economy/2008/03/is-something-wr.html
On that link is a chart that their chief economist uses to talk about inflation. Their own survey used to perfectly match up with inflation for decades, but in the past 3-4 years no longer. The key is NFIB hasn't changed anything, so that means the BLS must have.
NFIB believes actual inflation is much higher than stated.
Posted by: Michael Donnelly | Mar 15, 2008 9:08:55 AM
Reign in entitlement true.
The soldiers, who are bleeding in Iraq, need to know thier retirement, if that is why they are there, is being blde just like social security.
The huge house of cards, what is there is save?
Posted by: ilsm | Mar 15, 2008 9:10:23 AM
Excellent post by Paul Craig Roberts that touches on this topic:
"Watching the Dollar Die"
http://www.counterpunch.org/roberts03142008.html
Posted by: dukeb | Mar 15, 2008 9:27:55 AM
Can someone please explain to me why the members of the AARP....supposedly one of the strongest lobbying groups in the country, do not descend on Washington like the villagers seeking out Dr. Frankenstein??
They must know their Social Security payments are tied to the CPI...
Posted by: Linda P. | Mar 15, 2008 9:28:56 AM
Barry,
That's a pretty specious argument: official figures of inflation were much higher for 1980 than they are now, therefor today's figures are hiding inflation.
Whenever someone's argument rests on a complex conspiracy among politicians, bureaucrats, their spouses, their spouses friends, their spouses friends tennis partners, etc., it is deserving of a measure of skepticism.
The hysterical blogger you link to finds it inconceivable that care prices are down YoY. With sales down and inventories growing, doesn't that seem perfectly reasonable? And he bemoans that the calculations used to measure the costs of homeownership were changed. But with the old calculation, wouldn't they be negative now due to falling home prices?
There is a crowd of people at these blogs who predict a dire economic meltdown and with it uncontrollable inflation. Stagflation involved a mild slowdown. After the Volcker raised rates high enough, we had a severe recession and inflation fell rapidly.
Even Martin Feldstein, no Chicken Little, said this could well be the worse downturn since the depression.
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BR: Bob, I never said this was a conspiracy. Indeed, the Boskin Commission was a "blue ribbon" panel -- very public, fanfare, etc.
It was ot a secret they were trying to recalibrate CPI so as to cut COLAs.
But again, my argument is that we should have a backbone, and deal with SS -- not fake our way thru.
Posted by: Bob_in_MA | Mar 15, 2008 9:30:30 AM
No one I talk to in business or at family gatherings places any credence in the inflation statistics. Yes the reason for CPI manipulation is to contain benefit payments although most people don't really understand this. This is perhaps all part of a tide of scepticism about govt info which has been brought about by the very obvious mendacity of the administration, there's scarcely a day goes by when there isn't some new example, and the rise of the internet. Today half the country is wired and there are lots of voices out there expressing scepticism about whatever info the govt puts out. The fools who have presided over the manipulation of the CPI as in so many other cases are only just starting to realize the host of unintended consequences that have flowed from it.
Finally on another matter what's the big deal about the reaction by some(see dukeb above) to La Strassel's Immelt interview. Just because BR and some of us think this lady has a slightly loopy agenda and was trying to skewer Immelt with it(unsuccessfully) doesn't make us Cramerites or slavish followers of Howard Stern. Get some perspective here.
Posted by: john | Mar 15, 2008 9:32:27 AM
There's a serious problem developing and the government has to take immediate action.
Prior to the depression people made bank runs in an effort to get their cash out because they were worried about losing their money. This prevented banks from making loans and the system started to collapse. But times have changed with the FDIC and SPIC right?
No, Bear Sterns clearly shows the weakness in the system. The investment banks and hedge funds don't have protection because the investments are over the insured amount or they don't want the cash to get stuck in a bank that goes under.
So what happens now? Well, everyone knows history and now we have a clear sign of depression signals, a bank run.
The government has no choice they must take some type of action on Monday. They can not wait for this to get worse. It's already headlining many papers and the public is not dumb.
I think the Fed may step out first with a 1 point or more rate cut. The next step is to block up the futures market, release oil from the reserves or some other action to reduce commodity speculation.
As a regular guy with not much money I'm much more concerned about the banking problem than inflation right now.
If gas goes to $6 and food doubles again that's much less of a problem than a economic collapse. A banking collapse with depression will cause all prices to go down, except for the precious metals which should stay flat.
