Why Marc Faber Is Wrong About the CPI 33 comments
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In this CNBC video, Marc Faber claims that the U.S. is headed for 10% to 20% inflation. I share his concerns, as I noted Thursday.
Marc also asserts that the CPI understates healthcare and insurance inflation, making CPI grossly inaccurate.
This claim is baseless. Assertions like this now go unchallenged because the CPI's perceived flaws have become an urban legend.
Myth Busters at the BLS
After mocking CPI methodology for years, conspiracy theorists finally got their heart's desire in August of 2008. That's when the BLS responded to critics with a densely noted 17-page report. This addresses widespread myths that inflation is understated because of the statistical methodolgy used for substitution, hedonic quality improvements, and other adjustments. The report is well done, but the CPI has taken so much abuse that any attack is taken at face value. This brings us to Marc Faber.
Faber's Claim Doesn't Hold Water
Marc Faber' stated Friday on CNBC that the CPI underweights healthcare and inflation, and this leads to a massive underestimation of inflationary pressures. "It's a lie, what they publish."
According to the May 2009 data, the weight for medical costs was 6.4% and the weight for insurance was 2.8% (auto, health, and home). The inflation rate for the prior 12 months was only 2% for insurance and 3.2% for medical care. (Hospital care prices rose 6%, but this has a weight of just 1.5% in the CPI.) Since the core inflation rate for this period was 1.8%, the weightings for healthcare and insurance don't matter.
In fact,the BLS could triple the weight for medical care AND for insurance and it would raise the inflation rate by just ten basis points (for the twelve months ending May 31, 2009). Consequently, I disagree with Marc Faber about this, at least until he shows data that support his thesis.
Exaggerations Are a Distraction
With interest rates at zero and budget deficits skyrocketing, there is no need to exaggerate the threat of inflation. This makes the problem appear insolubable, and saps our resolve to fight it. In the meantime, investors who are concerned about inflation probably own GLD, TIPS, WIPS, and commodities. These will benefit in 2010-2012 as inflation accelerates, possibly to 1982 levels. I'm prepared, since I own GLD and TIP, and I'm buying USO on a pullback.
And if that's not enough, I still have New Order, The Cure, and The Clash. On vinyl.
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arabianmoney.net/2009/.../
When China feels secure enough in their own economy (with a middle class that is over twice the size of our entire population) inflation for the necessities will skyrocket.
It is already happening if you bother to look.
Now throw in utilities and increased "fees" and taxes and start to understand what the "average" American family is experiencing.
On Jun 22 01:04 AM sethmcs wrote:
> Lets see, no job, no credit, no equity, no sales equals no inflation
> regardless of what the fed does. People overestimate the power of
> the fed. The fed has already fired all its bullets and now the market
> will correct itself.
On Jun 22 09:47 AM TeresaE wrote:
> Since China controls so much of our necessity/day to day living items
> (processed foods, OTC medicines, pharmaceuticals & clothes) it
> really doesn't matter about OUR jobs, credit and homes.
>
> When China feels secure enough in their own economy (with a middle
> class that is over twice the size of our entire population) inflation
> for the necessities will skyrocket.
>
> It is already happening if you bother to look.
>
> Now throw in utilities and increased "fees" and taxes and start to
> understand what the "average" American family is experiencing.<br/>
Thanks, but your article was waaay better than mine. The photo of the gold bug ALONE was worth the price of admission.
I have read the rebuttal from the CPI and I believe that their methodology holds water. I have found that attacks on the BLS are taken at face value, since it SEEMS that inflation is higher than the data show. But when you dig into it, inflation is really not all that bad.
Of course, even the BLS will acknowledge that some groups, especially low-income folks, get whacked by inflation much harder than their data suggest. But overall, I have not been able to support an attack on CPI based on the weights of the variables, the prices, or the arithmetic calculations. If so, I will eat my words and adjust accordingly.
Thanks again,
Be well.
Rob
On Jun 21 02:14 PM Living4Dividends wrote:
> Nice article - well done!
> "Marc also asserts that the CPI understates healthcare and insurance
> inflation, making CPI grossly inaccurate.
> This claim is baseless. Assertions like this now go unchallenged
> because the CPI's perceived flaws have become an urban legend."<br/>
>
> Robert - 1. What are your opinions on the BLS Rebuttal ? Do you agree
> with it?
Thanks. Changes in portions is actually one of the easier things for the BLS to adapt to. It is a straight-forward price hike, and I have no reason to think that they can't see through this.
Rob
On Jun 21 09:19 AM Dave Dorgan wrote:
> There's another form of inflation that is being missed. I call it
> "portionflation". You can look at it as "in-" or "de-" flation as
> you want. The quantity or size of just about everything we purchase
> - especially food - has gone down, while prices have remained relatively
> stable to moderately higher. Average Joe is either being conned:
> being a charter member of Weight Watchers (lower consumption), or
> buying even more than they did before to achieve the old result (higher
> consumption). What a deal?! Now you get three peanut butter cups
> when, in the olden days, you used to get two.
I agree.
Based on the CNBC interview last Friday, I was astounded that the journalist took him at face value. She even gave credence to his claim about about medical and insurance costs by saying "We'll have to check into that."
It is VERY easy to go on the BLS website and look through their data. It takes 5 minutes, and anyone can verify the weightings and the price increases.
Rob
On Jun 22 08:28 AM Living4Dividends wrote:
> Marc Faber has destroyed much of his credibility by making unfounded
> assumptions and using faulty data.
www.bls.gov/cpi/cpiri2...
Please keep in mind that the CPI assumes that EVERY person spends 6.3% on education EVERY year. Clearly, this is misleading for anyone with kids in college. But the CPI is an average, nothing more.
Senior citizens get a break, since they are immune from tuition inflation but they still benefit from CPI-linked increases in CPI.
Rob
On Jun 21 08:27 AM User 406253 wrote:
> What about the education cost? The education expense has been straight
> up in the last few decades. I do not believe CPI properly takes
> account of the inflationary effect.
>
> CPI weighings are where the problems are.
Thank you. As you noted, China causes inflationary pressures for commodities across the globe, and will continue to do so.
But China depends heavily on trade with other nations, and if its trading partners collapse, it will collapse as well.
During the tech bubble, the aggregate value of the tech sector was greater than ALL of its customers combined. This is a fallacy, since companies cannot become bigger than their customers.
Likewise, countries such as China are not likely to "swallow the earth" unless their industries are supported by domestic consumption. That's a long transition.
Good question. I'm exaggerating for effect, of course, since you've raised a good point. But Chinese Economic Armageddon is a myth.
On Jun 22 09:47 AM TeresaE wrote:
> Since China controls so much of our necessity/day to day living items
> (processed foods, OTC medicines, pharmaceuticals & clothes)
> it really doesn't matter about OUR jobs, credit and homes.
>
> When China feels secure enough in their own economy (with a middle
> class that is over twice the size of our entire population) inflation
> for the necessities will skyrocket.
>
> It is already happening if you bother to look.
>
> Now throw in utilities and increased "fees" and taxes and start to
> understand what the "average" American family is experiencing.<br/>
Thank you.
The issue you have raised is called "hedonic regression modeling" that is used to adjust for changes in quality. It is a controversial issue, and the BLS has had to defend itself against its blogging critics. The BLS posted a response here:
www.bls.gov/opub/mlr/2...
From what I understand, hedonic regression works like this: When a new HD TV hits the market, the BLS measures the current price of TVs with high-def and without it. This gives them an idea of how much consumers are willing to pay for the improvement in picture quality. Since the difference in prices is a snapshot taken at a point in time, it offers an objective measure of how much the quality improvement is worth. Thus, the BLS does NOT make subjective judgements.
Much as we like to think of the BLS as sitting around watching high-def football, their methodology is a bit less colorful.
Thanks again for your comment.
Rob
In short, the BLS
On Jun 22 02:35 AM Donrparty wrote:
> My issue with the doom & gloom feeling from Mr. Faber: inflation
> of items that we use now that did not exist 10 or 20 yrs ago. For
> instance, how do measure medical costs that may inflate, but advanced
> scanning devices make high risk invasive surgery unnecessary and
> save lives. Is phone service more or less expensive than 20 years
> ago? The economic benefits of science and tech advances are hard
> to factor into such formulas. Frost free refrigerators with ice
> makers vs. old fashion 4 door built in ice boxes or hand-defrost
> versions. Lighter & better insulation than that used in same
> device from 40 years ago. Quieter appliances that make the house
> quieter for better standard of living.
Thank you for your comments.
You raise an interesting point about the proper weighting for healthcare. If healthcare has a weight of 6.4% in the CPI, but it comprises 15% of GDP, then the remaining 9% must be paid for by the government and other third-party payors. If 15% is the correct weight for the economy, than it should be captured by the GDP deflator. I'll have to check.
In the meantime, the issue of healthcare inflation remains. The price data do not suggest rampant healthcare inflation at present. Yes, hospital prices are rising about 6% per year, but this has a weight of just 1.5% in the CPI. We do not have runaway healthcare inflation at the moment.
I do not know Marc Faber, but his comments in the CNBC interview were not accurate. He either did not explain himself correctly, or his is misinformed about the CPI.
The link to the interview is below, and it runs about 5 minutes.
www.cnbc.com/id/31450173
You've made some very good points about healthcare, and I'll have to do more research on the weighting. It is an issue of national policy that's worth understanding.
As for a cost of living index, there are not many alternatives out there. Social security has to be indexed to something, unless you just give Congress fiat to raise it as they wish.
Have you seen an alternatives to CPI that you think are worth considering for adjusting social security, TIPS, and other government payments?
Rob
On Jun 21 04:07 PM sabre_jenn wrote:
> I don't think you and Faber are on the same page... I did not see
> Faber's CNBC interview, but I heard him speak in person recently
> (and he usually talks about the same things).
>
> Faber is talking about actual inflation experienced by the "average
> consumer" -- better known as the cost of living. A few comments
> note above that many prices such as utilities, education (college
> or local via property taxes) and healthcare are growing double digits,
> while the only things going down are stocks and home prices.
> The cost of living is skyrocketing.
>
> According to the BLS, CPI is supposed to be a **PRICE** index, not
> a cost of living index. That many people misuse CPI as an inflation
> measure does not change the fact that it is not an inflation measure
> -- it says so right on the BLS's website.
>
> As for the examples cited in the article -- I think the author did
> a lot to discredit CPI as either a cost of living index or a price
> index.
>
> For example, the article says health care and insurance are weighted
> 6.4% and 2.8% respectively. That's great in la-la land of government,
> but in the real world, health care spending is around 15% of GDP
> -- so says Obama, Republicans, insurance companies, hospitals, pharamaceutical
> companies, AARP, and the GAO. Basically, both political parties,
> as well as major suppliers and consumers of health care, all agree
> the correct weighting is around 15%
>
> The BLS weghting of 6.4% is just plain wrong, and the authors attempts
> to label detractors as conspiracy theorists just makes him look foolish.
> The correct weighting should be something close to 15%.
>
> Gross misweightings such as health care make CPI rather deceptive
> for its intended use as a PRICE index.
>
> CPI was never an appropriate gauge for cost of living -- no matter
> how many contracts use it as such. Even the BLS agrees with that
Thanks.
I agree with Dr. Faber's main theme and I own gold. I just think that his comments about CPI were unfounded.
Rob
On Jun 22 02:25 AM Peter Cooper wrote:
> I would just follow Dr Faber's main theme and buy gold, just have
> a look at the chart today, it looks ready to take-off:
> arabianmoney.net/2009/.../
You are right to say that there are a confluence of deflationary forces at present: deleveraging of banks, and huge losses in housing and the stock market. These put short-term pressure on prices, since they are cyclical contractions in liquidity.
My concern is that we have massive fiscal spending that will be nearly impossible to reverse once the recession is over. That is why I believe that inlation relief won't last. My article is below.
Rob
seekingalpha.com/artic...
On Jun 21 08:58 PM hrant wrote:
> i disagree with those that say inflation particularly high is coming
> .
> you need to balance the trillions lost last year vs the new printed
> money . net is still negative meaning deflation . cahllenge me
> !
Maybe I'm off base but yours seems a moot point.
On Jun 21 08:58 PM hrant wrote:
> i disagree with those that say inflation particularly high is coming
> .
> you need to balance the trillions lost last year vs the new printed
> money . net is still negative meaning deflation . cahllenge me
> !
Numbers racket:
Why the economy is worse than we know
By Kevin P. Phillips
www.harpers.org/archiv...
Thank you very much for your comments. The critics of the CPI now act as if assertions are proof. There's no need for facts or data when "we all know" that the CPI is a lie.
Question for you about money velocity: Where can you get good data about this? I agree with you that simple monetarism is akin to religion, and I'd like to learn more about velocity.
Thanks,
Rob
On Jun 21 10:02 AM American in Paris wrote:
> Show me evidence. Not just assertions. The CPI methodology weights
> prices by the share of budget devoted to the item in question. That
> is the sensible way of constructing a price index.
Thank you very much for your comments. The critics of the CPI now act as if assertions are proof. There's no need for facts or data when "we all know" that the CPI is a lie.
Question for you about money velocity: Where can you get good data about this? I agree with you that simple monetarism is akin to religion, and I'd like to learn more about velocity.
Thanks,
Rob
On Jun 21 10:02 AM American in Paris wrote:
> Show me evidence. Not just assertions. The CPI methodology weights
> prices by the share of budget devoted to the item in question. That
> is the sensible way of constructing a price index.
Thanks for the link--it is a good article.
John Williams asserts that CPI is 3%-4% higher than currently reported numbers. Marc Faber, on the other hand, asserted that inflation is running at 9% higher than reported CPI. Faber is exaggerating to make his point.
What I would love to see from John Williams is specific data about how owner equivalent rent, the biggest weight in CPI at 43%, is affecting reported inflation. Right now, rents are not falling as fast as housing prices, so the use of owner equivalent rent should be OVERSTATING inflation.
Any economist is right to question the government's motives, and I do believe that the CPI is systematically understating inflation. I also think that we are facing the risk of dollar collapse and double-digit reported inflation withing the next 4 years.
But I DON'T believe Marc Faber's claim about 9% inflation. We don't have to exaggerate the truth to make the point: Inflation is coming, and any type of inflation protection will be helpful: Gold, TIPS, WIPS, commodities, etc.
Thanks again for your comments. It was a great article, and it swung me over a little bit to Bill Gross's camp.
All the best,
Rob
On Jun 28 10:29 AM BigBens wrote:
> Read this article and tell me with a straight face that the CPI is
> not completely skewed.
>
> Numbers racket:
> Why the economy is worse than we know
> By Kevin P. Phillips
>
> www.harpers.org/archiv...
Thanks.
Money supply AND money velocity both contribute to inflation. M x V = P x Q is called the "exchange equation", and is the foundation of the monetarist view.
In the exchange equation, "M" is the money supply and "V" is the velocity of money. For a complete discussion, I like the explanation here:
en.wikipedia.org/wiki/...
On Jun 22 10:33 PM socialismSUCKS wrote:
> Does asset deflation (stocks and real estate) have anything to do
> with the money supply? I could have sworn that inflation IS money
> supply growth, which has nothing to do with equity prices or real
> estate values.
>
> Maybe I'm off base but yours seems a moot point.