Tuesday, February 08, 2011

There's No Food Inflation in the U.S.

We hear a lot lately about how the prices for commodities, metals (gold and copper), agricultural products and food are rising, but it sure hasn't started showing up yet in the CPI for Food and Beverages, see chart above of annual price inflation for that series.  Annual food inflation through December 2010 was only 1.5%, more than a full percent below the ten-year average of 2.72%. 

92 Comments:

At 2/08/2011 6:35 PM, Blogger morganovich said...

this food CPI measure has the same geometric methodology as the overall CPI.

hence, it suffers from the same massive underreporting of inflation.

"Food prices worldwide rose for the seventh straight month in January, up 3.4 percent from December 2010. Food prices in the global market are now the highest they've ever been. And don't look for prices to trend downward anytime soon, according to the United Nations Food and Agriculture Organization (FAO), which put out the report."

so we are to believe that with global food prices increasing 3.4% in one month the US is somehow managing to only experience 1/3 of that monthly gain for the whole year?

at what point will the massive divergence of reported US inflation from that of the rest of world start to make us wonder if maybe our CPI is broken?

 
At 2/08/2011 6:36 PM, Blogger PeakTrader said...

The U.S. is fortunate to spend less than 10% of its income on food. Unfortunately, some countries are spending over 50% (and they're not eating at Black Angus or Red Lobster):

World food prices hit record high
February 03, 2011

World food prices rose to an all-time high in January, according to the UN's Food and Agriculture Organization (FAO).

Rising commodities costs are one of the major factors behind a growing wave of civil unrest across the Middle East and North Africa.

Last week at the World Economic Forum in Davos, Switzerland, economist Nouriel Roubini warned that rapidly rising food prices posed a serious threat to global stability.

"What has happened in Tunisia and is happening right now in Egypt, but also the riots in Morocco, Algeria, Pakistan, are related not only to high unemployment rates and to income and wealth inequality, but also to the very sharp rise in food and commodity prices," he told CNN.

Poor people in developing countries spend between 50 and 80 percent of their income on food, making higher prices, as well as unpredictable prices, a serious threat to their ability to eat.

 
At 2/08/2011 8:33 PM, Blogger aorod said...

Maybe you should look at commodity prices.

 
At 2/08/2011 9:43 PM, Blogger T said...

The government statistics are bogus in my experience. Look at the increase in prices for health care (premiums), education ( tuition and books), and energy (electricity and gasoline). Mine have increased substantially over the last year. Just last week I noted a 25% increase in a package of cookies that was effected by reducing the quantity, not directly increasing the price. The same goes for coffee and milk at Costco where I shop.

Does anyone have a link to a direct price comparison over time of specific consumer products?

 
At 2/08/2011 11:29 PM, Blogger Mark J. Perry said...

The Boskin Commission report "Toward A More Accurate Measure Of The Cost Of Living" issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996, and about 1.3 percentage points prior to 1996.

 
At 2/09/2011 12:56 AM, Blogger Bill said...

The facts on the ground differ from the government reports. Anyone who shops at a grocery store or eats out knows for a fact that there has been significant inflation in the price of food. This is really not even debatable.

 
At 2/09/2011 1:07 AM, Blogger SheetWise said...

Morganovich --

"at what point will the massive divergence of reported US inflation from that of the rest of world start to make us wonder if maybe our CPI is broken?"

When the CPI is decoupled from entitlements.

 
At 2/09/2011 3:49 AM, Blogger PeakTrader said...

Anyone who believes U.S. inflation is understated ignores disinflationary forces in the (consumer-competitive driven) U.S. economy, which include high productivity, low production costs, and "gains-in-trade."

Also, I may add, U.S. consumption is picking-up:

Consumers step up credit card use for the first time in 2 years, sign of improving economy
Feb 7, 2011

The first increase in credit card use in 27 months helped boost overall consumer borrowing 3 per cent in December, to a seasonally adjusted annual rate of $2.41 trillion. It was the third straight monthly gain.

Borrowing in the category that includes credit cards rose 3.5 per cent. Borrowing on auto loans increased 2.8 per cent.

Even with the December gains, consumer borrowing is just 0.7 per cent higher than the more than three-year low hit in September. It is 6.6 per cent below the high set in July 2008.

Households began borrowing less and saving more after the country fell into a recession in December 2007. The decline in borrowing has dampened growth because consumer spending accounts for 70 per cent of total economic activity.

 
At 2/09/2011 5:38 AM, Blogger 


Steven Rodgers
said...

I agree with Bill. I can't comment on how the data is gathered and assembled but I do know that it costs me quite a bit more at the register now than it did a year ago and a LOT more than it did five years ago.

And that's after moving to a state without sales tax on food.

 
At 2/09/2011 6:44 AM, Blogger geoih said...

Quote from Mark J. Perry: "The Boskin Commission report ..."

You're actually citing a report commissioned by the government about the government as the basis for your support of the government's reporting systems? Is it too much to ask for a little skepticism?

 
At 2/09/2011 9:19 AM, Blogger Eric said...

Loaf of Bread in 1996: $0.99
Bread today (which weighs 15% less):$2.39

Gallon of milk in 1996: $1.99
Gallon of milk (actually still a full gallon) today: $3.69

16 oz. box of cereal in 1996:$1.50
14.5 oz. of same cereal today: $2.75

12-pack of 12-oz soft drinks in 1996: $2.50 Today: $4.50

Lean hamburger in 1996: $1.39/lb Today: $3.79/lb

The BLS just needs to delete the "L". Or revise their numbers after the press release like they do with unemployment.

 
At 2/09/2011 9:38 AM, Blogger morganovich said...

mark-

the boskin report was written by the same folks who recommended the change and using the same assumptions. that's hardly an impartial source.

more credible folks like PIMCO and volcker have all opined that the current CPI considerably understates inflation.

" Bill Gross of California-based PIMCO, the world's biggest bond manager, tells investors that interest rates on U.S. Treasury notes are inadequate. Inflation around the globe has averaged nearly 7 percent over the past decade, but the official U.S. inflation rate has averaged 2.6 percent. "Does it make any sense," says Gross, "that we have a 3 percent to 4 percent lower rate of inflation than the rest of the world?" And if Washington understates inflation by one percent, he adds, then gross domestic product has been overstated by that same amount. ("U.S. Inflation understated, Pimco's Gross says," MarketWatch, May 22, 2008)

Nor is Gross alone. In May, former Federal Reserve Chairman Paul Volcker told the Congressional Joint Economic Committee that "I think there's a lot more inflation than in those [CPI] figures." He said that the sharp run-up in housing before the recent implosion wasn't reflected in CPI data, adding that food and energy prices should not be excluded in gauging long-term trends. And when prices do go up, he said, government calculators are "much more inclined to say that there are improvements in quality" rather than an increase in inflation.

At Charles Schwab & Company, one of the nation's biggest money managers, chief economist Liz Ann Sonders wrote in June that "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today...No wonder clients constantly tell me they distrust government inflation data." ("Back to the 1970s?" Charles Schwab Investing Insights, June 19, 2008)"

i really think you ought to take a fresh look at this topic.

try running 50 iterations of a geometric weighting based CPI on a set of goods with chained fluctuations but zero net arithmetic change. you'll get deflation every time. it's a mathematical fact.

that is pretty much the definition of bias in a methodology.

prices change for 2 reasons: supply and demand.

the implicit assumption of the geometric CPI weighting is that you consume less of something that goes up in price. while this sounds reasonable on its face, it misses the obvious question: then why did it go up in price?

if the answer is "increased demand" then it ought to be over weighted, not under weighted.

the geometric CPI only makes sense for products that are driven by supply, which makes very little sense as an inflation metric and is simply not as big a force in terms of price increase.

do you really believe that there are a lot of products in the US spiking in price due to supply limitations?

