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ex-Inflation, There is No Inflation

Posted By Barry Ritholtz On September 26, 2005 @ 3:23 pm In Commodities,Economy,Fixed Income/Interest Rates | Comments Disabled

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 [1]
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 [2],
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.

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/09/ex-inflation-there-is-no-inflation/

URLs in this post:

[1] The Economist: http://www.economist.com/finance/displaystory.cfm?story_id=4425575

[2] shenanigans of the Conference Board with their LEIs: http://www.chicagotribune.com/business/chi-0509250321sep25,1,7931852.story

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