Wednesday, November 17, 2010

Cleveland Fed Median CPI: No Inflationary Pressure

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.

32 Comments:

At 11/17/2010 7:54 PM, Blogger aorod said...

Prices aren't up but the amount in the package is less.

 
At 11/17/2010 8:10 PM, Blogger Benjamin said...

Inflation is dead, and getting deader.

For two years now, we have been hearing about the perils of inflation. What are probably having is mild deflation.

Nippon is calling. The Japan Wing of the R-Party is answering.

Following a course recommended by the R-Party, Japan has managed 20 years of deflation, and 75 percent drops in their stock and peoprty markets.

Yeah, baby, that will be nice.

How does your retirement look with a 75 percent swoon in your stock portfolio (or of your pension's) and a 75 percent drop in the value of your home?

Keep fighting QE2, and you can speaking Nipponese too.

 
At 11/17/2010 9:14 PM, Blogger morganovich said...

benji-

citing those badly adulterated numbers over and over won't make them true.

we are now in the deadly position of having inflation that our numbers don't show because BLS calculation methodology is flawed.

this is akin to having a fire raging in your house but deciding to be unconcerned because the smoke detector says there isn't...

oh, and benj, QE2 continues to backfire and have precisely the opposite effect on the long end of the curve. at a time (int'l bank crisis in ireland) when investor generally flee to safety in us bonds, our yields are going up because we are acting like a banana republic.

great plan you have there.

 
At 11/17/2010 9:53 PM, Blogger juandos said...

From the Business Insider: As the saying goes, the CPI's a fine price measure--as long as you don't eat or drive...

 
At 11/17/2010 10:02 PM, Blogger Hydra said...

BLS calculation methodology is flawed.

=================================

Yep, the data is flawed, as always.

It is a government conspiracy.

 
At 11/17/2010 10:04 PM, Blogger Hydra said...

Long end of the curve is like long term profits. You can't get them without short term profits.

At the long end of the curve, if it happens, we will have been supporting unsustainable debt for a very long time.

 
At 11/17/2010 11:27 PM, Blogger Michael said...

The Cleveland Fed must not be familiar with indoor plumbing or electricity. I've seen some of my suppliers double prices.

 
At 11/18/2010 5:57 AM, Blogger techperson said...

Bernanke’s biggest flaw is that he thinks this is only a credit contraction recession, so he can fix it with credit expansion tools. He doesn’t realize that he is up against (1) a generational shift to the Gen Xers who got buried in student loans, and view credit very differently from the Baby Boomers, (2) the retirement of said Boomers, the pig in the python with the largest cohort turning 48 ( the year of peak consumption per Harry Dent) in 2005 – did something change after that? And (3) technology, which slashes prices every year (OMG – deflation!). SurviveTheGreatInflation.com the book launched yesterday – Bernanke isn’t going to change – given his history, he can’t – and Obama doesn’t have any idea how awful his appointments were. It's inflation coming, not deflation. Don't ever bet against the Fed.

 
At 11/18/2010 6:38 AM, Blogger geoih said...

Quote from Hydra: "Yep, the data is flawed, as always. It is a government conspiracy."

While I'm sure you're being sarcastic, it's even funnier because it's true. The inflation numbers have manipulated downward for 25 years (see http://dailycapitalist.com/wp-content/uploads/2010/11/CPI-per-ShadowStats-Oct-2010.png).

It's even more funny when you understand that this information is out there for everybody to see, yet so many smart people simply don't see it.

Conspiracies, like predictions of doom, are always false, until they're true.

 
At 11/18/2010 8:06 AM, Blogger Free2Choose said...

"For two years now, we have been hearing about the perils of inflation. What are probably having is mild deflation."

That's ok. I kept hearing economists talking about a potential "housing bubble" for years, starting in early 2000. That turned out to be nothing so I'm sure the same is true of the impending "inflation" crisis.

 
At 11/18/2010 9:41 AM, Blogger morganovich said...

hydra-

that's a pretty weak reponse.

