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

Category: Data Analysis, Economy, Employment, Federal Reserve, Inflation, Real Estate, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

98 Responses to “Bloomberg: CPI Inflation Data is a “Lie””

  1. Vic says:

    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.

  2. Global Savings Slut says:

    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!

  3. Mike Sankowski says:

    “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.

  4. VoiceFromTheWilderness says:

    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’?

  5. VoiceFromTheWilderness says:

    wups, meant to type house prices up 10 % per month (in places, at times)

  6. dblwyo says:

    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 ?

  7. Bill says:

    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.

  8. Winston Munn says:

    “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.

  9. Francois Theberge says:

    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

  10. vega says:

    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.

  11. Lex says:

    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.

  12. Stuart says:

    FLUSH: Durable goods.

    Non-defence capital goods -12.6%

    Thank god for war!

  13. 12th percentile says:

    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

  14. Justin says:

    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?

  15. Pool Shark says:

    dblwyo,

    http://www.tinyurl.com

    It’s your friend.

  16. Stuart says:

    “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!!!

  17. SPECTRE of Deflation says:

    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.

  18. Jim K says:

    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.

  19. 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.

  20. Stuart says:

    “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.

  21. D. says:

    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.

  22. Ironman says:

    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?

  23. zell says:

    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.

  24. SPECTRE of Deflation says:

    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?

  25. Peter B says:

    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.

  26. dblwyo says:

    Poolshark – thanks.
    http://tinyurl.com/263wj3

    Micheal Donnelly and Ironman- here, here, Are we on the same page then ?

    Check out (thanks to the Shark) the comp graph.

  27. SPECTRE of Deflation says:

    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

    You seem to make the case that it’s simply bad accounting causing all the trouble or mistakes that are innocent. We are saying they purposefully manipulate the figures to suit the well healed thieves in suits.

  28. mhm says:

    If you see a boat listing and about to sink you can point and say it out loud. You don’t have to build a new boat (it was not yours to start). Leave that to a naval engineer.

    Well, the CPI index is listing and Barry says it out loud. He does not have to create a new index. Leave that to a resourceful university or institution with no political affiliation, grant strings or otherwise.

  29. I’ve posted this picture on my blog, but here’s the skinny which I find interesting. The average Citizen believes the inflation rate is pretty constant.(conference board survey).

    Essentially they say inflation is about 4.5%, CPI actually is about 3%. But there was a big and permanent shift in the CPI in 1992.

    People essentially believed the CPI from 87-92, but since then there has been about a 1.8% divergence in what CPI says and what people believe.

    http://pbp.typepad.com/economy/2007/09/inflation-expec.html

  30. Stuart says:

    As I posted earlier, 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.

  31. SPECTRE of Deflation

    A coverup / manipulation on that sort of scale is too massive to pull off. And generally I’m not a big conspiracy buff.

    Does the govt want lower inflation, yes. I just don’t think they are competent enough to pull off such a scam. Somebody would spill the beans.

    However the -20% declines in computers prices from about 97-2004 that was a complete fraud, Europe did not record those kinds of price declines in computers, and I’m not typing any faster than I did in 1997.

  32. SurferDude says:

    Surprise, surprise, surprise! Folks wake up, waging war always is inflationary. i am not sure if anyone publishes cpi based on the old methodology (before hedonics, OER, etc.), but undoubtedly the rate would be higher than the early 1970s when nixon imposed wage and price controls.

  33. A university ??

    CPI has 350 economic data collectors throughout the country. Maybe a hundred satellite offices around the country.

    100 staff in DC to assemble and crunch the numbers.

    They get some mail collection as well.
    Average electricity price from utility or natural gas prices or average telephone rates

    Plus they look at internet pricing for car insurance, airline tickets.

    I don’t get the impression that any of you appreciate the magnitute of this effort.

  34. michael schumacher says:

    Michael D-
    >>I just don’t think they are competent enough to pull off such a scam. Somebody would spill the beans.>>

    IT’s nothing to do with competency IMO as there is one motivation that trumps any competence implied…..$$$$

    I’ve often thought that there has to be one person who has been screwed or treated poorly who would be motivated to spill the beans however money is a powerful conscious builder and when one has a moral compass it is quickly replaced with a check and the feeling of any wrong doing is gone.

    There is no central point of conspiracy per se however they all have the same end result and you do not have to put much thought into how to accomplish that when you have the type of capital and reserves readily available to do to the market exactly what you want to. We’ve seen this already as the S&P, DOW and NAS got walked up in a rush of buying frenzy that no one has ever seen….and that was on the back of a 3% down day at it;’s lows about 30 minutes into the close.

    Stuart-

    That quote says about all one needs to know about GS and how it does what it wants when it wants.

    Ciao
    MS

  35. Stuart says:

    “I don’t get the impression that any of you appreciate the magnitute of this effort.”

    and yet for all that effort, we get countless examples where the report doesn’t even come close to reality.

    Door #1. Incompetence
    Door #2. Honest human error
    Door #3. Deliberate deceit

    Too much variance, too often to be honest errors or just incompetence. I do not believe the data collectors are incompetent. They’re the ends of the tentacles that gather data food feed the beast. The immediate caretakers of the beast are also not likely to be found incompetent or prone to repeat errors. Not much else left to chose.

  36. Philippe says:

    No man has enough memory to succeed through lies « A Lincoln »

    The most popular word in the financial spheres is no longer new paradigm, productivity, but a trivial triumphing word « lie »

    Bloomberg: CPI Inflation Data is a “Lie”

    “Lies, lies and statistics”, the cynics will retort… Morgan Stanley Strategy bulletin September

    So if today’s indicators are not “fugly” macro news, what do analysts need to realize that the risk of a hard landing recession is now growing by the day? Dr Roubini

    Épiménide
    « All the inhabitants of Crete are liars, Mr X is an inhabitant of Crete and says that he is not a liar » who is he?

    Mr Greenspan’s book is an ode to the power of lies

    Obviously if a man can succeed through lies, civilisation may not, if for A Lincoln it was a memory capacity problem it has now been superseded by computerization and the lies can multiply in geometrical order.

    The good news is that no anti monopoly laws have to be enacted « the lie » is meeting with markets perfect competivity rules it does not require any passport or nationality.
    The lie is the ultimate expression of freedom of movement on the planet earth.

