Pre-Revision CPI: 9%
I have been trying to wrap my head around how the US is enjoying such modest inflation,while Eurozone and Asia are both stricken with much more robust price rises.
As I was mulling this over, Martin Hutchinson reminded us that BLS changed its methodology this year for seasonal adjustments. Hmmm, I wonder if that had any impact?
"Before the adjustment for typical seasonal price fluctuations, the CPI increase was 0.9%. The Bureau of Labor Statistics, which compiles the index, has generally adjusted March numbers downward. In the decade 1998-2007, the average drop was 0.2 percentage points, and the maximum was 0.3. But this year it was 0.6 percentage points. The BLS changed its adjustment methodology in January 2008, but the process appears to have gone wrong.
If this year had followed the 10-year average, the monthly inflation would have been 0.7%, which annualises to an annual rate just below 9%.
That is remarkably close to the inflation rate in China, where the central bank is busy raising rates and squeezing financial institutions. It's well above the rate in the eurozone, where the European Central Bank has held rates constant, without letting troubled banks run out of money. But the Fed has been cutting while prices rise."
That's a little closer to reality than the reported nonsense we got yesterday.
Unless of course you believe that food prices in the US have only risen 4.5% over the past 12 months. Other countries with much stronger currencies are suffering from global food inflation in the double digits -- but we of the free-falling American Peso have inflation under control. Does that smell kosher to you?
And Energy prices up 17% year over year?
Bill King reminds us we know one thing for sure: The lower the CPI is, the more we measure inflation as growth, all the better to generate a higher-than-warranted GDP, and obfuscate the deteriorating economic and financial condition.
>
Sources:
Let's stop fooling ourselves
Martin Hutchinson
Considered view, 16 Apr 2008 08:14
http://www.breakingviews.com/2008/04/16/Global%20inflation.aspx?sg=breakingstories
Consumer Price Indexes (CPI)
http://www.bls.gov/CPI/
http://www.bls.gov/news.release/cpi.nr0.htm
Thursday, April 17, 2008 | 11:20 AM | Permalink
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Time to buy some new chest waders. The shit is getting deep.
Posted by: Marcus Aurelius | Apr 17, 2008 11:30:42 AM
Don’t overlook the added benefits (to the politicians) of understating CPI. For example, there are social security recipient COLA’s (cost of living allowance), and COLA’s for Federal employees and retirees. Also, some private sector wage increases are tied to the CPI. (Excess wage gains on a broad scale will add to inflationary momentum).
It’s not a “conspiracy”, but politicians are very much in the business of creating illusion.
Posted by: DL | Apr 17, 2008 11:34:41 AM
Non-seasonally adjusted CPI in the first 3 months of this year: +.3, +.5, and +.9 = Total for Q1 2008 = +1.7%.
Now, before everyone goes running for the hills because of accelerating hyperinflation, here is the equivalent data from last year: +.5, +.3, and +.9 = Total for Q1 2007 = +1.7%.
Prices have been accelerating over the last year, but the YoY inflation rate has remained ~steady for the last 5 months at ~4 - 4.3%.
Posted by: ndd | Apr 17, 2008 11:36:49 AM
Must be all that substitution... substituting dollar a roll Charmin with a one penny "The Bush Boom" book alone almost makes up for the difference in a gallon of gas at the pump. See, zero net inflation!
Posted by: Brendan | Apr 17, 2008 11:41:57 AM
I'm not here to defend the Government's sham statistics, but wouldn't it stand to reason that food prices here (vs. developing countries) are less sensitive to the underlying commodity cost given the amount of processing, packaging, marketing & distribution reflected in final prices to the consumer?
Posted by: John F. | Apr 17, 2008 11:47:03 AM
Enough with the use of "Peso" to insult the dollar! It was never clever and now it sounds like pandering to anti-immigrant xenophobia.
Indeed, why insult the peso? If you run a 5 year time series on the Mexican peso versus the dollar you will see that it is currently at the strong end of its range. So go pick on someone more appropriate, say, Zimbabwe.
http://finance.yahoo.com/currency/convert?from=USD&to=MXN&amt=1&t=5y
Posted by: TempusFugit | Apr 17, 2008 11:59:03 AM
Thanks Barry for digging into this - very much appreciated. It goes to show that truthiness is really standing in the way of the facts.