 
At 2/09/2011 9:52 AM, Blogger VangelV said...

I take it Mark that you must be one of those guys who believe in Santa and the Easter bunny. Since when is it credible to argue that there is no food inflation when grains have gone up by 50% and everything we buy in the grocery stores has gone up in price? The fact that the BLS makes all kinds of adjustments and plays statistical games that would land a private business in jail does not mean that there is no inflation.

 
At 2/09/2011 9:57 AM, Blogger VangelV said...

The Boskin Commission report "Toward A More Accurate Measure Of The Cost Of Living" issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996, and about 1.3 percentage points prior to 1996.

This is total crap and you know it. The idea of the CPI was to track a fixed basket of goods and see what happened to prices, not to substitute lower quality goods when prices went up. And while the BLS is good at picking up improvements of quality and calling them price decreases it never seems to bother with the opposite and see decreases in quality as price increases. Why is a netbook that has more memory and a faster processor considered to have fallen in price but a flight that is delayed and requires that you get to the airport 1.5 hours sooner not considered a price increase?

 
At 2/09/2011 10:09 AM, Blogger juandos said...

"The Boskin Commission report... the CPI overstated inflation by about 1.1 percentage points per year in 1996"...

Why Michael Boskin Deserves Our Contempt

 
At 2/09/2011 10:27 AM, Blogger morganovich said...

geo-

boskin is about as credible on CPI as michael mann is talking about climategate...

 
At 2/09/2011 10:39 AM, Blogger morganovich said...

vangel-

you make a good point about quality adjustments: they all go one way.

many products are of much lower quality than they were.

my grandmother's blender was built like a Studebaker and could crush gravel for 30 years without the slightest problem. then new ones at bed bath and beyond are shot in 3 years, but are considered higher quality because they have more speeds.

i question the whole idea of hedonic adjustments altogether. how could anyone tell you with any degree of objective precision how much better a 2004 ford taurus is than a 2003? this makes the whole CPI utterly subjective.

further, even if we do have an increase in quality, this tells us nothing about the cost of living. you can't go buy a new 2003 taurus anymore. cars may be better, but they now cost more. pretending that they don't won't get you to work any more cheaply.

i find the internal contradiction of the CPI assumptions ludicrous. a car is better, so we take some of the price increase out of CPI, but at the same time, we use geometric weighting to substitute flank steak for rib eye and call that equivalent.

how is it that worse steak is just as good, but a better car is better?

they seem to be having it both ways and making sure that nothing can ever really go up in price. everyhting is an upgrade, but there are no downgrades.

 
At 2/09/2011 11:36 AM, Blogger Buddy R Pacifico said...

If I am interpreting the data correctly from the U.S. Import Price Indexes, then I have a suggestion. You can save money through a Buying American strategy! Import prices have increased substantially except for coal and natural gas.

 
At 2/09/2011 11:36 AM, Blogger morganovich said...

this out today:

"U.K. Food Inflation – Accelerated in January to +4.6% (vs. +4% in Dec)"

 
At 2/09/2011 12:12 PM, Blogger Jason said...

Seems to me that the CPI is a better track for wage inflation. I cannot fathom how rising input material costs don't result in rising output costs unless input labor costs are stagnant.

 
At 2/09/2011 1:14 PM, Blogger Dr William J McKibbin said...

Your article opens with "There is no food inflation in the US." Whenever I see expletives such as "there is..." and "it is...," I find my self asking, "what is..."? So, given that food prices are not rising, the question remains, "why...?" My guess is that the US has too little money chasing too many goods, whereas other countries are in the opposite situation. Something is a amiss macroeconomically with US food prices today...

 
At 2/09/2011 1:21 PM, Blogger James said...

I told my wife about this report. Her first response was to laugh. She then asked what kind of a guy did that. Someone who does not shop?

Mark this one just does not pass the laugh test. Check out publicly traded ETFs that track commodity prices. Corn is up 54 percent in the last six months. Higher than most because government pushes it as an alternate fuel but most are up 20 percent plus.

One of the problems with the CPI is that when something goes up in price it is taken out of the mix. That makes the CPI lower than it really is.

This article and belief that the CPI is a realistic number is for Kool-Aid drinkers.

 
At 2/09/2011 1:23 PM, Blogger morganovich said...

buddy-

that's a very interesting set of data.

prices on US food imports were up 13.1% last year, something like 10 times the number reported by US food CPI.

we import about 10% of our food.

this would seem to imply that every last cent of food inflation in the US comes from imports.

anybody else find this a little far fetched?

further, the overall inflation rate on imports is 4.8%, nearly 4 times reported CPI.

does anyone else find it odd that we would be importing everyhting that goes up in price if our own

even if you leave out energy, you are still seeing imports go up in price at 250%+ of CPI.

this seems extremely implausible.

 
At 2/09/2011 1:46 PM, Blogger juandos said...

It went unnoticed how the Bureau of Labor Statistics (BLS) relieved the volatile food and energy prices of volatility. The BLS also relieved the CPI of “extreme values and/or sharp movements [of prices] which might distort the seasonal pattern [which] are estimated and [are] removed from the data.” So out went milk, cheese, oil, and cars from the CPI, if they did not meet the BLS volatility criteria. (The excisions also include non-edibles and non-combustibles, including cards, trucks and textbooks.)

 
At 2/09/2011 3:08 PM, Blogger VangelV said...

i question the whole idea of hedonic adjustments altogether. how could anyone tell you with any degree of objective precision how much better a 2004 ford taurus is than a 2003? this makes the whole CPI utterly subjective.

That is the idea; the more subjective a methodology is the more likely it is that you can manipulate the final outcome.

further, even if we do have an increase in quality, this tells us nothing about the cost of living. you can't go buy a new 2003 taurus anymore. cars may be better, but they now cost more. pretending that they don't won't get you to work any more cheaply.

It works in a different way as well. While you could argue that buying a faster computer with more memory for the same amount of money means that you can assume that there was an improvement and are getting more value one can also argue that the need for more speed and memory because of a clunky operating system that needs much higher specs does not help you use the word processing software more productively.

 
At 2/09/2011 3:11 PM, Blogger VangelV said...

Seems to me that the CPI is a better track for wage inflation. I cannot fathom how rising input material costs don't result in rising output costs unless input labor costs are stagnant.

Doesn't Mark keep posing comments about how wages are now rising? That seems incompatible with his claims of no inflation.

And the big problem with CPI is the equivalent rent component, which dominates the index and is not obtained in any objective manner. By keeping that low (or negative), by ignoring increases in health care costs, insurance, property taxes, tuition, and other things that are going up the BLS can produce any conclusion it is asked to sell.

 
At 2/09/2011 3:15 PM, Blogger VangelV said...

http://www.ritholtz.com/blog/2010/11/there-is-no-food-inflation-the-bls-made-sure-of-that/

Great commentary that explains the CPI fraud far better than many of us are capable of doing. Thanks.