  37. zell says:

    Michael D.
    You don’t understand how gov’t agencies work. First, there is tremendous compartmentalization till you get to the significant career people that have advanced, which they have done by adhering to the agency line, and in their capacity “making it so.” The higher echelons have too much to lose, like their career, their sanity, and their physical health. It’s not pretty- believe me!
    There is a constant winnowing process wherein those who can’t go along to get along leave.
    That exists in the military, the CIA, the VA-anywhere, everywhere, at all levels of gov’t all the time.
    I’m painting with a very broad brush but the essense of what I am assertin is correct, though it may not be true in the case of each particular employee. The final product is a reflection of agency policy. A President can only make a minor dent in that.
    It’s grow up time- time to at least understand what goes on in the belly of the beast. The problem is there is no solution- it is part of human nature and the only defense is skepticism. That’s Barry’s stance.
    On all levels, both private and pub;ic, but much more intensely in the pulic sector, you know what happens when you piss into the wind!

  38. scorpio says:

    if the FRB acknowledged the true inflation rate (and i think they were edging in that direction prior to the credit meltdown in August) then they would have had to raise rates, probly to something like the 6.50% in early 2000. but their main priority since Greenspan took office has been making the world safe for the investment programs of the top 1% of wealth-owners in the US. inflation has to take a back seat, or more likely, has to be bound and gagged and locked in the trunk so no one can see it or hear it.

  39. michael schumacher says:

    I’m sure we would all appreciate the CPI data collection process if it actually spoke to us in realistic terms. You see the fed just added to the inflation problem and it would’nt want to show that at all……

    Frankly it does a great job of masking inflation to the point where it’s useless as an indication of anything we do on a daily basis. However that is not what we are led to believe……

    The one thing missing in all the inflation talk is that wages have been stagnant and will remain so as even a little wage pressure upwards would skew the inflation data to levels that the commerce dept is unwilling to show.

  40. mhm says:

    MD,

    Yes, university and/or other institutions. You probably missed the ‘resourceful’ bit, which does not translate to in house staff.

    Price data collection for food is an example. Given a _defined_ basket of edible goods it is not hard to get a number of people (anybody) reporting weekly prices for the local market across the country. Price variations can then be weighted according to local weather (fresh food), seasonality or other conditions.

    There are many indexes out there (all valid) but, as an individual, what I want to know it the _consumer_ price index.

  41. Linda P. says:

    Something I’ve never understood is, aren’t increases to the Social Security payments tied to the CPI? So isn’t it in the gov’t's best interest to keep the number low?

    If the AARP is one of the most powerful lobbying groups out there, why aren’t they descending on Washington like the guys/marauders in the Capitol One commercials?

    Can anyone help me with this? Is it because that generation was taught to respect authority, so does not question the government calculations? Does anyone think the Baby Boomers will act the same?

  42. Pool Shark says:

    zell,

    You make an excellent point.

    How many German citizens during WWII were merely “following orders”?

    The typical bureaucrat merely tows the party line. Department heads make the strategic decisions, the rank and file only mine the data.

    The weight and momentum of government agencies carry all employees in their wake. If you work for a government agency, you do as you are told and never question your betters. That’s the nature of bureaucracies; there is no conspiracy, merely top-down policies to implement.

  43. C says:

    No doubt inflation has been masked for years. I have long wondered what the incremental cost to the gov’t would be from cost of licing adjustment perspective, not to mention the incremental interest on index linked gov’t debt? As it relates to the most pernicious of all threats, I contend the gov’t has surreptitously devalued the American standard of living via bankrupting trade policy (and I am an ardent free markets advocate) and statistical gymnastics. In effect, the Fed policy has created asset market inflation and trade policy has created standard of living export (homeland deflation). I suspect if you asked most Gen Xers if they intend to match their parents success, and the consensus would be a resonding no (not a class warrior either). The day of reckoning is inevitable. The dollar decline, dismissed by the perma bulls, is the beginning and perhaps the example that will disprive the mean reversion rule. As usual, the “invetment class” will be the last to know.

  44. rex says:

    Maybe this news item might shed some light on how people feel about inflation:
    “ZURICH (Reuters) – Prices for luxury goods rose twice as quickly as consumer prices this year, a study found, showing the jet set need even more to fund their lavish lifestyle.
    Forbes’s Cost of Living Extremely Well Index (CLEWI) — which measures the price of a basket of luxury goods — rose by 6 percent in the year to August 2007, Forbes said, more than twice the U.S. consumer inflation rate.”

    Perhaps those who think the CPI is vastly understating inflation are merely falling prey to the common fallacy that what they think/feel/desire must be universal. Maybe they are just whining that the cost of champagne has risen. Anecdotes are interesting, but they are not facts.

    I’d have a lot more sympathy with these complaints if they were based in some understanding of the strengths and weaknesses of statistics and random sampling. Most of the arguments seem to be of the form: “I paid 10% more for X, so everyone must have paid 10% more for X.”

    Everyone knows there are problems with the CPI, but no one has come up with a better method that’s practical. And any suggestion that Barry could produce a more accurate CPI in his off hours is laughable on its face.

    Barry: If you really think inflation is running 5% or 6% and that GDP is flat, then where are all those profits coming from? And if those profits are phantoms, then how are corporations affording all those big bonuses to the boys on Wall Street who are whining about the cost of champagne?

  45. Mike M says:

    Barry, I agree with your thoughts on CPI. One thing, why doesn’t the bond market see it, or for that matter, the stock market? I thought the market knows everything.

  46. clarke says:

    I’ve seen several studies showing that CPI tracks gold with a lag. What would even be implausible about such an assertion?

  47. zell says:

    Rex,
    Instant better method. Put theprices of houses, food and energy back into the index and eliminate hedonic adjustments.

    Linda,
    AARP realizes that it has done what it can for its current members until more boomers become eligible for benefits. Then it will toughen up again but always keeping in mind that its future is with the following generation.
    Right now AARP is in a give a little to get a little stance… it is still in muddying the waters mode always presenting both sides of the debate regarding Soc. Sec., etal.
    Everyone knows there is a major problem ahead so why continue with the balanced argument charade.

  48. wunsacon says:

    Hi rex,

    I’ll take a stab at this.

    >> If you really think inflation is running 5% or 6% and that GDP is flat, then where are all those profits coming from?

    The extra profit (EPS) of which you speak buys you less food, energy, text messages, cereal, and other items.

    >> And if those profits are phantoms,

    Phantoms in real, not nominal, terms…

    >> then how are corporations affording all those big bonuses to the boys on Wall Street who are whining about the cost of champagne?

    He doesn’t mean every sector. Energy (inflation) and financials (the money changers in an inflating world) powered S&P profit growth. Other sectors contributed little profit growth.

  49. michael schumacher says:

    rex-

    If you consistently lower expectations and then beat them…..well there’s where some of the profits come from.