Though I don't understand how Euroland's 3.6 pc yoy is worse than US 4.0 yoy. The difference the ECB focuses on headline, the Fed on core. Am I missing something?
Posted by: Alfred | Apr 17, 2008 12:01:21 PM
astute observation from another blog. This opinion is gaining momentum, sadly.
"They are reporting that English .gov is not only working on buying crap mortgage paper from banks, but will do it for 3 years, not 3 months like USA. I would guess Fed will follow. If too much of the **** is squeezing out of the bread into sight, just buy a bigger loaf.
This is a pretty alarming direction. If Fed were to do something similar, with all the outright fraud going on in financials and banks, they could keep this "hidden" for a very long time.
I am starting to think that there is no longer a reason to be placing trades in this marketplace. There apparently are no rules, and the ones that give the home gamer a chance keep getting changed when the "establishment crowd" needs it. To boot, there are no longer referees on the field. "
Posted by: stuart | Apr 17, 2008 12:04:36 PM
Deflation still looks like a bigger risk than inflation. Unless wages start going up, higher prices cannot be sustained. With credit becoming harder to get, consumption is going to drop. Real wages are too low and have to increase one way or another. The only alternative to wage inflation is a depression.
Posted by: jkw | Apr 17, 2008 12:10:33 PM
Deflation in assets maybe...
As long as the government continues wrting cheques to everyone and his uncle, inflation will be the name of the game.
Posted by: D. | Apr 17, 2008 12:20:05 PM
I don't want to get back into the same old debate again but I will note that the CPI does not deflate GDP. The GDP deflator does that.
In the US the CPI is calculated by the BLS and the GDP deflator by the BEA.
Posted by: Karl Smith | Apr 17, 2008 12:28:28 PM
I have to agree, that without wage inflation, the end result will be deflation, not runaway inflation. The Japanese example from 1990 is becoming more and more likely...for those who don't remember, going into 1990 there was an explosion in the value of real estate in the Japanese market, but especially in Tokyo...seems like an oft-quoted number was that the value of real estate in Tokyo alone exceeded the entire real estate value of the US west coast....and the Nikkei was at 40,000...now look at what has happened in the last 18 years...if you stayed with the stock market in Japan all that time, you are STILL underwater, deep water....and Merrill Lynch, has for several of those years suggested that "Japan is our best investment idea going into the new year..." Boy did that work out...check it out...you have to follow your own best ideas in times like these...
Posted by: Alan Greenspan | Apr 17, 2008 12:42:44 PM
Samuel has it right. The govt's numbers are useless for the middle class (apparently now including those making up to $250K/yr per Charlie Gibson).
Inflation in the real economy is rampant.
Posted by: Espumoso | Apr 17, 2008 12:45:49 PM
Ignore the bogus adjustments. Go for the year over year averages. Inflation is at 4.1%.
Posted by: Kuds | Apr 17, 2008 12:46:54 PM
re: inflation being rampant. Agree, am buying bullion.
Posted by: stuart | Apr 17, 2008 12:49:02 PM
The seasonal adjustment factors for the CPI are recalculated every year in January. This year, as in essentially every year the changes were not significant.
Posted by: spencer | Apr 17, 2008 1:05:31 PM
Fed studies and most probably ECB studies are useless
Jan. 2 (Bloomberg) -- Federal Reserve policy makers' economic projections are useless and possibly misleading when given greater weight than more accurate forecasts by central bank staff, according to two scholars.
``Policy makers certainly talk as if they believe they have useful information to add to the staff's forecasts,'' University of California, Berkeley, economists Christina and David Romer wrote in a paper to be presented at a conference Jan. 4. ``For the most part, they do not.''
The Romers are on the seven-member business-cycle dating committee of the National Bureau of Economic Research, the Cambridge, Massachusetts, group that charts U.S. expansions and recessions. The couple's paper calls into question the usefulness of the Fed's November decision to boost disclosure of central bankers' views on inflation, unemployment and growth to four times a year.
The study also raises concern about the relationship between Federal Open Market Committee members' views and the staff outlook, which may be in conflict.
``FOMC members fail to add information,'' the Romers wrote. ``Their efforts to do so are actively counterproductive.''
Posted by: Philippe | Apr 17, 2008 1:16:54 PM
it's comical to anyone who buys the things we need for consumption.
What's more comical is that each time these I-banks let slip that they destroy money faster than it can be created (what used to be known as an earnings release) they get a good shot at recouping the "lost" money in it's share price appreciation the same damn day.
There is no consequence for lack of controls any longer. When MER can destroy almost $10billion and then gets a free pass.....how can you keep that up???
and then toss in options expiry. the very same week and you have quite a recipe for manipulation (that continues to go on without much protest from anyone) and the financial media just accepts that the rise in equities (in the face of yet more capital destruction) is fine because "they do it every month end, qtr end, option expiry, half year end, groundhog day, summer is coming, etc...."
But as long as you make a few bucks from it the moral compass continues to be ditched in favor of the Fed Put....
Ciao
MS
Posted by: michael schumacher | Apr 17, 2008 1:19:31 PM
Does the lower adjusted rate in March mean that later in the year, the rate will be higher than what is actually collected? If so, when typically does this adjustment occur? I just can't fathom how the rate is only 4%! My expenses for electric use, gas, and food are up close to 15% year over year. Rent is about the same.
Posted by: joanna z | Apr 17, 2008 1:22:26 PM
Karl Smith,
Good point about the GDP deflator. IIRC, shelter (esp. OER) is a significant factor differentiating the deflator from CPI. With the turmoil in housing, this may be worth watching.
Posted by: Estragon | Apr 17, 2008 1:23:57 PM
Barry,
Inflation is clearly not a problem Bernanke and Co. care about, despite occasional lip service. Bernanke is staring at some bone-chilling deflationary issues, credit and housing, whose impact will dwarf food and fuel inflation. The stock market is going to crash this year and the U.S. is facing an economic Depression, but inflation won't be the issue. The issue is the trillions of dollars of wealth that is in the process of disappearing.
If such an event comes to pass, there will be no asset in which to hide. Gold will be no haven. Energy will be no sactuary. Even Potash will trade down. There are many investors STUFFED into all these ag and materials names...those will get hit the most. The only thing that will rally is the treasury bond and the Swissy.
In the meantime, enjoy the traditional spring time rally in equities which should peak around 1454, the 61.8% retracement of the first wave down.
AT
Posted by: Andy Tabbo | Apr 17, 2008 1:25:05 PM
Did you seen this months Harpers mag article? It talks about the rigging of all the gov't statistics over time GREAT ARTICLE
Posted by: jeff | Apr 17, 2008 1:26:57 PM
The CPI numbers are gamed. Now that there is no way they can hide the housing increase by calling it "owners equivalent rent" because rent is going up, they will "redefine" housing costs to reflect real estate purchases.
If you want to fix this, get congress to pass a law that limits all pay raises for anyone making more than $150,000 a year to one half the CPI for the previous year. Why one half? It's the hedonics.
Posted by: AGG | Apr 17, 2008 1:27:35 PM
"Don’t overlook the added benefits (to the politicians) of understating CPI. For example, there are social security recipient COLA’s (cost of living allowance), and COLA’s for Federal employees and retirees. Also, some private sector wage increases are tied to the CPI. (Excess wage gains on a broad scale will add to inflationary momentum).
It’s not a “conspiracy”, but politicians are very much in the business of creating illusion. "
Well yes, but if I hear that inflation is really 3% per year instead of let's say an actual 9% per year. It means that the 4% raise I get every year in June means I'm actually making less money from one year to the next. And if the citizenry hears it's 9% inflation, they'd demand higher pay raises. (Not that it would matter, unions here are castrated and the companies would do what the financials have been doing and just lay off people.)
Posted by: rj | Apr 17, 2008 1:45:51 PM
I wish I understood the seasonal adjustments they make better than I do
Posted by: Barry Ritholtz | Apr 17, 2008 1:46:51 PM