BLS changed the CPI methodology in 1992 in a VERY dramatic way by moving to a hedonically adjusted geometrically weighted algorithm.

this has had the undeniable effect of lowering reported inflation by a massive amount.

using the old method, inflation is running over 8%. alternatively, using the new method, inflation in 1974 was under 2%.

so either we had no serious inflation in the 70's, or we have serious inflation now.

any scientist who accepts heavily manipulated data without questioning it's validity is not a scientist at all.

the only dataset more heavily manipulated and distorted than CPI is the terrestrial temperature database.

 
At 11/18/2010 10:28 AM, Blogger juandos said...

"BLS changed the CPI methodology in 1992 in a VERY dramatic way..."...

Well morganovich Dr. Perry addressed this situation a couple of years ago...

Still it seems a person by the name of Stephen Church seems to share your opinion of real inflation to one degree or another...

You might find it interesting...

 
At 11/18/2010 10:52 AM, Blogger morganovich said...

j-

i have seen that analysis and find it unpersuasive. it fails to take into account the cumulative effects of iterating a geometric weighting.

note that this "study" was done by the BLS to justify its choice.

impartial third parties come up with very different numbers.

financial luminaries like bill gorss and paul volcker are on record describing CPI as vastly understating inflation.

it's pretty amazing that if you use apples to apples methodology, current inflation looks like 1974, yet we are acting like deflation is impending.

that's what you get when you put a bunch of academics who believe the map is the terrain in charge...

 
At 11/18/2010 10:58 AM, Blogger morganovich said...

also:

i just read church's work, and i think it's a good summary.

john williams (shadowstats) has published a great deal on this as well.

if you look at how far in advance of the last "official" recession things started to get shaky, (especially with small caps peaking 16 months before the recession "began") his argument that real GDP was contracting long before it was official looks pretty plausible.

i've been impressed with how well his inflation figures combines with dollar depreciation predict the price of gold.

it's within 4 or 5% of where it would be just in SGS inflation and the $ going all the way back to the last major low.

such a tight correlation gives me increased confidence that he is correct.

 
At 11/18/2010 11:00 AM, Blogger juandos said...

"it fails to take into account the cumulative effects of iterating a geometric weighting"...

Hmmm, so you think the 'fixed basket of goods' sans substitution method is still the way to figure it?

 
At 11/18/2010 11:01 AM, Blogger morganovich said...

hey benji-

rates on the long end are up yet again despite what ought to be a flight to safety.

boy, this QE sure works well...

 
At 11/18/2010 11:23 AM, Blogger morganovich said...

j-

my issue with geometric weighting is that it provably lead to deflation in a basket of goods of constant value if you fluctuate their prices randomly.

take a basket of 100 items each prices at $1.

vary their prices by +/- 5% randomly but in such a way that the overall basket still costs 100 (no net basket price change)

retain the new prices and repeat the procedure.

iterate 100 times.

at the end, the basket still costs $100, and using a simple arithmetic algorithm (pre 1992 CPI) will show this.

geometric weighting emphasizes the goods that go down in price and de-emphasizes those that go up.

this means that according to that methodology, you'll have deflation of 10-20% after 100 iterations (depending on parameters in the weighting).

this is why you wind up with healthcare being 1/16 of CPI when it is 1/6 of GDP. that's a massive distortion.

of course you get disinflation and deflation if you take all the items that go up in price out of the basket explicitly because they do.

the rationale behind this is seductive, but wrong. the fed would have you believe that you'll consume more of things that drop in price substituting them for more expensive goods.

this is wrong.

if you substitute them, they should go back up in price and high prices goods should drop as you move away from them. the signal they are adjusting for is already in the price data. they are double counting it.

for items like healthcare and rent, it's very clear that you don't stop consuming them because they go up in price. in many cases, price is up BECAUSE demand is up. assuming it then drops makes inaccurate claims about observed behavior. we are not seeing anything like that.

the fed model is based on a relfexivity that is not there.