    Look at BSC….lowest in 10 years……but it’s up on “expectations that it will do better”……..AS the dollar is dropping US based companies get to reap the reward of foreign currency transactions….go look at any multi-national company’s ER and look at how much of it’s earnings are from FOREX…..I know AMZN’s earnings are totally juiced from that very reason.

    We seem to have gone from the complete denial of any recession coming for months to a complete capitulation to the coming recession and it was all done on the back of ONE weak jobs report (that said more about what reality looked like over the last 6 months than any given month).

    Plainly put…in a normal market (the one where actual cycles are allowed to occur instead of artificially “forstalling” them)we have had news delivered just in the last two days alone that would kill the market…but not here as you can see the crap going on in the SPX each night as the news gets worse here and in other places our futures just are immune from it.

    let’s see, dollar tanking (over time), GDP dead, inflation ramping up, analysts going out of there way to lower expectations, oil at over 80, gold at or near ATH….

    Yea that sounds like a perfect recipe to have the index about 150 pts from the all time high…..

    Ciao
    MS

  50. wunsacon says:

    Zell, that same winnowing process takes place in the private sector.

    I’m sure some people at Countrywide said “let’s not sell no-doc loans anymore” during 2004-2006. But, they certainly weren’t promoted to positions to make a difference in policy. And, if they’re making enough money, why would they complain? Why rock the boat? The profit motive works for the 25 yo making $60k/year (copper handcuffs) as much as it applies to the 45yo VP making $250k/year (silver handcuffs). And the 25yo possesses only anecdotal evidence from a number of deals and isn’t going to challenge the VP.

  51. dark1p says:

    a nutty idea, but ya never know:

    bloomberg poking holes in the government status quo. and bloomberg is owned by the mayor, who most decidedly ‘isn’t’ running for president as an independent…

    well, it would be an interesting use of his media empire. if he was running.

    just saying.

  52. SPECTRE of Deflation says:

    Barry, I agree with your thoughts on CPI. One thing, why doesn’t the bond market see it, or for that matter, the stock market? I thought the market knows everything.

    Posted by: Mike M | Sep 26, 2007 11:36:04 AM

    “It’s hard to get a man to understand something when his job depends on him not understanding it.”

  53. SPECTRE of Deflation says:

    “The rich, as Voltaire said, require an abundant supply of poor.”

    Saw this quote this AM. How timely!

  54. MS – govt workers are not well paid, so if they could sell a cover up story, somebody would. and as you say $$$ is a powerful motivator.

    Stuart & Zell – it would be extremely hard for the top CPI folks to be deceived by the top political folks and not realize what is going on. and if the top bureucrats are in on it one would eventually sell out or, the folks immediately under them would eventually find out. The top staff I’ve met at the BLS are intellicually curious, they want to get inflation measured correctly, it’s a challenge they actively wish to solve.

    mhm – ha ! LOL not hard? You are funny. Go get several hundred folks willing to work 40 hours a day for nothing, or 14,000 willing to put in 1 hour a day, and who collects and analyses all that.

    Linda P. and Mike M, excellent points. For all the govt pressure to reduce the CPI, there are forces pushing for a higher CPI. Maybe CPI is exactly right and all the noise is from AARP that want higher SS payments and Wall Street that want their TIPS investments to skyrocket.

    Bond traders are smart folks who understand the CPI. They should not be willing to accept such a low rate of real return if they believe CPI is actually higher. If inflation is really 4% and 10 year is 5% what bond trader is buying ? Go buy some equity and capture the inflation adjusted return.

  55. Estragon says:

    If all you have is a hammer, every problem looks like a nail.

    The “faults” in the BLS data aren’t so much that they ignore reality, but that users of the data fail to appreciate that reality is very different for different users of the tool. For example, consider two different ways BR’s post makes use of the CPI.

    1. As a measure of changes in living standards.

    2. As a means of deflating GDP to measure changes in real output.

    In the first case, changes in standards of living are affected hugely by age, income, locale, ethnicity, occupation, family size etc. Housing costs, for example, were likely negative for anyone already in a hot market circa 2000 and exiting circa 2005. The argument runs that the CPI is measuring relative average living standards over time, but the reality is that the incidence of inflation is at least as important for this purpose as the absolute level. The exclusion of asset prices is a particular problem for this purpose, which I may expand on later.

    The second use is even more problematic. CPI components are weighted by consumption. Using the CPI to deflate GDP assumes production is weighted the same way, but that would only be true in a closed economy, and even then only if all current production was also being consumed concurrently.

    In short, the problem isn’t so much with the CPI per se, but in the way it’s interpreted and used.

  56. michael schumacher says:

    >>MS – govt workers are not well paid, so if they could sell a cover up story, somebody would. and as you say $$$ is a powerful motivator.>>

    So because all of out gov’t workers are not well paid they have integrity to boot???

    Sorry…not buying that…there is something else at work here and neither of us knows , for certainty, what it is. But I tend to think that it has more to do with “do as you are told”…..and not because of some underlying commitment to integrity…..

    Ciao
    MS

  57. KellyJ says:

    …see ‘Shadow Government Statistics’: http://www.shadowstats.com/cgi-bin/sgs …for an alternative inflation calculation.

    That site currently shows U.S. annual inflation rate at ~ 5.5 % , at least double the official government rate.
    _______________

    “Inflation” is caused by debasement of the official currency.

    The U.S. Government inflates {debases} its official “Dollar” currency thru its central bank — the Federal Reserve.

    “Inflation” is not some natural economic malady — it is deliberate government policy.

    _______________

    ” Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ” {– John Maynard Keynes}

  58. rex says:

    MS said: “If you consistently lower expectations and then beat them…..well there’s where some of the profits come from.”

    No no no no. Profits do not come from beating expectations. Profits come from having revenues exceed expenses.

    (slaps forehead)

  59. michael schumacher says:

    it’s not that simplistic rex and you know it….

    Ciao
    MS

  60. wunsacon says:

    >> (slaps forehead)

    LOL!! Physical comedy makes its debut on TBP.

    MS or rex, please accompany your next retort with either a “why, you!” or a “woo-woo-woo-woo-woo! nyuk, nyuk!”

  61. mfo says:

    Look at these 2 charts on inflation:

    Pre hedonics adjustments (1990′s)–
    http://www.shadowstats.com/cgi-bin/sgs?

    Pre owners equivalent rent adjustments (1980)–
    (3rd chart down the page)
    http://www.shadowstats.com/cgi-bin/sgs/data

    If we calculated todays inflation rate as they did in
    1990–it would be 6% not 2%. If we go back to the way
    it was calculated in 1980–it would be 10%.

    Inflation has not been tamed–it is just calculated
    differently. This is done by the government for the
    governments benefit(low cpi = lower entitlement
    increases).

