14 Aug 2009

Is the BLS Using "Cash for Clunkers" to Suppress Inflation?

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The CPI numbers came out today, and there was no smoking gun upon first glance. I still need to go through and make sure there was no hanky panky, but it seems that they did bump up the raw number. The reason the headline is flat is that (the BLS claims) raw prices actually fell from June to July, so that with their seasonal adjustment the headline number was the same.

Reader Joseph Webb emailed me the below video, and said I should watch near the end. They claim that the BLS is adjusting car prices down because of the “cash for clunkers” program.

However, I called the BLS myself and talked to Stephen Reed, the technical contact listed in the BLS press release. He sounded like he knew what he was talking about, and he said that the BLS is counting the actual price consumers pay for cars. Now the cash for clunker program could have an indirect effect, because dealers will presumably be willing to sell a given car at a lower price, if they are getting a check from the government for qualified transactions. But if you pay, say, $15,000 for a car, and the dealer gets a $4,500 check from the government because of your clunker trade-in, I understood Reed to say that the BLS counts that car’s price as $15,000.

So, I have no smoking gun to report right now. My overall view remains the same: Last year Bernanke increased M1 at the fastest annual rate since the mid-1980s. Back then, there was a plausible reason that the Fed could expand the money supply without causing large price inflation: Volcker had killed the late 1970s inflation, and Reagan cut taxes. So there were plenty of objective reasons for the worldwide demand for dollars to go up. In our time, the demand for dollars went up, especially in September 2008, because of the financial panic. But as that subsides, people are going to reduce their demand for USD. I still think that is the big picture here, and it’s why I still expect the BLS to pull rabbits out of hats in order to keep the CPI from going through the roof during the rest of this year.

I realize I can’t gloat until my unorthodox views have been fulfilled. In the meantime, let me just note the following excerpt from the CNBC article:

Even as the worst recession since the Great Depression starts to bottom, inflation pressures will likely remain contained given high unemployment and weak demand, analysts said.

If I’m right, five years from now that will look like a particularly silly thing to be saying right now.

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