 
At 2/09/2011 3:17 PM, Blogger Ron H. said...

morganovich,

"i question the whole idea of hedonic adjustments altogether. how could anyone tell you with any degree of objective precision how much better a 2004 ford taurus is than a 2003? this makes the whole CPI utterly subjective."

As all value is subjective, the use of hedonic adjustments in calculating CPI is inaccurate at best. In typical central planning fashion, it is presumed that some group of government bean counters can actually measure in dollars the value I place on various "improvements" in some product over time.

As there is no objective measure of the difference in value between a 2003 and 2004 Taurus, someone must presume to know what all of our subjective values are.

 
At 2/09/2011 3:45 PM, Blogger Jet Beagle said...

A look at the components of the CPI for food is revealing:

Annual increase in food prices
(Dec2009 to Dec2010)

All food ............ 1.5%

Meats ............... 7.2%
Poultry ............. 1.3%
Fish ................ 6.0%
Eggs ................ 6.1%
Fats and oils ....... 1.6%
dairy products ...... 3.7%
Fruits&vegetables ....1.4%
Cereals/bakery ......(0.2%)
Non-alcholic bev ....(1.2%)
Other foods .........(0.1%)

I don't know how the various parts are weighted. According to the USDA Economic Research Service, it is the non-animal portion of food purchases which are not experiencing inflation. Poultry pirces have increased very little as well.

My guess is that those commentors who cite anecdotal evidence above are remembering the large price increases in beef, eggs, and milk. According to the USDA, those increases are more than offset by decreases in some product groups.

 
At 2/09/2011 3:57 PM, Blogger morganovich said...

jet-

those are not raw prices.

those are hedonically adjusted geometrically weighted prices.

they tell us nothing about the actual cost of food.

just the inflation on the 10% of food we import (13.1% inflation, 10% of food) causes more overall inflation that this.

there is simply no way food CPI is true.

 
At 2/09/2011 4:01 PM, Blogger Eric said...

Well, I guess that will make up for my anecdotal experience that gasoline has inflated over 100% the last two years (and still rising).

Is Chinese plastic rice counted as "Other foods"?

 
At 2/09/2011 4:13 PM, Blogger PeakTrader said...

The U.S. is the most efficient food producer in the world.

The U.S. with less than 3% of the workforce produces more than enough food to feed the entire country.

Also, the U.S. has abundant arable land, compared to other countries, which is another competitive advantage.

 
At 2/09/2011 4:13 PM, Blogger Jason said...

Jet, for example, the beef futures index shows a 27% increase over that time period. Unless packaging and whole saleing entities are "eating" the increased costs, then I say bull.

 
At 2/09/2011 4:23 PM, Blogger morganovich said...

peak-

foodstuffs are traded and priced as global commodities.

the efficiency of our producers is irrelevant when considering prices here as opposed to the rest of the world.

 
At 2/09/2011 4:42 PM, Blogger PeakTrader said...

Morganovich, U.S. efficiencies and competitive advantages are why food prices are rising more slowly in the U.S.:

Rising Food Prices Can Topple Governments, Too
February 9, 2011

"In large part, the food-price crisis reflects the simple law of supply and demand. The supply of food has been diminished by bad weather in many crucial crop-growing areas of the world. Russia, Ukraine and Argentina have had severe droughts, while Pakistan and Australia have had massive flooding.

At the same time, demand for food has been rising as people in fast-developing countries, such as India and China, have been buying more groceries.

In addition, production and transportation costs have been driven up by the rising price of oil. Other factors involve currency fluctuations, food trade policies and financial speculation in commodities markets. Energy policy also plays a role, because ethanol makers are using more corn to produce fuel.

In the United States, these factors have not significantly pushed up consumer prices — yet. The USDA released a new study that showed U.S. grocery store prices rose less than 1 percent last year.

The reason for the tame price environment in this country is that the cost of food itself is a relatively small part of what U.S. consumers pay at the cash register, according to Homi Kharas, senior fellow for the Global Economy and Development program at the Brookings Institution, a Washington-based think tank.

He says that when a U.S. consumer buys a box of cereal or a cup of Starbucks coffee, she is mostly paying for the packaging, marketing and attractive store fixtures. So the shopper is not greatly affected by the underlying commodity price the way poorer people are in other countries when they buy, say, a simple sack of rice.

"Take corn flakes," Kharas says. "Very little of the price of the box reflects the corn inside."

Also, U.S. food companies often lock in lower prices by using futures contracts, so the price of ingredients they are using today may have been set a year ago, before bad weather drove up crop prices, he says.

Still, the impact of higher grain, dairy and meat prices eventually will filter down to U.S. consumers, he says. The USDA is predicting grocery prices to rise between 2 and 3 percent this year."

 
At 2/09/2011 4:42 PM, Blogger Jet Beagle said...

morganovich: "those are hedonically adjusted geometrically weighted prices.

they tell us nothing about the actual cost of food."


I have no idea what that means.

Are you suggesting that when the USDA reports a one-year price index for dairy products, they pay no attention to the actual retail prices of milk and butter? Or, are you suggesting that the mix of milk and butter varies so much from one year to the next that their dairy products index must be flawed?

Why do you believe the USDA's egg price index - or its non-alcoholic beverage price index or its poultry price index - does not reflect actual prices? Can you explain that in simpler terms than
"hedonically adjusted geometrically weighted"?

 
At 2/09/2011 4:42 PM, Blogger Jet Beagle said...

morganovich: "those are hedonically adjusted geometrically weighted prices.

they tell us nothing about the actual cost of food."


I have no idea what that means.

Are you suggesting that when the USDA reports a one-year price index for dairy products, they pay no attention to the actual retail prices of milk and butter? Or, are you suggesting that the mix of milk and butter varies so much from one year to the next that their dairy products index must be flawed?

Why do you believe the USDA's egg price index - or its non-alcoholic beverage price index or its poultry price index - does not reflect actual prices? Can you explain that in simpler terms than
"hedonically adjusted geometrically weighted"?

 
At 2/09/2011 4:47 PM, Blogger PeakTrader said...

American Agriculture: Its Changing Significance

"American farmers approached the 21st century with some of the same problems they encountered during the 20th century. The most important of these continued to be overproduction. As has been true since the nation's founding, continuing improvements in farm machinery, better seeds, better fertilizers, more irrigation, and effective pest control have made farmers more and more successful in what they do (except for making money). And while farmers generally have favored holding down overall crop output to shore up prices, they have balked at cutting their own production.

In 1940, there were 6 million farms averaging 67 hectares each. By the late 1990s, there were only about 2.2 million farms averaging 190 hectares in size. During roughly this same period, farm employment declined dramatically -- from 12.5 million in 1930 to 1.2 million in the 1990s -- even as the total U.S. population more than doubled. In 1900, half of the labor force were farmers, but by the end of the century only 2 percent worked on farms."

 
At 2/09/2011 4:59 PM, Blogger morganovich said...

when the BLS calculates CPI, they adjust the data heavily and with great inconsistency.

they reduce the reported prices of products that they assume got better (and yes, they do this to food as well) and call it hedonic adjustment.

they then adjust the weighting of the foods based on price over weighting items that go down in price and under weighting those that go up, effectively substituting cheaper products for those that go up in price. this is called geometric weighting.

for an excellent description of the changes and their effects i recommend reading this:

http://www.shadowstats.com/article/consumer_price_index

i think you'll be surprised how little CPI has to do with price level anymore.