    Either inflation is much greater then is currently reported, or it wasn’t that bad in the late 70′s. I hold with the former.

  62. mfo – now that is some compelling stuff, and it really matches quite well with the surveys of consumers (conf board) who say inflation has stubbornly remained at about 5% not the 3% our CPI says.

  63. Estragon says:

    MD,

    The survey data likely captures a couple of effects. First, people give more weight to like for like comparisons, particularly when seen often. For example, I may notice the price of regular ground beef more than my average total grocery bill. CPI assumes if ground beef goes up, I’ll switch to pork. That may be true, but my perception of price changes is still influenced by the change in ground beef price.

    Second, people do include asset prices in their perception. An asset, after all, is the present value of some future utility. If my house is going up, I intuit an implied increase in the price of future housing utility (even though the increase, if sustained, is actually lowering my personal lifetime cost of housing).

  64. zell says:

    M.D.,
    MFO makes the point. The bureaucrats are already working within a skewed framework. Once they have accepted that framework the game is over- they can do their job diligently but never come close to undistorted outcomes.
    You can’t go to the press and sell stories like that- even if you wanted to. You can’t evenm speak tp the press without the permission of the agency. They have “External Affairs” officers whose sole job is interacting with the ptess and Congress.
    If you do speak out you are on your own. Both the press and Congress may br with you initially bit they will tire of the story and move on. That’s when the bureaucrats come in for the kill. Your only option is to go to the Office of Special Counsel which takes very cases.
    Obviously I’m talking from experience. You have to be on the inside to see it.
    Your friends at BLS I’m sure are very nice but they are operating off certain premises and that predetermines outcomes.
    As to why do bond traders accept the CPI numbers- they operate with in a set framework- their trading reflects a short term time frame. They are not going to make a living looking for eternal truths. Their truth is on the screen in front of them.
    You have to read Nassim Taleb who was a trader and now has moved to philosophy- particularly epistemology- how you know what you think you know. He is a seeker of truth.

  65. It’s still hard to believe AARP would put up with a 2% increase vs. a 10% increase.

    But I do agree that hedonics were crap, but they’ve been phased out and aren’t used anymore. (and by the way computers went from -20 declines to -10 declines right away)

    The OER predates me, I wasn’t paying attention to this stuff in the 1980′s

    But you all do make pretty persuasive arguments, I’m going to have to temper my cheerleading.

    Oh additionally, the BRAC was disbanded, I’m guessing the mild criticism that myself and others from the business community leveled against the BLS during those meetings was unwelcome.

  66. mhm says:

    MD,

    “mhm – ha ! LOL not hard? You are funny.”
    Glad I could lighten up your day.

    “Go get several hundred folks willing to work 40 hours a day for nothing, or 14,000 willing to put in 1 hour a day, and who collects and analyses all that.”

    Seems you extrapolated my food example to a full blown centralized government statistics agency (like CPI data?). Nope, not like that.

    Roaming the aisles and entering 20 price points on a internet enabled cell/pda takes what, 10min. No paper, no pen, no clerks stamping 3-copies of anything. Data validation is done on the server side.

    Analysis is done by whoever wants to massage the data. The best model wins, not necessarily a gov sponsored team.

  67. Karl Smith says:

    Those who believe inflation is 4-5%, do you think that short term interest rates are negative?

    Heck, do you think that the 30 year is trading at effectively 0% real rate? And if so can you explain to me why stocks are so cheap?

    Even a company with no real growth should be trading at a minimum of 30 times earnings because the long term real interest rate is zero for at least 30 years!!

    Perhaps, you think that they are all experience a real erosion in profits. Well, wages aren’t keeping up with inflation and profits aren’t keeping up with inflation were the devil is that money going?

    Not to mention where is all this inflation coming from when the fed isn’t printing any money?

  68. Pool Shark says:

    “Not to mention where is all this inflation coming from when the fed isn’t printing any money?

    Answer: Credit

  69. techy2468 says:

    Karl….even though i am scared of inflation eating my 5% return from savings account..

    i am more scared of losing 15-20% in the stock market.

    dont you think thats the reason not everyone is invested in the stock market, even though interest rates are going down??

  70. cygnus says:

    To my knowledge there seems to be a large consensus among academic economists that the CPI is a decent measure of inflation. In fact I have heard some argue that it overstates inflation. It seems to me if the CPI is some tortured statistical instrument for some government conspiracy that there would be a larger outcry from academics. Thats not to say there are not dissenters among them – it just seems to me this issue would be a lot hotter.

    Seems to me OER has the potential to overstate inflation. Considering its making some sort of assumption that folks rent their house to themselves and thus their housing costs follow the rental market. Seems most americans have mortgages where their outlay each month is going to be pretty constant – things effecting it would utility costs insurance and taxes.

    I think Estragon makes an excellent point that it really depends on how you use the CPI – or think it should be used.

    It seems a lot of the people who have complaints against the CPI seem to have political or ideological motives. Not saying this is necessarily the case for BR.

  71. Winston Munn says:

    The entire debate on CPI is meaningless as the definition of that being measured is spurious. Price increases are a result of inflation, not inflation itself. And how can one ever identify a basket of goods that correctly apporximates general price increases in the first place?

    Inflation is a monetary event, and it is lagging in its effect. It is simply a debasement of money via either money creation (excess supply) or lowered demand (devaluation).

    A simple example shows this. Suppose China is selling t-shirts for “X” yuan and today it takes $6 US to buy that product. If the U.S. dollar overnight is devalued by 50%, the Chinese still sell their t-shirts for “X” yuan but it now takes $9 US to buy the product. No supply and demand change. No wage/price spiral. Simply a debasement of the dollar.

    However, there can be another event that acts as if it were inflation when it is not, and that is expansive credit. Credit expansion acts more like deflation, allowing increased purchasing power of limited capital. It is not inflation but a liquidity event – liquidity simply meaning “the ability to transact”.

    Unlike real inflation, which must eventually be felt generally among all goods, debt expansion – call it haluciflation as it is more illusion than reality anyway, and peyote is usually involved at later stages of the cycle – must by its nature target an asset class.

    Haluciflation has driven home prices to an unsustainable level. At this point, the only options are to print enough money to supply the divergence between price and affordability or allow the haluciflated price to come crashing down to affordable levels.

    But to argue about which price-change measures reflect inflation is as silly as arguing whether a camel or a zebra will win the Kentucky Derby.

  72. s mehta says:

    Several people have brought up the key question – if inflation is 5-6% in reality why does the bond market accept zero or negative real rates? Can money illusion exist accross a whole free market?

