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PPI Follow Up

Posted By Barry Ritholtz On November 15, 2007 @ 6:38 am In Commodities,Data Analysis,Energy | Comments Disabled

This may be a bit wonky, but follow it thorough to the end.

Yesterday, we discussed [1] how you can avoid the usual seasonal adjustments and other shenanigans by using year-over-year prices. Those numbers reveal that inflation is far from benign.

Rereading the BLS release on the train on the way home last night, I noticed another aberration: In October 2007, BLS reports that energy prices were down 0.8% in October.

As absurd as that appears on its face, there is actually a simple explanation for this. The methodology for measuring PPI contains a simple and dramatic flaw: It measures prices on a single day of the month. BLS samples for energy prices on the Tuesday of the week that contains the 13th of the month. In other words, BLS’s methodology essentially ignores all energy prices paid EXCEPT FOR ONE DAY OF THE MONTH.

Most of the energy price increases occurred later in In October. The so-called monthly measure of Producer prices failed to pick up any changes in prices for the 2nd half of the month.

This methodological failure results in some spectacularly absurd results. To wit: BLS has [2] gasoline prices down 3.1%, and energy prices down 3.64% since July. Even as Oil rallied from ~$75 to the mid-90s since July 9.  Over the
same period, gasoline has rallied from $1.95 to $2.35; heating oil has
rallied from $2.15 to $2.55; natural gas has fallen from $8.50 to
$8.25.

~~~

As we have so laboriously explained, there is no grand conspiracy. Rather, the BLS data outputs are merely the result of lousy statistical methods. This helps to explain why the official data manages to not see the inflation that any sentient beings with functioning visual orbs can’t miss.

CPI data is out at 8:30 am. I would tell you what the consensus expectations are, but by now you should you have already figured out that they are totally irrelevant to any reasonable approximation of reality . . .


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

URL to article: http://www.ritholtz.com/blog/2007/11/ppi-follow-up/

URLs in this post:

[1] we discussed: http://bigpicture.typepad.com/comments/2007/11/producer-prices.html

[2] BLS has: http://www.bls.gov/news.release/ppi.nr0.htm

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