 
At 11/18/2010 11:37 AM, Blogger Hydra said...

any scientist who accepts heavily manipulated data without questioning it's validity is not a scientist at all.

==================================

I once had a long series of chromatograh (GC/Mass spec) analyses to make and I set up a serires of known concentration samples to calibrate against.

Try as I might, I could not get a consistent set of results. the sample for 100 mg would come back as as a series of tests: 98,0,101,0,99,0,98.5,100,0

And this was consistent no matter what my calibration sample was. I had a pretty good idea what was going on, but it would take monets to prove it, and if I was right, there wasn;t much I could do to fix it.

So I just manipulated the data by eliminating all the zeros (which I knew to be faulty).

A scientist works to get an accurate answer, and sometimes that means manipulating the data to eliminate interfering factors. There is nothing wrong with that process, nor does it mean the answer is rigged.

A scientist wants and answer that is accurate, and he does not have to like the answer he gets.

A politician wants an answer he will like, whether or not it is accurate.

 
At 11/18/2010 11:40 AM, Blogger Hydra said...

the fed would have you believe that you'll consume more of things that drop in price substituting them for more expensive goods.

this is wrong.

================================

Agreed.

If the price of brake calipers go up, I'm not replacing them with zucchini because the price went down.

 
At 11/18/2010 11:51 AM, Blogger Hydra said...

Dr Perry presents data, and there are always a few people here who find the data does not fit their preconcieved notions of what "must be" because their prefferred theory says so.

They then proceed to either manipulate the data based on variables they claim were left out, or claim the government manipulated the data to say things that are not so.

If government can actually do that, then it is pretty clever and uniquely conspiring against conservative ideals. And these are the same government employees tat are utterly incompetent at getting anything else right.

Yeah, call me sarcastic.

 
At 11/18/2010 11:58 AM, Blogger Benjamin said...

Let's see---unemployment is near 10 percent, capacity use is way down, real estate is in a depression, we are stuck in two wars...and you guys are losing your bowels over 0.5 percent inflation?

And serious studies suggest the CPI overstates inflation?

 
At 11/18/2010 12:05 PM, Blogger morganovich said...

benji-

the "serious" study you continually cite was done by the same guys who made the change and uses all the same faulty logic.

unlike you, i have actually read it.

food is way up from last year, so are commodities. healthcare is up. fuel is up. even rents are up. even prices at walmart are up 4%.

the deflation you are talking about is a statical artifact, not an reflection of the actual price level.

the QE you recommend is pushing rates UP.

at what point are you going to realize that you are being misled.

to claim that inflation is dropping because you keep taking all the things that rise in price out of the basket is functionally a tautology. it demonstrates nothing.

 
At 11/18/2010 12:09 PM, Blogger morganovich said...

hydra-

your argument about incompetent government employees seems self defeating. if they are incompetent, why should we trust the dramatic and self serving changes they made to CPI?

claims of incompetence cut both ways.

if incompetent people are using data that is more adjusted that it was previously, shouldn't we fear that the data quality is worse?

CPI is a heavily politicized number. not only does lower CPI help reign in SS and medi costs, but it also overstates growth, all things that a sitting government wants.

if you are going to heavily adjust raw data, you need a really good reason for doing so.

i am unconvinced that the BLS has one outside of politics.

 
At 11/18/2010 12:10 PM, Blogger Benjamin said...

Let's see, a peer-reviewed articl in AER vs. the crank John Williams..who should we believe?

Morganovich--get real. Inflation is deader than Jimmy Hoffa.

Next issue...or do you believe the Cleveland Fed is part of a vast conspiracy...or that all their economists are stupid, and you are smart?

See below---

"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.

Since that time, the Bureau of Labor Statistics has initiated a number of methodological changes that have reduced the CPI’s mismeasurement. In a 2001 paper, Federal Reserve Board economists David Lebow and Jeremy Rudd put the CPI bias at only about 0.6 percentage points. And again, of this amount, the big share of the bias (about 0.4 percentage points) resulted from the imperfect accounting of new and improved goods.