    I dont know the answer but it certainly challenges the idea than inflation is underestimated.

  73. a guy called john says:

    It’s still hard to believe AARP would put up with a 2% increase vs. a 10% increase.

    two words: wealth effect. they just spent the last 5 years watching their houses explode in value. what do they care if their social security check barely budged? the house they bought 20-40 years ago is worth 8 times what they paid. if they are lucky, they sold out and moved south and still own outright. par-tay til the next tax bill comes. then the foreclosures, public employee benefits and construction project inflation catches up to ‘em.

  74. Caleb Standafer says:

    The analysis of medical insurance premiums would be more sound if you considered that at least a significant percentage of premiums are paid by employers. The increase in premiums subsitutes for an increase in wages. Cash wages are rising more slowly because of employers bearing the higher cost of insurance premiums. Employees are receiving raises to the extent that employers are paying increasing medical insurance premiums, and then using those raises to pay for medical insurance.

  75. another economist says:

    Totally crazy.

    There is a near-universal belief among Ph.D. economists that inflation is being over-estimated. See, for example
    http://ideas.repec.org/p/nbr/nberwo/7695.html
    or
    http://www.nber.org/papers/w10712

    Reading how people rant about OER reminds me about how every economist ranted about not OER. See for example, the opinion of the famously pro-government Cato institute: http://www.cato.org/pub_display.php?pub_id=891&full=1 As they state “So obviously flawed was the treatment of housing costs that a chorus of economists protested that it be changed.” The assumption that every person buys a new house every year is just stupid.

    The huge flaws from not performing quality adjustments (using, e.g., hedonics) were known to the readers of this Time magazine article from 1961 http://www.time.com/time/magazine/article/0,9171,869925,00.html

    The objections to substitution effects are silly: anyone claiming that they don’t respond to a 50% price cut is a plain liar.

  76. Fullcarry says:

    The bond is driven my leveraged players. Leveraged players do not care about inflation. They care about financing cost. Hence their obsession with the direction of the fed funds target.

  77. Clyde says:

    Fullcarry,

    You took the words right out of my mouth. Leverage is why nothing else matters in the bond market.

    As for inflation, today “California O.K.’s Tuition Hikes”: The initiative is part of a plan approved by the University of California’s Board of Regents on Sept. 20 that calls for yearly fee increases over the next three years ranging from 7% to 15% for students in the system’s business, law, medical and other professional schools. The additional revenue will help the graduate schools bounce back from budget cuts imposed on them earlier this decade, system officials said.

  78. kennycan says:

    Why are real bond yields 0? One reason is that foreign governments buy trillions of USD’s worth of bonds in order to keep their currencies from rising against the USD. This keeps their domestic population working and so they don’t care about what they are “earning” on the “investment” of their USD “surpluses”.

  79. wunsacon says:

    Fullcarry or Clyde, would you please elaborate on why the “bond vigilantes” don’t care about real return?

  80. The Dirty Mac says:

    “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.”

    Yes. Government has a vested interest in growing as little as possible.

  81. wunsacon says:

    Dirty Mac, people want government to do many things and so Congress passes many programs expanding government to get re-elected. But, if inflation expectations rise and cause existing program costs to rise and TIPS to rise, the cash flow deficit will become more of a headache for politicians than it is now. Also, since CPI is used to calculate real GDP growth, a higher CPI will make real GDP look lower and disillusion the sheeple. Overly nationalistic politicians won’t be able to say we have a “strong economy” that’s “growing better than those dopes in country ___”.

    Government has a vested interest in keeping official CPI low.

  82. Aaron says:

    Keeping up your own CPI index could be automatic.
    Using XML your webpage could pull the raw underlying data from disparite sources and assemble and print them on your page on the fly. And you could use the underlying raw data fresh of the .gov web. if they offer it.
    I would imagine.

  83. Blissex says:

    «To my knowledge there seems to be a large consensus among academic economists that the CPI is a decent measure of inflation. In fact I have heard some argue that it overstates inflation. It seems to me if the CPI is some tortured statistical instrument for some government conspiracy that there would be a larger outcry from academics. Thats not to say there are not dissenters among them – it just seems to me this issue would be a lot hotter.»

    Many famous academic economists also profess to believe that income distribution is determined solely by productivity (todays CEOs are a hundred times more productive than the CEOs of the 50s), that small increases in the minimum wages cause large drops in employment (and not small drops in profits), and a lot of other idiotic propaganda that helps them enhance their academic career and get tenure and eventually perhaps a Ken Lay endowed chair (he created 30 of them). What do you think, that the benefactors of Economics departments are more likely to be low wage losers eaten by inflation or hugely wealthy scammers benefiting from free government money?

    «Several people have brought up the key question – if inflation is 5-6% in reality why does the bond market accept zero or negative real rates?»

    Well, for a constructive proof look at the Japanese bond market since the great deflation… There must be something that kept their bond market alive :-). In part it is agent-principal issues, where agents buy assets for principals following cover-my-ass formulas. Bonds are safe, aren’t they?

    «Can money illusion exist accross a whole free market?»

    But perhaps that you have missed that for example the vast majority of treasuries has been bought by foreign governments, while USA entities have been buying real assets or proxies or foreign assets like crazy (e.g. Warren Buffet, and he has shorting the dollar heavily too).

    The foreign governments that have bought a lot of USA debentures and fueled the zero or negative real interest rate story have done so for political reasons or to keep the dollar high, and who cares about the negative real interest rate. In effect the Saudis and the Japanese have been covertly financing the Iraq war by buying USA paper at ridiculously high prices, and the Chinese have been stealthily subsidising their exports while remaining in the WTO by doing the same.

    An enormous percentage of the profits of quotes companies goes to financial companies, which can only make money if interest rates are near zero or negative; as to non financial companies the story has been the internal carry trade, borrowing essentially for free in the USA and investing it to acquire foreign assets, from foreign stocks to building enormous amounts of capital intensive plants in India and China.

    The extraordinarily low cost of capital to USA companies has not only made their exporting of jobs abroad very cheap indeed, it has resulted in the export of capital intensive production to countries with no capital of their own and plenty of labour. At their stages of development India and China should be selling t-shirts and plastic shoes, not iPods, mobile phones and high speed Internet routers, and the sunk costs of capital intensive plants should keep high value added jobs in the USA.

    But thanks to Easy Al and Helo Ben handing free capital to USA corps, they have been able to build highly advanced, capital intensive plant abroad, as their cost of capital has been lower than even the low cost of labour there.

  84. Blissex says:

    «what I want to know it the _consumer_ price index.»