Posted by: John Borchers | Mar 15, 2008 9:32:38 AM
Sorry, car prices are down, care prices are certainly higher. For instance, it would take a lot more to get me to care about someone on Wall St losing their job.
Posted by: Bob_in_MA | Mar 15, 2008 9:33:46 AM
Herman Kahn wrote in his 1982 book "The Coming Boom" that inflation as measured slightly overstated the true rate. The reason for this was simply the way housing was accounted.
The true inflation rate is somewhere close to John Williams stats but not quite that high. Using hedonic and trade down theories probably help in reflecting quality and productivity improvements but why should we be 'Taxed' for productivity enhancments?
Kahn's reason for wanting to state a close to true inflation rate was simple. Prior to the 1970's corporations used historic accounting for book keeping purposes. Inflation distorts historic accounting and causes managers to make incorrect decisions.
Inflation cost accounting better evinced reality but better yet is replacement cost accounting.
Not trying to be too obtuse here but most analysts have no idea what the REAL returns to a corporation are these days.
I bit of irony but Bear Stearns was the first sell side firms to employ a forensic accountant to help their analysts sell research...
Posted by: Ross | Mar 15, 2008 9:45:38 AM
RE: cattle prices and the AARP
Cattle are being slaughtered at a high rate because of feed prices. I know some farmers who plowed their hay meadows to plant winter wheat this year. The cattle cycle runs about 2 years. Expect to pay up up up for your burgers and rib eyes in the coming 18 months.
AARP? The're a bunch of insurance salesmen. Ma and Pa have been living off of MEW just like the others. The 'greatest' generation are still a bit too proud to storm the castle.
Posted by: Ross | Mar 15, 2008 9:56:15 AM
One of the more nefarious aspects of these manipulated (or if you prefer recalibrated) inflation numbers is that they allow the government to overstate real growth in GDP. We've been in (or close to) a recession for years. Anyone who works for a middle-class wage knows it, the decline in labor force participation shows it, and the manipulated inflation rate is allowing the government to hide it.
Cutting real entitlement spending may have been the reason to restate inflation, but the effect of denying reality ripples through every government statistic. It's difficult to trust any of them.
Posted by: Random | Mar 15, 2008 9:56:39 AM
Thanks for the great post Barry. Probably the best I've ever read.
Posted by: JS | Mar 15, 2008 9:59:15 AM
If you think that the economic situation is serious (as I do), that we need innovative solutions (as I do), do not read Gail Collins OpEd in the NYT today entitled, George Speaks, Badly. It will raise your blood pressure to dangerous levels. seriously, the chance of developing innovative solutions to the most serious economic problem in our times, has to go through some simple minded ideologue. Fat chance for serious change, I say.
Posted by: larster | Mar 15, 2008 10:07:10 AM
Barry,
That's an interesting post but here's another take on it.
http://seekingalpha.com/article/45720-how-owner-s-equivalent-rent-duped-the-fed
If OER manipulates shelter costs to stay in a range, as the blogger you linked to states, wouldn't that be than overstating CPI now? That's what the author in the link I provided is arguing. He's throwing OER out and using the Case-Shiller price index as a proxy for home prices.
I'm not saying he's right or wrong but when people argue that inflation is less or more than the BLS figures, they often use their own methods to manipulate the figure to reach a desired result.
Posted by: Phil | Mar 15, 2008 10:07:32 AM
BLS does a poor job capturing what the true costs of shelter are.
OER is flawed, but I cannot tell you what by how much. I can say that when Home prices are rising, OER understates the price increases. When Home prices are falling, they skew the other way.
Indeed, when House prices drop, OER will make CPI higher.
However, given that we don't know the true baseline cost of shelter is compared to OER, I cannot tell you if it overstates, moves it towards neutral, or understates it. We only know the OER bias reverses -- but not the deviation off of true price.
At TBP, we've been railing about OER for a long, long time.
Click this!
Posted by: Barry Ritholtz | Mar 15, 2008 10:25:53 AM
Jim Rogers has been complaining about the CPI calculations for years. I agree that the falsification of data and the adoption of such false figures leads to suboptimal decisions, which we are now paying for and will for a long time.
Posted by: Mike McCartney | Mar 15, 2008 10:28:47 AM
I saw a segment on CNBC yesterday
if I heard it right (looked for qualifier)
World Derivatives = 570 Trillion
on
Real World Assets = 50 Trillion (give or take a T)
it does work out to be less than 10%(so its legal right)
but
520 Trillion is a lot of interest moolla to pay
even at 1%
Posted by: Greg0658 | Mar 15, 2008 10:41:18 AM