 
At 2/09/2011 5:01 PM, Blogger Jet Beagle said...

from the BLS web page on CPI FAQ

"How are CPI prices collected and reviewed?

Each month, BLS data collectors called economic assistants visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain information on the prices of the thousands of items used to track and measure price changes in the CPI. These economic assistants record the prices of about 80,000 items each month, representing a scientifically selected sample of the prices paid by consumers for goods and services purchased."


Based on what I'm reading here, the BLS uses real prices in deriving its CPI measures. We may not agree that they are selecting the correct 80,000 items. But for deriving a dairy products index, or a poultry index, or a non-alcoholic beverage index, it cannot be that difficult to obtain a relevant mix of items.

 
At 2/09/2011 5:02 PM, Blogger morganovich said...

peak-

it doesn't work like that. corn is a global commodity and is priced in global terms. our cheap production has an effect on the global price, but that price is the same here as it is anywhere else just like any other global commodity be it oil or DRAM.

food prices all over the world are spiking. our imported food rose in cost over 13% last year.

 
At 2/09/2011 5:15 PM, Blogger morganovich said...

jet-

it's not the collection that is the problem, it's what they do with the data afterward.

again, go read that CPI primer and i think you will begin to see the issue.

CPI used to be (where P = total price of a basket of goods)

(P this year - P last year)/P last year.

the calculation no loner looks anything like that.

if p 2009 = p 2008, you'd call it zero inflation.

the BLS would inevitably call it deflation. some goods would "improve" and have their prices lowered in the p 2009 basket.

some goods would change in price. even if P of the basket is constant, just the fact that one thing went up $1 in price and one went down $1 will result in reported deflation as the item the rose will be underweighted and the one that sank overweighted.

thus a basket of 4 items priced at 2,2,2,2 for a total of $8 than changes to a basket of 1,3,2,2 will be priced at less than $8 due to weighting and then lowered still hedonically based on subjective product improvements.

i recommend reading what bill gross at PIMCO (world largest bond manager) or volcker (the fed president who broke the 70's inflation) on this.

the BLS methodology is provably biased to the downside. we have proven this ourselves with an iterative model of their weighting applied to a basket of goods the sum of whose price remains constant while individual prices fluctuate. the fed model repeatably results in significant deflation in such a model. that is pretty much the textbook definition of methodological bias.

 
At 2/09/2011 5:18 PM, Blogger PeakTrader said...

Morganovich, oil is also a global commodity. Do you believe the price of oil in Riyadh is the same as in New York?

 
At 2/09/2011 5:19 PM, Blogger morganovich said...

peak-

"The USDA released a new study that showed U.S. grocery store prices rose less than 1 percent last year."

just our food imports caused more overall food inflation in the US last year than that (10% imported, 13.1% inflation = 1.3% net effect on overall food price.)

the USDA study uses BLS methodology and thus has results that are garbage.

based on the rest of the developed world (who eat cornflakes too) the real number is likely north of 10% which would put them more in line with imports.

 
At 2/09/2011 5:32 PM, Blogger PeakTrader said...

Morganovich, you have no proof the BLS uses a biased method. We've had this conversation before:

Morganovich:

peak-

take the current BLS methodology for CPI.

instead of price data, use random price fluctuations that have a zero average (which is to say 0% inflation using an arithmetic measure).

run the model 30 times iteratively.

you will get a downward slope in CPI. this is the nature of automatically overwieghting things that decline in price and underweighting those that rise.

this tells you the model is biased to the downside.

this means the current CPI measure understates inflation.

PeakTrader:

Morganovich, inflation reflects exponential growth (a 3% rise in inflation is a rise from the prior year). So, the arithmetic mean would overstate inflation. You can see this using a compound annual growth rate calculator. Type 140 for ending value, 100 for beginning value, and 4 for number of periods. The answer is 8.78% (not 10%). The more periods, the lower the rate, e.g. 180, 100, and 8 is 7.62% (not 10%).

 
At 2/09/2011 5:45 PM, Blogger PeakTrader said...

What does gasoline cost in other countries?
MSNBC.com
April 24, 2006

"The cheapest places to top off, not surprisingly, are in countries that produce the most oil.

In Iraq, until recently, pump prices were capped at 10 cents a gallon. Iran also keeps pump prices low — less than 35 cents a gallon, according to a recent Reuters survey.

But for a real bargain, drive on down to Venezuela, where President Hugo Chavez has made a name for himself lately by delivering heating fuel to low-income American families at bargain prices. In Venezuela, you’ll pay just 12 cents a gallon to fill your tank.

 
At 2/09/2011 5:50 PM, Blogger Ron H. said...

Peak,

"Morganovich, you have no proof the BLS uses a biased method. We've had this conversation before:"

What would you consider proof? The method used has been shown to be biased in its very nature. The BLS has means, motive, and opportunity to commit the crime. US inflation appears to be much lower than the rest of the world, although most commodities are globally priced.

It seems everyone believes their personal experience is that prices have increased, although I understand that anecdotes are not evidence. I wonder why so many are unfortunate, in that their personal basket of goods contains mostly unrepresentative items that have all gone up in price.

 
At 2/09/2011 5:55 PM, Blogger Ron H. said...

"In Iraq, until recently, pump prices were capped at 10 cents a gallon. Iran also keeps pump prices low — less than 35 cents a gallon, according to a recent Reuters survey.

That is meaningless. You do understand that your examples aren't market prices, right?

 
At 2/09/2011 6:12 PM, OpenID Sprewell said...

Wow, only on an econ blog can you get such debate (50 comments!) about such an esoteric subject as the calculation of food price inflation. :) I didn't read the previous comments- I'm not that interested in this topic- ;) but it makes me wonder if inflation has always been a tenuous concept which has become largely useless these days, considering how fast our mix of goods changes in the modern economy. Unless one can find marked year-over-year price rises in the exact same basic goods, it is very difficult to adjust for all the variety and change we see today. A good argument for the Fed not to peg to inflation but to just use a steady increase in the base money supply, as Friedman always wanted. Oh well, private electronic substitutes will soon kill off the dollar and other antiquated currencies anyway so who cares.

 
At 2/09/2011 7:07 PM, Blogger morganovich said...

peak-

"Morganovich, inflation reflects exponential growth (a 3% rise in inflation is a rise from the prior year). So, the arithmetic mean would overstate inflation. You can see this using a compound annual growth rate calculator. Type 140 for ending value, 100 for beginning value, and 4 for number of periods. The answer is 8.78% (not 10%). The more periods, the lower the rate, e.g. 180, 100, and 8 is 7.62% (not 10%)."

honestly, i have no idea what you think you are talking about.

my best guess is that you are confusing compounding with measurement.

arithmetic in this case does not mean what you think it means.

your example is meaningless.

p = 100 = 108.78 = 118.3 = 128.7 = 1.4

that is compounding. in each case, if you take (p1-p0)/p0 in each case, you get 8.78 and the result after 4 periods is 40% inflation.

that is not what we are talking about at all. you seem to have missed the whole thrust of the conversation.

the geometric weighting we are discussing is used to calculate the weighting of individual items in the overall consumption basket. it has nothing to do with compounding. go back and read the link i gave jet.

based on what i think you were trying to argue there, you are not following the conversation.

 
At 2/09/2011 7:21 PM, Blogger morganovich said...

peak-

"Morganovich, you have no proof the BLS uses a biased method. We've had this conversation before:"

i do, in fact, have conclusive proof. i have had a statistician run this myself. the results could not be more stark.

do it yourself.

take a basket of 100 goods priced at $1 each. fluctuate their prices randomly but make sure that the sum of the prices remains $100 (no net change). that is the arithmetic price. then take you new prices and do the same. iterate 100 times. apply the fed's geometric weighting by which you underweight goods that go up in price and overweight those that go down. you will get deflation every time. it is a mathematical certainty.

consider the simplest possible basket of 2 goods, each priced at $2. it costs $4 to buy. now imagine that those prices change to $1 and $3. the price of the basket is still $4, but if we overweight the former and underweight the latter, we get a geometric price of <$4. so the BLS declares deflation where anyone actually buying the 2 goods would say "it cost the same". again, this is a mathematical certainty. so yes, i do have proof and it is solid and incontestable. the BLS is making assumptions about changing buying patterns that are not realistic. many prices rise due to increased demand. in such a case, the BLS dramatically under-counts units.

this is how we get healthcare as 1/16 of CPI when it is 1/6 of GDP.

but you don't have to believe me. ask bill gross at pimco or volcker, the most impactful and successful fed president of all time. ask david einhorn at greenlight, ask liz sonders at schwab or eric swergold at firestorm (a fund focused exclusively on inflation).

the proof could not be more clear no matter the ludicrous post hoc assertions of political hacks like boskin which would make even the IPCC blush.

 
At 2/09/2011 7:27 PM, Blogger morganovich said...

peak-

Morganovich, oil is also a global commodity. Do you believe the price of oil in Riyadh is the same as in New York?

yes. (less transport costs and taxes)

if i could sell in london for more than riyadh + transport costs, then i would.

oil (by grade) is a totally fungible commodity thus priced efficiently.

is oil cheaper in texas than new york? no. not in bulk it isn't. it trades on the CBOT or the NYMEX and those prices are the same no matter where you are.

 
At 2/10/2011 9:06 AM, Blogger VangelV said...

The U.S. is the most efficient food producer in the world.

Yes, but it has been the most efficient producer for decades. Productivity in the agricultural sector in not growing much when compared to other nations, which have a long way to go and can reduce their costs in ways not available to the US.

The U.S. with less than 3% of the workforce produces more than enough food to feed the entire country.

Yes, but food is a global business. When prices for corn go up by 50%, US users of corn pay just as foreign importers do.

Also, the U.S. has abundant arable land, compared to other countries, which is another competitive advantage.

But the US needs a great deal of energy to work that land so when energy costs go up so the input costs for farmers. There is no free lunch, When prices go up they go up for all of us, not just foreigners.

 
At 2/10/2011 9:08 AM, Blogger VangelV said...

Morganovich, U.S. efficiencies and competitive advantages are why food prices are rising more slowly in the U.S.:...

The narrative does not work. There is a difference between the BLS reported price inflation and the real price inflation that is paid by American consumers.

 
At 2/10/2011 9:20 AM, Blogger VangelV said...

Based on what I'm reading here, the BLS uses real prices in deriving its CPI measures. We may not agree that they are selecting the correct 80,000 items. But for deriving a dairy products index, or a poultry index, or a non-alcoholic beverage index, it cannot be that difficult to obtain a relevant mix of items.

Yes, they use real prices. But when the price of beef goes up the BLS assumes that people will switch to chicken or pork so the weighting of beef is reduced.

The idea of a fixed basket was done away with around twenty years ago and the BLS methodology no longer provides inflation figures that can be compared to historical measures. I think that the best explanation can be found in the link provided by morganovich above. In it John Williams explains substitution quite well.

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

In essence, the Boskin/Greenspan argument was that the BLS did not have to report price increases because people would adjust their purchasing power to buy lower quality items. If that method was used in the 1970s the reported inflation would have been less than half of what was being reported. But the change in reporting would not have had an impact on the consumers, who did see a much higher inflation rate than what would have been reported.

 
At 2/10/2011 9:29 AM, Blogger VangelV said...

Morganovich, oil is also a global commodity. Do you believe the price of oil in Riyadh is the same as in New York?

You make several errors in logic. One of them is assuming that oil is the same around the world. It isn't. Another is that all oil is equally useful to refineries. Again, it isn't. Then there is the issue of price. In a location like New York, which has no oil of its own you have to account for transportation costs and various royalties, taxes, and fees that may not be a factor in other locations where oil is produced.

The differences between grades of corn are much smaller than those in oil. And those differences are much easier to deal with when you are looking at corn than they are for oil where you need billions of dollars worth of capital investment to deal with changes in supply conditions.

 
At 2/10/2011 9:32 AM, Blogger VangelV said...

Morganovich, you have no proof the BLS uses a biased method. We've had this conversation before:...

The changes made by the BLS are not a secret. He gave you an excellent overview and provided you with a link to the Williams explanation of the changes. He advised you to look at the comments made by Paul Volker and Bill Gross. Yet, like a true believer, you refuse to look at the data and the evidence and are willing to buy the story that the government is selling without question, even when the story does not reflect your actual experience in the checkout lines.

 
At 2/10/2011 9:41 AM, Blogger VangelV said...

It seems everyone believes their personal experience is that prices have increased, although I understand that anecdotes are not evidence. I wonder why so many are unfortunate, in that their personal basket of goods contains mostly unrepresentative items that have all gone up in price.

Some of us have actually experienced deflation because our basket of goods is different than that of most people. While I consume food and energy like everyone else changes in my diet have led to mild price increases that are lower than those experienced by the average person. If you are eating 5% of the grains that you used to the 25-50% increase in the price of grains has not had much of an impact. If you drive less than you used to the doubling of the price of crude is not as big a factor as that for the average person who does not have the luxury of choosing to drive less.

And if your basket of goods is over-weighted items like books, cruises, electronic equipment, and other things that have gone down in price due to much greater competition you can find that the cost of living has not gone up very much at all. But that experience is unique and not reflective of the experience of the average person who has to deal in a reality that the BLS ignores.

What gets to me is why people like Mark, Peak, and others are willing to believe when the evidence against their beliefs is overwhelming. I guess that they did not learn from the series of bubbles that the Fed orchestrated and are playing their roles just as the politicians want.

 
At 2/10/2011 9:46 AM, Blogger VangelV said...



based on what i think you were trying to argue there, you are not following the conversation.


It is clear from his argument that he has no clue what we are talking about. He never read the John Williams piece or has read what Rogers, Faber, Gross, or Volker have written or said on the subject of the inflation calculation methodology. Some people just want to believe and once they do they will ignore the actual empirical evidence in favour of a narrative that supports their views. Anyone who has paid attention to the climate change debate should be familiar with this phenomenon.

 
At 2/10/2011 10:32 AM, Blogger PeakTrader said...

VangelV, there remains no proof of any systematic inflation bias by the BLS.

It's more likely inflation has been overstated, rather than understated, because quality improvements haven't been fully captured.

You may want to see "100 Years of U.S. Consumer Spending" by the BLS:

http://www.bls.gov/opub/uscs/report991.pdf

 
At 2/10/2011 11:46 AM, Blogger PeakTrader said...

VangelV, your Williams link says:

"Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year."

Does that mean over 10% nominal GDP growth?:

Jan 2007

Bloomberg's Tom Keene: "Bill [Gross], your note every month is always interesting. This last one is one of my favorites. As you know, I'm a big fan of nominal GDP - this, folks, is real GDP plus inflation. It's the 'animal spirits' that's out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that's going to end?"

Pimco's Bill Gross: "I think almost assuredly, because of oil prices. I'm not suggesting it end because of real growth going down - that's the Goldilocks scenario in which we have 2% plus or minus real growth. With oil prices doing what they're doing - if they hold in the $55 range - gosh, we're going to see CPI prints y-o-y over the next three or four months of 0.5% or 1.0% and that means nominal GDP is down in the 3% range."

Tom Keene: "And the important distinction here is you have two moving parts: GDP and inflation. So you've got roughly four outcomes: They both go up, they both go down, or they split the difference. You're suggesting - your focus - is more on the inflation part of nominal GDP or are you looking equally at the growth dynamics?"

Bill Gross: "Ultimately, the inflation component affects the real growth component. To the extend that you have nominal GDP - in my forecast 3 to 3.5%, that's really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining assets prices ultimately factor into eventually lower real growth. But that's not for mid-2007 but perhaps for later in the year."

Tom Keene: "When we look at six months of low nominal GDP, is that enough to link directly into the 'animal spirits" of the business investment component of GDP - the "animal spirits" of business men and women?"

Bill Gross: "Well sure it is. When you realize that the average cost of debt in the bond market - and therefore in the economy and this includes mortgages - it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications. When you go back to 1965, Merrill [Lynch] did this study - in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well. The question becomes why hasn't that happened yet, and I think we're simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy."

Tom Keene: "Where will the 10-year yield be 12 months from now?"

Bill Gross: "I think around 4.5%, and that's not a dramatic bull market, Tom. We're at 4.75% now and that would imply a point and a half of price appreciation on top of that yield, so maybe a 6% total return. But we're definitely moving into a period of time during which bonds begin to do better. Obviously, in the last month or two they have not, and risk assets - typified by equities - have done just the reverse. But I think we're beginning to get into a period in which this tightening effect will move things in the opposite direction."

 
At 2/10/2011 12:19 PM, Blogger Ron H. said...

VangelV,

"And if your basket of goods is over-weighted items like books, cruises, electronic equipment, and other things that have gone down in price...""

So, this is the substitution effect in action. You are taking cruises instead of driving to work. Nice move. :-)

 
At 2/10/2011 12:30 PM, Blogger Ron H. said...

""And if your basket of goods is over-weighted items like books, cruises, electronic equipment, and other things that have gone down in price..."

Your comment raises another interesting point. The items whose prices have gone down are items enjoyed by those who are well off, whereas food and energy are a larger part of the budgets of the poor. It would appear that inflation disproportionately affects the poor.

 
At 2/10/2011 2:27 PM, Blogger Jet Beagle said...

Ron H: "The items whose prices have gone down are items enjoyed by those who are well off, whereas food and energy are a larger part of the budgets of the poor. "

I'm not so sure that food prices are up significantly. We can argue all day about the weights used in the index. But BLS also reports prices for specific retail foods.

Here's the latest annual price increase for some common foods:

Grade A Milk +6.8%
American cheese -1.6%
Brolier chicken +2.2%
Boneless chicken breast +0.2%
Grade A eggs +1.2%
Ground chuck +3.7%
Round steak +9.6%
Sliced bacon +16.5%
White rice -3,9%
Choc chip cookies +1.0%
Butter +28.0%
Margarine +1.7%
Frozen orange juice -3.0%
Potato chips +1.9%
Iceberg lettuce -16.0%
Tomatos -18.9%

A few prices are up significantly, but most are nearly flat and some are down.

 
At 2/10/2011 3:11 PM, Blogger Ron H. said...

Jet,

You're right. the items on that list don't indicate much of an increase in food prices. However, I might note that the items with lower prices aren't things I usually buy.

 
At 2/10/2011 3:17 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 2/10/2011 3:19 PM, Blogger Ron H. said...

I'm looking forward to an anonymous whistle blower at BLS releasing thousands of incriminating e-mails between various government officials and the BLS...Inflationgate?

 
At 2/10/2011 4:12 PM, Blogger Jet Beagle said...

Ron H: " However, I might note that the items with lower prices aren't things I usually buy."

Well, I was responding to the idea that items consumed by the poor are costing more. I intentionally chose the items which I consumed as a child, when I was part of a poor family. Butter was not one such item, though. I just threw that in to show that the poor man's purchase - margarine - was not increasing as much as the rich man's purchase.

 
At 2/10/2011 4:43 PM, Blogger VangelV said...

VangelV, there remains no proof of any systematic inflation bias by the BLS.

But as was shown to you by morganovich the new method severely understates inflation when compared to the pre 1990 method changes. If we use the same methods in the 1970s as we use today they would have been shown to be a period of mild inflation, which we know not to have been the case.

Because you have a hard time with this subject let me try and go through it slowly in the hope that you might be able to follow it.

First, the original method for calculating the Consumer Price Index involved the tracking of how the price of a FIXED basket of goods
changed over time. The important word is FIXED. It is critical that we do an apples to apples comparison because it is only such a comparison that ensures that the reported statistics will measure a constant standard of living. If I love steak and am used to eat steak it is not important that I will choose chicken or hamburger when steak prices go up because when I go to my second choice because I can't afford the first my standard of living has gone up. The original CPI, which was a fixed index, is called a Cost of Goods Index.

Political pressure forced the BLS to change its method of calculating CPI. The changes means that we no longer have a Cost of Goods Index but a Cost of Living Index.. This new index accounts for changes in consumer purchasing patterns so it ignores rising prices and overweighs the effects of items for which prices have fallen.

Let us go to a simple example where our basket of goods is made up of cheddar cheese and steak. (This example has been given by many commentators on the subject so let us stick with it.) Over a five year period both goods have gone up by 50% so our Cost of Goods Index would show a 50% increase. But today the BLS would say that when prices went up consumers would avoid steak and cheddar. They would substitute hamburger and processed cheese slices, which may have only gone up by 12% over that time. So instead of the 50% increase we would have a much lower number that reflects a consumer choice to accept a lower standard of living.

Now you can argue that the BLS is right to ignore increasing prices because it is obvious that people will adjust their purchases as they could no longer afford to buy the things that have gone up in price. While the observation that consumers will adjust and choose a lower standard of living is valid, the claim that there was no inflation isn't.

It's more likely inflation has been overstated, rather than understated, because quality improvements haven't been fully captured.

That is not true. As I said, the BLS methodology is very clear. It ignores rising prices and understates inflation.

You may want to see "100 Years of U.S. Consumer Spending" by the BLS:..

I have seen it thank you. But as a work of fiction it isn't very good.

 
At 2/10/2011 4:56 PM, Blogger VangelV said...

So, this is the substitution effect in action. You are taking cruises instead of driving to work. Nice move. :-)

It is a nice move thank you. That is what happens when you have kids and have to change your life accordingly.

But it is also life and also reality. We are all unique so no basket of goods can reflect the experience of more than a handful of us and then only by coincidence. People like me, who consume books and have a large budget set aside for books and software have experienced massive price decreases that are not reflected in any basket of goods that I am aware of. And even within our lives our own preferences change. People will choose to live differently based on their age specific requirement and based on price signals that they get from the real world, which is not the world of the BLS. When income taxes become prohibitive some will stop working as hard or stop working entirely. When gasoline gets too expensive some people will choose to buy smaller vehicles or move closer to work. When they get too fat they might choose to eat less and to eat a different mix of foods. All of these choices impact their standard of living and the level of price inflation that they experience.

 
At 2/10/2011 4:58 PM, Blogger VangelV said...

Your comment raises another interesting point. The items whose prices have gone down are items enjoyed by those who are well off, whereas food and energy are a larger part of the budgets of the poor. It would appear that inflation disproportionately affects the poor.

I agree. While the poor benefit from the falling prices in the telecom and computing sectors they take a beating when it comes to food and energy because those are a bigger portion of their spending.

 
At 2/10/2011 5:02 PM, Blogger VangelV said...

Here's the latest annual price increase for some common foods:

Grade A Milk +6.8%
American cheese -1.6%
Brolier chicken +2.2%
Boneless chicken breast +0.2%
Grade A eggs +1.2%
Ground chuck +3.7%
Round steak +9.6%
Sliced bacon +16.5%
White rice -3,9%
Choc chip cookies +1.0%
Butter +28.0%
Margarine +1.7%
Frozen orange juice -3.0%
Potato chips +1.9%
Iceberg lettuce -16.0%
Tomatos -18.9%


I am sorry but where are these numbers coming from? I do not believe that we are paying 16% less for lettuce and 19% less for tomatoes than we were last year. And how do cheese prices fall by 1.6% when the price of milk went up by 6.8% when cheese making is not exactly a high margin business?

And where is the change for wheat, corn, rye, barley, onions, flour, sugar, and other goods that go into the basket of most consumers?

 
At 2/10/2011 5:07 PM, Blogger VangelV said...

I'm looking forward to an anonymous whistle blower at BLS releasing thousands of incriminating e-mails between various government officials and the BLS...Inflationgate?

Speaking of whistle blowers did you look at the Wikileaks item on Saudi oil capacity and reserves? Imagine what happens to the inflation index when the realization that we are on the back end of Hubbert's Curve becomes widespread.

 
At 2/10/2011 5:38 PM, Blogger Ron H. said...

Jet,

"Well, I was responding to the idea that items consumed by the poor are costing more."

Perhaps I wasn't clear. I didn't mean to suggest that food items purchased by the poor are more costly than food items purchased by the wealthy, only that food, if it is more expensive at all, affects the poor more, as they spend a higher percentage of their income on food. The items the wealthy might buy more of such as books, cruises and electronics, the prices of which have dropped, would benefit the wealthy more than the poor. I other words, inflation in general would appear to hurt the poor more than the wealthy.

 
At 2/10/2011 6:27 PM, Blogger Doc Merlin said...

"And if your basket of goods is over-weighted items like books, cruises, electronic equipment, and other things that have gone down in price due to much greater competition you can find that the cost of living has not gone up very much at all. "

So the very wealthy have deflation, while the poor and middle class have inflation?

 
At 2/10/2011 7:38 PM, Blogger PeakTrader said...

VangelV, I explained above mathematically how a systematic bias in calculating inflation causes a systematic bias.

Also, there's no proof "political pressure forced the BLS to change its method of calculating CPI."

Moreover, the substitution effect doesn't work only one way, i.e. from higher to lower quality goods. It works both ways.

If U.S. living standards didn't improve, then why are there uneducated Third World immigrants, who were dirt poor a few years ago, and through work are living in big houses, driving SUVs, buying lots of retail goods, food, imports, etc.?

 
At 2/10/2011 7:49 PM, Blogger Ron H. said...

"So the very wealthy have deflation, while the poor and middle class have inflation?"

Well, not exactly. There is only inflation if there are more higher prices than lower prices - and deflation if the reverse is true and then only if there is an increase or decrease in the money supply.

 
At 2/10/2011 9:57 PM, Blogger VangelV said...

"Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year."

Does that mean over 10% nominal GDP growth?:..


No. It does not mean that because the real economy is not growing by 3%. Given the falling workforce employment rate I doubt that there is much growth if any.

 
At 2/11/2011 12:06 AM, Blogger VangelV said...

VangelV, I explained above mathematically how a systematic bias in calculating inflation causes a systematic bias.

There is bias but it understates inflation. That is why the methodology was changed in the first place; politicians prefer to hide the terrible job that they and the Fed are doing and would like to keep SS cost of living increases as low as possible.

Also, there's no proof "political pressure forced the BLS to change its method of calculating CPI."

The BLS serve the politicians, not the public. They respond to pressure no matter what narrative their PR people may try to spin.

Moreover, the substitution effect doesn't work only one way, i.e. from higher to lower quality goods. It works both ways.

Not really. The adjustments the other way are only minor and do not capture all of the decreases in quality. While the BLS has changed its surveys to include many more discount stores with their own brand merchandise they do not really reflect the reduction of quality of those brands over the brands covered in their previous surveys of more expensive chains. An obvious example is the lack of and adequate adjustment made for the much poorer airline service, delays, etc.

If U.S. living standards didn't improve, then why are there uneducated Third World immigrants, who were dirt poor a few years ago, and through work are living in big houses, driving SUVs, buying lots of retail goods, food, imports, etc.?

When you substitute chicken for steak you are not buying the same standard of living. I did not make up the example. I heard Greenspan give it in the 1990s. It may have also been given in the Boskin hearings. The fact is that the BLS numbers are phony and cannot be compared to the reported numbers prior to the methodology changes.

 
At 2/11/2011 4:34 AM, Blogger PeakTrader said...

I suspect, it cost more to raise cattle than chickens pound-per-pound (also, I may add, the average size or weight of cattle has increased 20% to 40% over the past few decades).

U.S. Beef and Cattle Industry:
Background Statistics and Information

•Retail equivalent value of U.S. beef industry:

2002: $60 billion
2003: $63 billion
2004: $70 billion
2005: $71 billion
2006: $71 billion
2007: $74 billion
2008: $76 billion
2009: $73 billion

•Total U.S. beef consumption:

2002: 27.9 billion pounds
2003: 27.0 billion pounds
2004: 27.8 billion pounds
2005: 27.8 billion pounds
2006: 28.0 billion pounds
2007: 28.1 billion pounds
2008: 27.3 billion pounds
2009: 26.9 billion pounds

U.S. Beef Prices

◦Annual prices in 2005 averaged $4.09/pound
◦Annual prices in 2006 averaged $3.97/pound
◦Annual prices in 2007 averaged $4.16/pound
◦Annual prices in 2008 averaged $4.33/pound
◦Annual prices in 2009 averaged $4.26/pound

 
At 2/11/2011 8:11 AM, Blogger VangelV said...

I suspect, it cost more to raise cattle than chickens pound-per-pound (also, I may add, the average size or weight of cattle has increased 20% to 40% over the past few decades)....

It looks to me as if the market is calling for price increases.

You might also wish to go to the CRB handbook and take a look at historical price changes. Or check out the USDA data.

http://usda.mannlib.cornell.edu/usda/ers/94006/livestockprices.xls

 
At 2/11/2011 10:11 AM, Blogger Jet Beagle said...

VangeIV,

BLS Average Food and Energy Prices, U.S. City Average

I was responding to Ron H.'s comment about food price inflation impacting the poor, so I left out higher priced food items in favor of those which in the past have shown to be lower priced. Thus, I used ground chuck instead of ground beef and round steak instead of sirloin.