    But the CPI as published by the government is indeed the Consumer Price Index. The skill and art of the BLS is in defining the appropriate consumer to keep his index low. For example the BLS via hedonic adjustments thinks *that* consumer has a fixed income, so if steak becomes rises in price, he will eat more beans, if holidays become expensive, he will stay at home more, if petrol goes up in price, he will travel less.
    Of course the cost-of-living of such a cleverly defined consumer shows no inflation, because it is assumed the BLS consumer will always be able to live within a given fixed budget by trading down all the time. In other words it presumes that the consumer whose prices are being index is totally indifferent to his standard of living, the only thing that matters is the *cost* of living. The standard can go down as long as the cost can stay constant.

    «I contend the gov’t has surreptitously devalued the American standard of living via bankrupting trade policy (and I am an ardent free markets advocate) and statistical gymnastics.»

    But that’s precisely the point — the CPI measures the *cost* of living, given a variable (downward) standard of living.

    «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.»

    This is bait-and-switch — nobody here has criticized the *data collection* done by the BLS. It is the *index* built from that data in very astutely political ways that is being laughed at.

    «But at the end of the day we have to work to make the BLS better, not kill it.»

    Well, there are people have been working towards building a better index, one that measure a constant *standard* of living, not the lowest one to which you can afford to trade down. This is the Dynamic Price Index, mentioned in other threads, and it shows that currently if a consumer want to maintain their standards of living their costs go up by roughly 8% a year.

    «If the AARP is one of the most powerful lobbying groups out there, why aren’t they descending on Washington like the guys/marauders in the Capitol One commercials?»

    The main problem that keeps the AARP awake is not maintaining the standard of living of their members, it is making sure they make out like bandits from their appreciation of their assets, and the second biggest is to get their benefits at all, never mind for them to be fully inflation proofed. For many AARP members the state or even the company pension they have is worth peanuts compared to the huge amount they have vested in their assets.

  85. SD Scientist says:

    Criticizing the government is easy. Pinpointing real problems with CPI is hard. It’s hard to find a black cat in a dark room, especially when the cat isn’t there.

    * There is no reason for the government to manipulate data to artificially depress the CPI. Government does not spend its own money. Government spends taxpayers’ (your) money.

    * There’s no evidence of a massive conspiracy to depress the CPI.

    * It is perfectly natural to use rents instead of house prices for CPI during the boom. CPI measures renter’s cost of living. Rents are much better behaved than houses, and they don’t experience bubbles. If we used house prices, we’d end up extremely erratic numbers which would not represent reality. What do I care if house prices go up 3x and new buyers’ property taxes go up 2x, if I’m a renter? Or if I bought a house in 1995? If rising house prices affect CPI, should we somehow correct for the fact that homeowners’ net worth goes up, allowing them to spend more money, thus increasing their standard of living? I think not.

    * Between August 2002 and August 2007, CPI-U grew 15.1%. CPI-U less food and energy grew 10.5%. Oh yeah. Evil evil government using the “wrong” index to hide whopping 4.5% of inflation in 2002-2007 (0.9% per year). BTW, social security and things like TIPS are indexed using “regular” CPI, not “core” CPI.

    http://research.stlouisfed.org/fred2/categories/9

    * NYC subway fares are increasing? Hmm. I suppose, a few million Americans who live in NYC and use subway to commute to work will have to pay a bit more. 90% of Americans who
    drive their own cars to work will have to pay less because average gasoline retail prices are down 6% vs. August ’06 and down 10% vs. May ’07. But we’ll just ignore that.

    Seriously, everyone likes conspiracy theories, and everyone hates the government, but that’s not a good reason to disseminate myths about CPI.

  86. SD Scientist says:

    To those of you claiming that real inflation was 6-8% a year or more. Prove it.

    August 2002 CPI: 180.7
    http://www.bls.gov/news.release/archives/cpi_09182002.pdf

    August 2007 CPI: 207.9
    http://www.bls.gov/news.release/pdf/cpi.pdf

    Official 2002-2007 price changes per category:

    food: +16%
    housing: +16%
    apparel: -5%
    transportation: +20%
    including:
    * new and used cars -5%
    * gasoline +96%
    * public transportation +11%
    medical care: +23%
    including:
    * medical commodities +13%
    * professional services +19%
    * hospital services +35%
    recreation: +5%
    education: +10%
    other goods & services: +13%

    now please explain to me, which of these numbers are wrong (and why), and how to construct +34% (6% a year) or +47% (8% a year) from them.

  87. fred says:

    I can’t believe how misinformed this discussion is. People who talk about hedonics without any understanding of what it is. People who think the CPI is used to deflate GDP. People who think bubbles in asset prices should be reflected in the CPI. People who think the CPI is adjusted for substitution of cheaper goods. People who think quality or functionality doesn’t matter to consumers. People who think academic economists fudge their research to please dead tycoons. People who think professional statisticians at the BLS care what Bush or Cheney think…

    Please!! Go to the BLS site and read up on these issues before you spread misinformation around.
    Here’s a suggestion: If you don’t know what you are talking about, don’t say anything.

  88. Winston Munn says:

    Here is the starting point: define inflation.

  89. rubberbandman says:

    WASHINGTON, Sept 27 (Reuters) – Tight central bank monetary policies and well-grounded expectations of low inflation are to thank for low inflation in recent years, not globalization, Federal Reserve Governor Frederic Mishkin said on Thursday.

    “Inflation has come down in the old-fashioned way. Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations,” Mishkin said in remarks prepared for delivery to a conference on globalization hosted by the Fed.

    Mishkin said that on balance, the net effect on U.S. inflation from cheaper manufactured imports and higher commodity prices has been small in either direction.

    “Many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up,” he said.

    Discussing the effects of globalization on economic growth, Mishkin said global factors have the potential to be stabilizing for individual economies. Meanwhile, globalization has been a key factor in promoting economic growth, he said.

    Globalization may have helped desensitize inflation to the gap between an economy’s economic speed limit and its actual rate of growth — known as the output gap, Mishkin said. Global factors may mean an economy is less likely to develop bottlenecks as domestic labor markets tighten, he said.

    There is some evidence to suggest that foreign factors influence interest rates, Mishkin said. For example, a global savings excess has somewhat lowered long-term interest rates by reducing the risks associated with holding longer-dated debt, he said. However, central banks still retain the ability to control short-term interest rates, which affect the domestic cost of credit and long-term interest rates, and so can continue to do their job of stabilizing inflation and output,” he said.

    Mishkin said globalization may have increased the role of exchange rates as a factor affecting inflation and growth.