Now, in an article (available to all in its working paper version) appearing in the latest issue of the American Economic Review, Christian Broda and David Weinstein say the earlier estimates of the new goods/quality bias may be a bit understated. The authors examine prices from the AC Nielsen Homescan database and conclude that between 1996 and 2003, new and improved goods biased the CPI, on average, by about 0.8 percentage points per year. If this estimate is accurate, consumer price increases since last October would actually be around zero, or even slightly negative, once we account for the mismeasurement of the CPI caused by new and improved goods."

 
At 11/18/2010 12:14 PM, Blogger morganovich said...

"A scientist works to get an accurate answer, and sometimes that means manipulating the data to eliminate interfering factors. There is nothing wrong with that process, nor does it mean the answer is rigged."

while it is true that sometimes data can be adjusted to eliminate other factors, this is a very messy process. every time you do it, your data is less trustworthy and predicated upon more assumptions. at a certain point, adjustments hide more than they reveal. i believe we have long passed that point with CPI.

 
At 11/18/2010 12:59 PM, Blogger geoih said...

Quote from Hydra: " I had a pretty good idea what was going on, but it would take monets to prove it, and if I was right, there wasn;t much I could do to fix it."

And if you were wrong, then you were just manipulating the data to get the answer you wanted. Now, what was your incentive to find out if you were wrong and what was your incentive to assume you were right?

 
At 11/18/2010 2:07 PM, Blogger Benjamin said...

Morgan-

It may be the CPI is no longer accurate, and can even be accurate, given what happens in the real market.

But, if the CPI is way understating inflation for decades on end, it would imply our living standards are well below those of Europe.

That may be.

 
At 11/18/2010 2:16 PM, Blogger morganovich said...

benji-

europe uses similar CPI dodges to those that we do. the whole emerging world does not.

so we can compare ourselves to europe much more readily to europe, but the extent to which the emerging world is eating our lunch is being understated.

the problem with trusting government agencies to produce CPI numbers is that the results have vast political importance. governments wind up manipulating them to get what they want.

to my mind, the answer is to use private services for this data (which i do). they are paid to be accurate.

 
At 11/18/2010 2:17 PM, Blogger Ron H. said...

"the rationale behind this is seductive, but wrong. the fed would have you believe that you'll consume more of things that drop in price substituting them for more expensive goods.

this is wrong.

if you substitute them, they should go back up in price and high prices goods should drop as you move away from them. the signal they are adjusting for is already in the price data. they are double counting it.
"

Thanks for this explanation morganovich, Sowell would call it, "thinking beyond stage one".

I had previously rejected the new CPI method only because I wondered how I could be as well off if I had to substitute things I valued less for the higher priced goods.

That, and my conviction that it allows the feds to cheat on Social Security increases, among other things, and to continue high federal spending.

 
At 11/18/2010 2:44 PM, Blogger Benjamin said...

Ron H and Morganovich-

You understand that you are saying that the economic staffs of the St Louis and Cleveland Fed are either complicit or stupid, and that the AER paper authors are either complicit or stupid, and that most of academia is either complicit or stupid...it gets to a point where it is Ron and Morganovich against the world....

And Morgan is saying all the European governments are pulling wools down over the eyes of academia too....

Keep up the fight guys, but I think you are boxing yourselves into a dark closet...

 
At 11/18/2010 2:50 PM, Blogger morganovich said...

benji-

what i'm saying is that once you have a massive social welfare, medical, and retirement system in place that you cannot afford, you have a great deal of incentive to adulterate the CPI number to keep costs under control. (they are indexed to CPI)

this turns what ought to be a straightforward piece of data into a political tool.

is that really such a difficult concept to grasp?

 
At 11/19/2010 1:21 AM, Blogger Ron H. said...

Benji,

To see how it's possible for otherwise really smart people to lose their way and support bad data and methods at all costs to further a particular agenda, see this.

 

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