In response to your implied suggestion that I may have selected only low-inflation items, here's some additional yr-over-yr changes:

white flour -5.0%
white bread -0.3%
Wheat bread +7.0%
sugar +7.9%
Navel oranges +9.5%
Seedless grapes -8.5%
Apples +7.4%
Potatoes +3.8%
peanut butter -5.0%
beer +2.2%

The BLS report did not include corn and onions. I do not believe the poor directly consume the other items you suggested - rye and barley. This is a BLS report of consumer food prices.

I do not know how to weight the prices of the food items in my two lists. But I believe the BLS knows better how to do so, and how to adjust those weights, than do the people commenting here at Carpe Diem. Substitution does occur in the real world as relative prices change, and it makes sense top me that weights be adjusted to reflect that substitution effect.

 
At 2/11/2011 11:05 AM, Blogger VangelV said...

In response to your implied suggestion that I may have selected only low-inflation items, here's some additional yr-over-yr changes:

white flour -5.0%
white bread -0.3%
Wheat bread +7.0%
sugar +7.9%
Navel oranges +9.5%
Seedless grapes -8.5%
Apples +7.4%
Potatoes +3.8%
peanut butter -5.0%
beer +2.2%


I am sorry but as a person who invests in the sector I have not seen the type of price decreases that the BLS is claiming. Did the makers of Red Rose flour really drop their average price by 5% y-o-y? Did the price of Dempster's white bread really decline?

The BLS has several tools at its disposal that ensures that it can get any result it wants. One is the sampling method. Because there is no standard flour the BLS must sample different brands. By simply choosing to sample more low priced stores this year than it did last year it can get a price decline even though prices may have gone up at both types of stores. The second tool is normal price volatility. On occasion players in the futures markets can cause temporary spikes or collapses. That means that by choosing to sample at the appropriate period the BLS can get a very favourable result that does not reflect the actual average price during the year.

You need to sit back and look at the bigger picture. What is happening is quite obvious. If you choose not to see that is a your problem.

 
At 2/11/2011 11:28 AM, Blogger Jet Beagle said...

VangeIV,

Are you a person who invests in commodities? a person who invests in retailers? It wasn't quite clear from your statement why you believe you know as much as you do about consumer food prices.

Although commodity prices will certainly drive some food prices, commodity costs are hardly the only factor determining retail food prices. Other inputs determine costs, and demand definitely exerts pressures on prices. Furthermore, I have noticed a significant lag between commodity price increases and retail consumer prices.

VangeIV, you must value highly your experience as an investor. My opinions about food prices are based on not just personal observations as a consumer, but also experience as a food buyer for one of the nation's largest restaurant companies. Although that was many years ago, I do not believe the knowledge I gained about commodities and food prices is irrelevant today.

 
At 2/11/2011 5:54 PM, Blogger PeakTrader said...

Some people find those low U.S. prices simply unbelievable!

 
At 2/11/2011 7:25 PM, Blogger VangelV said...

Are you a person who invests in commodities? a person who invests in retailers? It wasn't quite clear from your statement why you believe you know as much as you do about consumer food prices.

I invest in commodities. They have done exceptionally well because prices have been going up steadily for years with only a pullback during the crash in 2008. But I also invest in the ag sector and pay attention to producers who use wheat, rice, sugar, etc. They have made it clear on the conference calls that their costs have gone up. Given their margins they are passing the costs through by playing games with packaging, using lower cost substitutes where they can, etc.

Although commodity prices will certainly drive some food prices, commodity costs are hardly the only factor determining retail food prices. Other inputs determine costs, and demand definitely exerts pressures on prices. Furthermore, I have noticed a significant lag between commodity price increases and retail consumer prices.

Yes, there are other costs. For example, investment in new capital can make a difference and will lower costs over the long term. As a producer you can also cut costs on packaging, dumping low value clients, etc. But most of these cost saving measures have already been taken and in a country like the US, where there isn't much distribution channel fat to cut, the savings possibilities are very small. Companies like Wal-Mart have already made sure that the waste in the system was squeezed out and what is left is difficult to eliminate.

VangeIV, you must value highly your experience as an investor. My opinions about food prices are based on not just personal observations as a consumer, but also experience as a food buyer for one of the nation's largest restaurant companies. Although that was many years ago, I do not believe the knowledge I gained about commodities and food prices is irrelevant today.

As a buyer you should know that there are ways to cut costs but most involve making hard choices about substitutions. Consumers do this when they buy lower quality store brands or when they unknowingly pay the same amount for a box of cookies or a can of tuna that contains less product than it did a year ago. Companies that sell processed foods have also figured out how to use cheaper fillers and additives to make the food seem as good as before even though the nutritional value and the caloric content is lower. One of my neighbours just closed down her shop. She was selling fish but found that her customers have gone towards cheaper products. While they were able to afford fresh fish caught in the wild before her former customers now go to the local grocery stores and buy frozen farm raised fish. Now we could have a government statistician claim that her customers are paying less and that would be fair, but not if the adjustment for the lower quality is not made as it would be when quality improves.

And that is the big problem. When you are talking about thousands of different products and different sampling choices it is easy to get a conclusion that you want. Do the statisticians notice that the bread that used to sell for $2.50 a loaf last year is now $2.47 but weighs 12% less? Do they notice that the canned salmon is now from farm raised fish instead of wild? Or that there is 19 grams less tuna in a can than there used to be before? All of these things matter but are not properly accounted for. Given the difference in incentives it is easy to see how food producers can get a higher price without creating the impression that they are passing on all of their cost increases to the consumers and how government statisticians looking for as little inflation as possible can ignore some of the tricks used by the producers.

 
At 2/13/2011 2:56 PM, Blogger VangelV said...

Some more bad news for the BLS. Consumers will need to do some more substitution.

Mexico loses 80-100% of crops to freeze, US prices to skyrocket

 
At 2/13/2011 9:34 PM, Blogger Ron H. said...

"Some more bad news for the BLS. Consumers will need to do some more substitution.

Mexico loses 80-100% of crops to freeze, US prices to skyrocket
"

Hmmm. As hard as I try, I can't think of a substitute for tomatoes.

 
At 2/13/2011 10:19 PM, Blogger VangelV said...

Hmmm. As hard as I try, I can't think of a substitute for tomatoes.

I guess a job for the BLS is out of the question then. A tomato is a red fruit. If the price of apples, seasonally adjusted of course, decline then you can assume that some people will substitute them for tomatos. Red grapes from Chile may also be a fair substitutes. Obviously, you do not have the imagination it takes to work for the BLS.

 
At 2/14/2011 3:09 AM, Blogger Ron H. said...

"Red grapes from Chile may also be a fair substitutes. Obviously, you do not have the imagination it takes to work for the BLS."

You're right. I didn't really think this through. All this talk of food is making me hungry. I think I'll make myself a bacon, lettuce, and grape sandwich.

 
At 2/14/2011 9:49 AM, Blogger VangelV said...

You're right. I didn't really think this through. All this talk of food is making me hungry. I think I'll make myself a bacon, lettuce, and grape sandwich.

There you go. See how easy it is to think outside of the box if you want to. Imagine how much better you would be at it if you had the incentive to be more imaginative.

 
At 2/14/2011 2:42 PM, Blogger Ron H. said...

"There you go. See how easy it is to think outside of the box if you want to. Imagine how much better you would be at it if you had the incentive to be more imaginative."

Yes, I see what you mean. It's now obvious to me that my standard of living hasn't changed due to substitution. My level of satisfaction is just as high with a BLG as with a BLT.

Now - where did I put that BLS job application? I think I'm ready.

 

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