    The larger the share of imports in the economy, the bigger would be the effect on growth of a change in net exports, he said. Also, the more a country imports, the greater the effect on inflation from a change in import prices resulting from a move in exchange rates.

    Increased integration of global markets could change the way an economy works and complicate the jobs of monetary policy makers, Mishkin said.

    “In practice, however, the behavior of the U.S. and global economies does not appear to have radically changed in recent years,” he said. “The Federal Reserve and other central banks retain the ability to stabilize prices and output.”

  90. RodgersE says:

    The U.S. socialized central bank (Federal Reserve System) causes inflation for the benefit of the Federal government… and the detriment of the American citizenry.

  91. Blissex says:

    «People who think academic economists fudge their research to please dead tycoons»
    But many economists do fudge their research, with the most absurd and contemptible mistakes, which curiously all lead to the ”right conclusions” that ensure their acceptance in the profession and advance their career. The vast majority of USA economists profess to believe in smooth aggregate demand and supply curves (buffoons!), that productivity determines the income distribution (soldouts!), that market necessarily converge towards a unique equilibrium (idiots!), and a lot of other nonsense notions that have been repeatedly demonstrated to involve contradictions or gross mathematical mistakes, never mind entirely unrealistic assumptions.

  92. Blissex says:

    «Government does not spend its own money. Government spends taxpayers’ (your) money.»

    This is a splendidly disingenuous statement, which shows a well cultivated propensity to shysterism and intellectual dishonesty.

    Because it astutely omits from consideration the redistributive aspect of government taxation and spending. The interest groups that impose taxes and controls spending are not the same groups as those who pay the taxes or those who benefit from the spending.

    But naturally K-street is a figment of the imagination of un-American ideologues, and corporate welfare and pork and earmarks are the calumny of the envious…

    So it matters a great deal to some interest groups whether taxes are low or high, or how much of the revenues are spent on pensions or corporate welfare. Because the CPI indexes programmes that benefit the poor, and not the sponsors of the current government of the USA.

    Which suggests a simple solution to the issue of CPI manipulation: make the value of corporate and military contracts indexed by the CPI. I wonder what would happen to that index and its hedonic adjustments and other trickery. :-)

  93. Shibaura says:

    It`s a small point, but that 12.5% increase in the NYC subway fares is a good example of how an individual`s daily life can distort perceptions of inflation. The last increase was in May 2003. The .25 hike would presumably happen sometime in early 2008, or roughly five years since the last hike. So that makes what, a 2.4% increase over five years? As an aside, it looks like the MTA is considering charging less for off-peak fares to better distribute ridership. An interesting idea but one that would probably not make the BLS`s job any easier.

  94. Blissex says:

    «that 12.5% increase in the NYC subway fares is a good example of how an individual`s daily life can distort perceptions of inflation. The last increase was in May 2003. The .25 hike would presumably happen sometime in early 2008, or roughly five years since the last hike. So that makes what, a 2.4% increase over five years?»

    No, it is a 0% increase in 4 years,and 12.5% this year. Why did a large increase come now? That’s what Barry is pointing at…

    «the MTA is considering charging less for off-peak fares to better distribute ridership»

    Conversely the trick used by many rail/bus companies here is to sell two types of tickets, full and discount, and to constantly raise the price of full tickets but also to constantly reduce the availability and usability of discount tickets, driving up the average cost of travel by far more than the headline increase of the price of full price tickets…

  95. There’s No Inflation (If You Ignore Facts)

    First Bloomberg, now Newsweek: One of our favorite topics — inflation ex-inflation — has slowly crept into the mainstream. We have been hammering away on this for years; the surprise half point Fed cut is the most likely reason as to why the MSM has …

  96. Adam Marx says:

    First, I would like to thank you guys for this discussion. It is a pleasure to read all of you, most of you make sense with relevant arguments.

    “Keeping up your own CPI index could be automatic.
    Using XML your webpage could pull the raw underlying data from disparite sources and assemble and print them on your page on the fly. And you could use the underlying raw data fresh of the .gov web. if they offer it.”
    What about building an “inflation wikipedia” where people all around the country would enter their budget and consumption patterns? As long as it is not owned by the government or by a corporation, I think that would be a an amazing way to know what is ( approximatively) the inflation rate. Moreover, The Fed usually set the rate according to previous data. This would be a real time rate without bias.

  97. royallyreemed says:

    excuse my typo & sp, typing once is enough…….feedback invited..

