Inflation Update: Do Not Believe Everything You Hear

by: Barry Ritholtz

We have long used this platform to provide a reality check on some of the questionable errata we hear from various entities. It seems everyone has an agenda, and whenever we encounter official BS, from the Government, Wall Street, Mutual Funds, the White House, or the Media, it offends us.

The dishonest tendency towards spin, the official salesmanship of mendacity raise our hackles. For those who wish to accept the official data at face value, we have two words for you [no, not those two]: Good luck!

If your reality is defined by the trend -- and for technicians and traders, we think trend is extremely important -- then our views of macro-economics, GDP, CPI, Retail Sales shouldn't matter at all to you. Try not to let it influence your world view.

For those of you who want to know what is really going on, however, this site can be helpful in making sense of the complex and contradictory data flow. Last week's inflation-free CPI, and upside surprise in Retail Sales are classic examples. These two are intimately connected, because total Retail Sales are a combination of a) people buying more goods [units], and b) people paying more for the same goods [price rise/inflation]. So if we are to figure out either, we really need to understand both.

Today, we will see what we can do to make sense of each of these since we first addressed them last week. Lets start today with a look at our Inflation-free CPI. For this, we go to John Williams' Shadow Stats:

“The unbelievable $5.4 billion monthly decline in the seasonally-adjusted October trade deficit to $58.9 billion from September's $64.3 billion was more than accounted for by an equally preposterous plunge in reported oil import prices, which was on top of price declines in the prior two months that more than accounted for oil's recent drop. Without the phony oil price decline, the trade deficit would have risen to $64.9 billion...

The seasonally-adjusted November CPI-U was unchanged from October, [down 0.15% unadjusted], following October's 0.49% adjusted monthly drop. Of significance, seasonally-adjusted gasoline fell by 1.6%. In conjunction with the retail sales report, this suggests an understatement of gasoline inflation by 3.9% in November, and a corresponding 0.2% understatement of the CPI, which is about how much the CPI came in below market expectations...Annual inflation for the SGS Alternate Measure was 9.4% in November, up from 8.9% in October.” [emphasis added]

Consider actual surveyed fuel costs, via the Energy Information Administration [EIA]:

11/06/06 - 220.0
11/13/06 - 223.2
11/20/06 - 223.9
11/27/06 - 224.6
12/04/06 - 229.7
12/11/06 - 229.3

Maybe my math is rusty, but that doesn't look like prices came down in November, does it?

Another big WTF: Medical care costs, which have inexplicably fallen 3.7% y/y. Bill King points out that "this is a 'substantial slowing' from the perennial 4.2% increase we have seen for the past dozen years . . . And where is the inflation from increasing rents that most everyone sees?"

annual consumer inflation

Yes, