Wednesday, November 17, 2010

Why the CPI is understating inflation








Jake said...

Energy is up significantly year over year, yet overall inflation is only 1.2%

Benjamin Cole said...

Inflation is dead, and getting deader.

Also, please note: Serious research on this topic suggests the CPI overstates inflation.

"How big is the CPI’s bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living. This so-called “Boskin Commission Report” said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.



So, the CPI probably overstates inflation by perhaps one percent.

But overall, sheesh--we are talking flatsville here. Kansas looks hilly next to this.

Benjamin Cole said...

Also, please note: The MIT stuff is global prices. China and India etc

Benjamin Cole said...

Dr. Perry just published this:

"According to the Cleveland Fed's report today, its median CPI measure of prices increased by only 0.50% in October over the same month last year, the same as the year-over-year rate for each of the last three months (August - October). October marked the 26th consecutive month that the median CPI annual inflation rate dropped or stayed the same, and the 0.50% inflation rate in six out of the last seven months is the lowest year-to-year inflation rate in the history of the Cleveland Fed's series back to 1984 (see chart above). In contrast, the regular CPI from the BLS increased by 1.2% over the last year (October 2009 to October 2010), and has held steady at between 1.1 and 1.2% for the last five months.

Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and neither the median CPI from the Cleveland Fed nor the CPI from the BLS is showing any signs of inflationary pressures."

Boy, it ain't inflation that I worry about.

John said...

A valiant effort, sir, but today's data suggests you're wrong about inflation and Bernanke's right to worry about deflation. We are likely to tend toward deflation as long as unemployment is high.

brodero said...

Owner's equivalent of rent definitely subdues CPI but can you imagine if they substituted Case Shiller??

Case Shiller National Index
2q 2006 189.93
2q 2010 138.03

Owners equivalent of rent of residence

2q 2006 236.93
2q 2010 256.209

The deflation of the asset has been dramatic...

brodero said...

Not to get too esoteric but if
take the median new home price and
divide it by the owners equivalent of rent see a gradual
rise in this ratio over the last 27 years...There were 2 spikes that the late 1980's and
the 2005 to 2007 time frame. We have since returned to the levels
we saw in 2000. A gradual rise in the owners equivalent of rent index
will buttress home prices ( especially when the inventory overhang is lessened)....

marmico said...

A valiant effort. I beg to differ.

Grannis doesn't understand the difference between disinflation and deflation. I guess extreme pre-1985 supply-siders have finally crawled out of their caves.

Now if Grannis had a consistent belief system he would compare core PCE with core CPI due to differentials in scope, weight and index calculation. He doesn't, so let me elucidate.

Core PCE is running higher than core CPI. Why?

It's all about weights. Medical care always runs hot. PCE weights it 2x CPI. Owners equivalent rent is running cold. CPI weights it 2x PCE.

The only thing understated is Grannis grasping at straws (data mining) in support of his horrendously wrong call on inflation and the 10-T yields.

marmico said...

brodero, a picture is worth a thousand words. Granted it's an outdated chart as the red line has popped above 0%. The red line will once again be below 0% by January 2011, however.

Learn to link. At least you offer some data in opposition to "Stockey-Jockey" Johnnie who's raison d'être is buy financials. Gurgle, gurgle...

brodero said...

Give me the hard data every time
that is the way to truly judge a situation....percentage changes
always should be looked in context...valuable but with a
discerning eye....

brodero said...

Marmico, as opposed to finding things that justify your belief
study the stress test ,read some 10Q's look at outside sources and challenge your beliefs. I try to do
it every day.

MCKibbinUSA said...

The future will be inflation, and history is my proof -- eventually, both fiscal and monetary policy-makers will yield to the horrors of deflation, which means monetary expansion -- my advice is to prepare for the coming inflation by holding high quality equities that pay regular dividends...

John said...

Financials will be big winners over the next few years. Money Market Marmico...don't forget to declare the interest on your account on your tax return. You DO file one....don't you?

John said...

Doc McKib..

I agree. In fact I suggested same in late August here on Scott's board. The S&P 500 was between 1040 and 1060. This morning its a bit over 1200. I was castigated by our resident snark at the time I recall.

Benjamin Cole said...

Dr. McKibben:

How do we get to inflation from 0.5 percent increases in the CPI?

And remember, when the great "inflation fighter" Ronald Reagan left office, inflation was running at 6 percent.

We survived 6 percent inflation easily. We survived 4 percent inflation easily.

Now, people lose their bowels when we might get to 1 percent inflation.

When did ultra-low inflation become a fetish among right-wingers?

marmico said...
This comment has been removed by a blog administrator.
Bill said...


You seem to be suffering from a bad case of Roubini envy. I bet it just kills you that nobody knows who you are and you can't get a spot on CNBC to spout your negativity about the economy.

Steve Fulton said...

The CRB raw industrial materials index consisting of the following
components has just hit a new all time high.
01 = Burlap
02 = Butter
CC = Cocoa
HG = Copper Scrap
C2 = Corn
06 = Cotton
30 = Hides
LH = Hogs 09 = Lard
10 = Lead Scrap
11 = Print Cloth
12 = Rosin
13 = Rubber
BO = Soybean Oil
57 = Steel Scrap
LC = Steers 17 = Sugar
18 = Tallow
54 = Tin
MW = Minneapolis Wheat
KW = Kansas City Wheat
22 = Wool
23 = Zinc

I smell inflation coming.

Scott Grannis said...

Actually, the CRB Raw Industrials hit a new all-time high about 11 days ago. It has since dropped from 568 to 551. Still high enough, nevertheless, to suggest higher inflation in the pipeline.