16 Sep 2009

My Thoughts on the CPI Release

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OK first I’ll deal with the CPI numbers as the media is handling them, and then I’ll question the numbers themselves.

First off, the headline on CNBC today says, “Inflation Still Tame Despite Jump in Gasoline Prices.” Huh, so I guess that means there was a CPI reading well within the “comfort zone,” right? Well no, the official, seasonally adjusted price increase from July to August was 0.4%. If that were to happen twelve months in a row, it would mean an annual inflation rate of 4.9%. If Bernanke suddenly announced that he expected inflation to average 4.9% per year over the next ten years, would we describe that as “tame” and blame it on low capacity? Of course not! People would flip out and say, “Whoa! That’s about double what we all thought your target was! Dude, you need to jack up interest rates pronto!”

Now don’t misunderstand, folks, I understand that you can’t robotically take a single month’s number, raise it to the twelfth power, and flip out. But my point is, if “last month’s inflation reading was tame” is to have any meaning, surely it is, “At this rate, inflation is still under control.” It can’t possibly mean, “Sure, if we kept that up, inflation would be way too high, but Bernanke still has plenty of time to cut that number in half.” Everyone see the point?

OK, let’s go back to the article and see just why nobody is worried about inflation. As we’ve seen, it has nothing to do with the actual number, since that number indicates high inflation. Here’s the real reasoning:

Still, analysts said the risk of inflation remained low as the economy crawled out of its worst recession in 70 years, in part because stubbornly high unemployment is likely to keep labor costs down.

“We’re in the part of the economic cycle where inflation is not an imminent concern, not to say there won’t be long-term issues with the Fed’s balance sheet,” said Steve Goldman, market strategist at Weeden & Co in Greenwich, Conn.

A separate report from the Federal Reserve showed there was still a great deal of slack in the economy, which also supported the belief that inflation posed no near-term threat.

Suh-weet. So everybody from the CNBC writer to a “market strategist” to the Federal Reserve apparently believes that you can’t have stagflation. We’re all Keynesians now (again).

It’s not merely that this analysis is sometimes off; it’s backwards. What is price inflation? It’s too many dollars chasing too few goods, right? OK then, during a recession, what happens to the flow of goods–does it go up or down? So, other things equal–and that’s an important caveat, since in this recession in particular other things have not been equal, namely the demand for liquid assets–recessions should lead to higher price inflation. If you think I’m nuts, that my armchair reasoning has somehow gone off the rails, I point once again to the below chart. It’s certainly consistent with my claim that there is a tendency for price hikes to increase during recessions in real output (which is what guides the NBER in drawing the gray bars).

Another thing that really annoys me about the media spin, is that yesterday the PPI was more than double what people were officially “expecting.” And yet there was no separate story at all. Instead, they buried the news release at the bottom of an article that had headlined with the recession being over, as I explained at the time.


Now that I’ve criticized the media treatment of the official numbers handed over to them by the BLS, we turn to the numbers themselves. If you go to the official BLS press release, you learn that the non-adjusted increase (from July to August) in the CPI was a mere 0.2%. So they doubled it to 0.4% with the adjustment. OK I am glad they did that, because they systematically adjusted the true number downward for the first half of the year.

But now we ask, does it make sense that consumer prices only went up 0.2% from July to August? Well maybe, but from mid-July to mid-August, actual retail gasoline prices were up about 4.5%. I am very skeptical. Remember kids, you can do just about anything you want with economic statistics, and you won’t even be officially lying. Just change your assumptions.

For example, both on NPR and in the CNBC story linked above, they talked about how prices for retail automobiles fell sharply, but they expect them to rise in September. The reason? Oh, cash-for-clunkers, of course! But wait a second. If the government hands out up to a $4,500 subsidy to buy a new car, shouldn’t that increase sticker prices? E.g. do we explain plummeting college and health care prices by reference to government support? Of course not–that’s how we explain skyrocketing tuition and medical expenses.

After last month’s CPI release, people on CNBC were talking about this, so I called the BLS. And the guy I talked to assured me that they were measuring the actual sticker price, before the government rebate. That makes sense economically, but it wouldn’t surprise me in the slightest if the people at the BLS decided to buy themselves an extra two months of suppressed CPI by counting the post-rebate price for new cars.

Another point: It is extremely misleading when the deflationists say, “What are you nutjobs talking about? Year/year we still have price drops!” Look at this chart of the raw (non-adjusted) CPI for the last five years. Now do you see why I think we are in an inflationary environment, even though the 12-month change in CPI is negative? For what it’s worth, prices bottomed in Dec 08. From then until August 2009, the unadjusted CPI level has increased 2.7%, which translates to an annualized increase of just over 4%. I grant you, that’s not Jimmy Carter material, but (a) would anybody who just watched the news have ANY idea that this year, actual prices are rising at more than a 4% annualized clip, and (b) I think that is a bogus, suppressed number.

Final point: People keep talking about the bond market. Well, the Fed is intervening like never before to suppress interest rates, so maybe that has something to do with it. I admit that I am surprised ten-year yields are still so low. But how do the deflationists–the people saying, “It will take markets years to work off this debt overhang, and only then will we see rising prices”–explain the fact that gold is now trading at $1017 an ounce? Why do we assume that TIPS traders are genius forecasters, but gold traders are morons?

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