Friday, April 15, 2011

CPI Inflation Report and a 25-Year Perspective

The BLS released its Consumer Price Index report for March, with the following highlights:

1.The Consumer Price Index for All Urban Consumers increased 0.5 percent in March on a seasonally adjusted basis. Over the last 12 months, the all items index increased 2.7 percent.

2. The index for all items less food and energy rose 0.1 percent in March, a smaller increase than in the previous two months. The index for all items less food and energy has increased 1.2 percent over the last 12 months.

3. Over the last year, the energy component of the CPI increased by 15.5%, driven by a 27.5% increase in gasoline prices, but offset somewhat from a 5.5% decrease in natural gas prices.

4. Overall food prices increased by 2.9% on an annual basis, with the "food at home" component increasing by 3.6% and "food away from home" increasing only 1.9%, suggesting that restaurants are absorbing some of the food prices increases to stay competitive.

5. Apparel prices fell by -0.60% compared to last March, marking the 13th consecutive month that clothing prices have fallen on a year-over-year basis.  American consumers can thank globalization and trade for delivering the most affordable clothing in history - 50 years ago Americans spent 8% of their disposable income on clothing that was probably all "Made in the USA" and relatively expensive, and today they spend less than 3% of disposable income on low-cost clothing that is made all over the world.

MP: See the chart above for a 25-year historical view of annual inflation for both the CPI: All Items and core inflation.  Since 1985, the average annual inflation rate for both series is 2.9%, meaning that inflation today is below the 25-year average especially for core inflation at only 1.2%.  


At 4/15/2011 9:46 AM, Blogger morganovich said...

that chart is not a valid comparison across the whole period.

the CPI methodology was changed in 1992.

see the coincident step function down in the reported number?

thus "average rate since 1985" has no valid meaning, whatever you believe about the correct way to measure inflation.

it's like measuring speed in km/hr from 1985-1992 and them mph thereafter and then averaging them.

the whole downtrend of the 90's is a methodological artifact.

the way that "core" is currently calculated would create deflation from a set of stable prices.

i urge you to try this yourself dr perry, as you seem capable of replicating what we did.

take 100 items price $1. vary their prices randomly from 0-5% but with a sum total change of 0 so that the basket always retains a price of 100.

apply geometric weighting to get an average price.

take the new prices from step one and iterate the process 100 times.

you will see deflation emerge very clearly in the geometric average while the basket itself has no price change.

to really see this result emerge, increase the likelihood that a product that went down in price in period one will do so in period 2 (consumer electronics) and do the same for those going up (healthcare, education).

this is how you wind up with a CPI that only only counts 1/6 of GDP (healthcare) as 1/16 of the inflation basket.

the entire premise behind geometrically weighting the consumption basket is flawed. while it sounds rational that we would consume more of things going down in price and less of those going up, this assumes only one kind of causality (from the supply side). that's not how prices work in the real world. often, they go up BECAUSE we consume more.

if the atkins diet makes us eat more bacon and less pasta, that is s demand issue. pasta drops in price, but so does it's consumption. it drops in price BECAUSE consumption dropped.

a geometric system not only assumes that this cannot happen, but it assigns the wrong weightings when it does.

i seriously urge you to test the CPI methodology yourself. i think you will be VERY surprised at what you find.

At 4/15/2011 10:27 AM, Blogger juandos said...

Hmmm, interestingly (to me at least) it does seem inflation is alive and well if this handy, dandy Inflation Calculator works as advertised...

The cost of a $20 item in 2006 is now $22.17, a rate of inflation change of 10.8%...

At 4/15/2011 11:30 AM, Blogger Benjamin Cole said...

Cluck, cluck, cluck,--but inflation is running wildly out of control, the infaltion sky is falling!!!! Cluck, cluck, cluck.

Listen, we inflation Chicken Littles know there is a government and academic conspiracy to under-report inflation! This conspiracy even carries over into Europe!

Economists at the Fed, the BLS and academia are all in on it!

The Inflation Sky is Falling!!!

At 4/15/2011 11:59 AM, Blogger morganovich said...

listen to benji sheep!

baaaaaah. baaaaaah.

just follow the herd until it's time to be shorn then eaten benji lamb.

you have no data, so all you spew is nonsense.

at least you have finally dropped all pretense that you have an augment here or even understand the topic.

the honesty is refreshing.

your views are also wildly inconsistent. you seem to understand that government is self serving, ineffective, and lies a great deal about its motives in nearly every other aspect of its duties.

so why is it that you fins it so difficult to believe that on a matter as high stakes as entitlement price adjustment, the single greatest third rail in US politics, that politicians might seek a way to cut benefits without bringing down the sort of electoral wrath that comes with doing so?

isn't that precisely what you would expect them to do?

you seem to be on both sides of this issue of government trust.

At 4/15/2011 12:05 PM, Blogger Che is dead said...

" ... the whole downtrend of the 90's is a methodological artifact."

CBNC: “Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.”

At 4/15/2011 12:10 PM, Blogger morganovich said...

also note:

back when the idea to change CPI was first being mooted, debate raged over this as a closet COLA cut.

note that greenspan was a strong advocate of increasing SS taxes due to the impending funding crisis.

when he could not get that pushed through, he cooked up this CPI device.

go read your history.

go read the debates that took place when this actually happened and why bush the elder told greenspan to take a hike on this and why relentless self promoter and serial economic liar clinton said yes. (note - clinton NEVER had a balanced budget despite his claims to the contrary. he always excluded intergovernmental borrowing from those numbers. US debt went up every year of the clinton presidency)

what you are attempting to brand as a "conspiracy" was no more so than most other government policy.

i would be willing to be that you have never once read the debates that led to this change.

try it.

i realize that become informed on an issue before opining on it is a new idea for you, but you may be amazed how much more seriously other people take you if you do...

oh, and if you think the euros don't have the exact same issue and know a viable political option when they see one, then you have not been paying attention.

At 4/15/2011 12:34 PM, Blogger morganovich said...



either we have double digit inflation now or the inflation of the 70's never happened.

there is no consistent way to argue that inflation is low now but was high in the 70's.

to due so is like arguing that switching the markings on your speedometer from kmh to mph means you slowed down.

At 4/15/2011 12:48 PM, Blogger Benjamin Cole said...

Morgan Frank:

I completely agree that large public agencies become coprolitic, whether Health and Human Services or the Department of Defense.

The fact that public agencies waste money is a distinct issue from whether the current method of measuring CPI is worthy. That CPI issue has been looked at by many private-sector, academic and government economists, and they agree--across ideological lines--that the current CPI measurement method is good. Nothing is perfect, and there are grey areas, no matter how you measure inflation. Consumer do, in fact, switch away form expensive goods. Cars today do, in fact, get better mpgs than 30 years ago. So, measuring the impact of gasoline with 1980 weights does not make sense.

That said, if we believe inflation is running at 10 percent and has for years, then our real living standards have been cut in half, while socialist Europe moved ahead.

Your fall-back position on this issue, of course, is that also in Europe they are gaming the CPI figs. It is a global conspiracy.

Your argument looks silly, paranoid, deficient.

Shadowstats is run by some crank who recently changed his name. Please, can you cite a peer-reviewed paper for your "facts?"

At 4/15/2011 12:48 PM, Blogger Benjamin Cole said...

Okay, true-blue right-winger Donald Boudreaux, chairman of George Mason econ department, says the CPI overstates inflation.
You cannot get more free-market and right-wing that George Mason. You are in effect calling the right-wing a bunch of cheap fruads is you beleive Shadowstats.

Calculating real wages
By Donald J. Boudreaux
Sunday, February 19, 2006

Like many pundits today, New York Times columnist Paul Krugman often asserts that middle-class Americans have suffered stagnant income growth since the mid-1970s. In one of his columns last June, Krugman summarized his gloomy assessment of economic performance in America over the past three decades: "The middle-class society I grew up in no longer exists."
He's right. The society that he (and I) grew up in indeed is history. But this fact deserves applause because ordinary Americans' standard of living today is so much higher than it was 30 years ago.

I admit that standard-issue data mask the truth of my claim. Most notably, after adjusting for inflation, wages of the average worker haven't risen since the mid-'70s -- while during the previous 30 years these wages escalated impressively.

But data can be tricky. For a variety of reasons, the data relied upon by Krugman and others to paint a picture of an economy that's failing the middle-class are incomplete or misleading.

One of the trickiest maneuvers for statisticians is to adjust wages for inflation. This adjustment is typically done by (as economists say) deflating actual wage numbers by the Consumer Price Index (CPI). In theory, as the average of all consumer-goods prices rise, so does the CPI. And the higher the CPI, the higher the reported rate of inflation and, hence, the greater the amount by which actual wages must be discounted to translate them into "inflation-adjusted" (or "real") wages.

Average hourly wages of private-sector workers in 1975 were $4.73; today this figure is $16.34. But when deflated by the CPI, we find that today's average wage is worth only $4.62 in 1975 dollars. Looks bad for the average wage earner.

But can we trust the CPI? I think not. For a variety of reasons, it significantly overstates the amount of inflation we've suffered -- and, thus, it misleads us in estimating changes in real wages over time.

Let's explore in some depth.

To calculate inflation, statisticians cannot literally look at all goods and services that consumers buy. Instead, statisticians who compile the CPI choose a "basket" of goods and services that represents what the typical American family purchases. Changes in the prices of these goods and services are then used to measure inflation.

How, though, to select which goods and services to put into this basket? The obvious answer is to choose those items that ordinary consumers routinely buy. Putting in a loaf of bread makes sense; putting in a Tahitian vacation does not.

The problem arises because the set of things consumers routinely buy is itself affected by prices. The lower the price of something, the more likely is the typical American family to buy that something. In contrast, something whose price is quite high won't be routinely purchased and, hence, isn't a good candidate for inclusion in the CPI basket.

Prices, though, change over time. Because consumers can and do switch their consumption patterns to adjust for these price changes -- buying lesser quantities of items whose prices rise and buying greater quantities of items whose prices fall -- the CPI basket chosen today gives too little weight to items whose prices fall tomorrow and too much weight to items whose prices rise tomorrow.

The result -- the CPI overstates inflation.

At 4/15/2011 12:50 PM, Blogger Benjamin Cole said...

Che is Dead-

If you think the CPI overstates inflation, why don't you take some econ classes at George Mason, the Mt. Olympus of right-wingers, and tell them you know better?

At 4/15/2011 1:03 PM, Blogger morganovich said...


"You are in effect calling the right-wing a bunch of cheap fruads is you beleive Shadowstats."

they apparently did not teach logic at your imaginary college eihter.

the latter premise does not follow from the former in any way.

i see that once again, you attempt to resort to an appeal to authority to cover up the fact that you do not understand this subject matter.

you can find an academic at a third rate college that believes anything.

so what?

i'm going to side with volcker, bill gross, shcwab, greenlight, and the other financial luminaries that have a track record of being right.

boudreaux makes the same mistake i outlined above: he assumes that all price changes come from the supply side.

if price for an item goes up because demand goes up, then underwieghting it is precisely the wrong thing to do.

At 4/15/2011 1:06 PM, Blogger juandos said...

Courtesy of Bloomerg: U.S. wholesale costs climbed 5.8 percent in March compared with a year earlier, and the government said today that the cost of living rose for a ninth straight month...

At 4/15/2011 1:09 PM, Blogger morganovich said...


take a look at the accounting methods that the government uses.

then you tell me:

how credible are they in terms of honest economic reporting?

At 4/15/2011 1:23 PM, Blogger morganovich said...


so benji, if we use today's CPI calculation, inflation was quite low in the 70's as well.

are you arguing that the inflation of the 70's was a myth?

At 4/15/2011 3:08 PM, Blogger Benjamin Cole said...

Hey, take up your arguments with the head of the econ department at George Mason. He is deeply conservative. He says the CPI overstates inflation. Tell him you would like to teach a class on the CPI.

All I remember about the 1970s is disco and sex, and I am sorry that decade ever ended.

At 4/15/2011 4:11 PM, Blogger juandos said...

Well someone is lying or someone is forgetting...

Maybe Boudreaux needs to do some more homework or maybe Congress does...

From the
U.S. Congress Joint Economic Committe: Core inflation, which does not include food and energy, remains muted.
December’s inflation numbers showed that core CPI-U (the consumer price index
for urban consumers), increased by only 0.1% last month. Over the past 12 months, core inflation has only increased by 0.6%, close to the lowest on record

At 4/15/2011 5:14 PM, Blogger morganovich said...

"Hey, take up your arguments with the head of the econ department at George Mason. He is deeply conservative. He says the CPI overstates inflation. Tell him you would like to teach a class on the CPI."

ahh, the appeal to authority, the last refuge of those who cannot make their own arguments.

(though at least you have finally settled into your role as the court fool and stopped trying to make actual arguments)

volcker and bill gross both know far more about inflation than does your third rate academic, disagree with him, and have made a great deal of money doing so.

this is why appeals to authority are stupid and pointless ways to discuss issues. you point at one guy, i point at another, and nothing is resolved.

what does his conservatism have to do with anything?

you seem to be using a deeply flawed string of logic.

ronald mcdonald sells french fries. he has a red nose. you have a red nose. thus, you are in the fast food business?

you have to be kidding me.


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