    This is all too deep and apparently financially astute educated types. Would it be too bold if a regular type person; myself, extracted the small portion I understood, or thought I sorta followed, from all the intellectual blue skying above and threw some “here’s I feel” ’bout it mixed with the greater aspect of my influence; personal experience. To attach a label so as you get my theme, you could refer to the personal experience chunck of my meandering as, “Maintaining standard of living, my eye/(or expletive)”; then again, “I’m glad I worked all my life so SSI, the no-coverage medical coverage and 2% cost of living on hold for a year…cause by golly, I always wanted to be one of those people I used to feel sorry for!!!”
    If I had to choose however, I think I’ll be bold and go with my gut, “Their All A Bunch OF BIG FAT LIARS THAT I ONLY HOPE BURN IN HELL!” That is the biggest burning, churning in my gut that would be so much more palitable if I didn’t know in my heart how calculated it was and is. From my point of view, the resulting altruism makes me want to scream,”Are you kidding, who believes this fodder; but at least their planning a bailout…yuck yuck, which of course makes watching millionares in line marching up to bankruptcy court so delightful I could giggle hysterically. From the 500 foot view, I’m so sure everything does look all rosy and inflation free, or then again, no, I’m not. I think it would be more accurate for me to say that wall street, corporate america, and the overseers of my welfare leave me without words to describe. Actually, no I’m not sure what is said is how the economy is viewed let alone how it really is and in fact, very much the opposite of most scenarios may be closer to true. Wall Street/Corporate America and the elite money moguls at the top of the pyramid would LOVE the childlike thinking part of middle America to be to overwhelmed to consider the massive deceitful manipulative money grabbing that is going on right under their noses. Given the necessity to waste any effort blowing smoke these days, it’s become hard to ignore how blatent the behavior of our Government and the money that runs it. Shew! Thank you, got that out. But just so someone knows this is tuff, and no part of it is because I am greedy, uneducated, careless or the like. I reference that concept because that is the theme in the latest barrage of bull filling the info waves. A “shakedown” in the mortgage market? At first slowly, then more directly, and finally not subtle at all….people are losing their houses because (pick your poison), they deserve it! Believe that and continue to wonder how dumb can they be. Middle class America living in homes they paid for with the labor of a lifetime we’re targeted! Plain and simple, the terms targeting, redlining, equity theft, liar loans, and flipping are rarely heard in the retelling of the financial picture. If so, not in the evalutation of the Government’s manipulation of the economy and what is the bottom line. At the end of the day, all marbles belong in the collective pockets of monied America. Since there is no gold and money is just paper, in the reality of myself and those like me, there is only my home and the spot it sits, that’s all. Ask me, YES it was paid for and I looked forward to retiring, not rich, but not angry and insane. But alas, my husband died, and I became sick. Without family or a support system, I’ve learned alot and unfortunately it’s been more about harsh reality rather than inner discovery. CitiFinancial…federally chartered Citibank…reaching across America and the word Citibank. It’s hard to begin accept to say an FBI investigation that never ends nor progresses should be a clue. But let me give you a scenario that multiplied across my neighborhood a line can be drawn from house to house to house. In those houses are the disabled, single mothers, widows and minorities that have one thing in common and it’s not that the ARE FIRST TIME HOME OWNERS! Vunerable yes and unsuspecting as targets, I’ll agree. Of course what is one thing you always hear and still do? “Banks don’t want your House!!” YES THEY DO! They are systematically robbing equity, flipping loans, and as a result falsely coloring the economic picture. The resession is and has been going strong however, the numbers are so easy to skew with all the tools available to the players. Of course I’m not in the business, but I’d venture a guess, further ease in manipulating the numbers is acomplished simply by PRINTING MORE MONEY! It’s just paper, and after all, the technology of high speed printers makes ease of access something that was the turn of the tide comparing now to the great depression.
    So far if I’ve not been dismissed with due cause my ignorant stupidity, but consider this. (this part is not the guess part) Pretend you go along for 30 years, work hard, don’t have alot, but retirement $ that suddenly seems safer “managed” by an “advisor” That a broker may be listed as a “financial advisor” and “tax consultant” seems to make sense. When the wind fall of the 90′s brings monthly statements that convince one, life is good. But then, your nest egg begins to shrink, first a little, then quickly it turns sour such as to bring a feeling of panic. But alas, your advisor is there, so you ask, should I pay off my house before I lose my $….and if I do, what will it cost in taxes?
    Pay attention here….because SHE LIES!
    ….then she HIDES!
    Low and behold by the time you realize what has occurred, your paid off home, becomes a new loan…TO PAY IRS!
    Bad news, but you can hang. (attorney? you wonder) NOPE, but sure made up for it when Martha went to jail, I’ll say.
    Fast forward, and health gets worse…
    and just about the time you know it can’t get harder, you are in a car wreck and left unable to care for yourself. During the next year the kitchen catches on fire and your insurance company still hasn’t paid for your totaled vehicle. Not monumental, except for renting a car waiting the two weeks that is two more weeks, etc. and just as you decide to return the car, (preapproved on AMEX), the preapproval is withdrawn and the limit reduced to 1500 leavin no resources to address the out of control car rental. Still no insurance but the rental car company wants the car back, NOW. They are intense and relentless so back it goes and the cash intended for AMEX goes to the rental company. Now it’s American Express’ turn and while they are considerate and understanding to tell you further charges are suspended, but will be reinstated after you pay. So on paying is the focus and while you had planned payment from insurance, time drags by. Just before 60 days, AMEX is gone and at the lowest point in memory the calls begin. EVERYDAY! Agressive, demoralizing, and abuptly inappropriate fear and unknowing gets the best of you.
    So, you decide to ask the mortgage company if they will take 1/2 this month now and 1/2 in 12 days. They will not. They are happy to give you a thirty day extension!! Heavy sigh…relief and on payday you hand your paycheck Blow Your Mind Collections and proceed with “the formality.”
    A simple piece of paper is faxed from the girl at the mortgage company 800 number and you fill it out / send it back. Then this call, receive fax, return fax, call back scenario is repeated over and over. 45 days go by and this starts feeling odd. To make a long story short, someone is screaming in your ear that you don’t need an extension because you are not even late. But now that they have been paid, other catching up is pending. The following Monday, you call back and before two words are exchanged you are told “You are in forclosure, it’s too late, there is nothing to be done, even if I wanted.”
    I thought it was true. How was I to know New Century Financial was three days from filing bankruptcy and purchase of mortgage portfolios was contingent on turning soft money into hard money, (I had never heard this before). As luck would have it, I was approached by a real estate broker whose offer was better than all my comparisons. (On the news it says, do your homework, be certain, get an interpreter, etc.) They neglect to tell you, however, brokers are not hired to find the best deal and you are being told that very thing because guess what, Yes, LYING IS ALLOWED.
    I don’t have to finish this story because this is the part I believe financial types know. At least I keep seeing all I SHOULD HAVE KNOWN and make sure next time. Thanks, Bush and company, all the TV time is warm and fuzzy. The best part however is what makes the outcome a disaster but doesn’t ever seem to be on the news:
    1) Enterprise Car Rental who insisted I bring the car back is….Citifinancial
    2)American Express who handed the account to collections in spite of large payments and knowledge of 17,000+ from insurance. At the time I didn’t understand until realizing AMEX is also Citifinancial
    3)The collector that I paid because of what was being inflicted on me every day could not have taken my SSI or disibility but threaten me each day until screaming into the phone “I’m calling your lender” Thinking it was more harrassment, I didn’t believe him, but I did pay him. Of course, I didn’t know he was paid by Citifinancial.
    4) Ultimately I found myself in a refi that just befor the 30 days was set before me in a completely unrecognizable format. I asked for clarification and was told not to worry. I felt I had no choice and proceeded and in doing so, paid three loan companies and two title companies as well as paying for the “free” appraisal twice. The terms dictated that I pay off a personal loan I had recently taken out to roof my house as well as three revolving accounts. At this point, a broker was getting a bonus for the “forclosure lie” that led to assistance from the bigger bank holding my mortgage and the bank represented by the….. oh yeah, she wasn’t licensed and disappeared right after…broker. Now I know…

    The bigger bank assisting the already written loan was, of course CitiFinancial

    my new company, (a couple of days anyway), yup, New Century and ….

    the happy ending being the soft money / hard money scenario…

    my unsecured roof loan…Citifinancial
    new doors at Home Depot, yes, Citifinancial
    hot water heater & kitchen appliances from Sears…you know it, Citifinacial

    AND, after two riders within the loan papers, three flips when the loan was written, a couple of adjustments and more ahead and this SOFT MONEY / HARD MONEY, 2/28 libor that helped New Century scrape off what Wall Street wouldn’t smile so widely on, then toddled off to bankruptcy.

    The end of this story….retired widow on disibility unable to afford home of 30 years……..EASY SLEEZY….Citifinancial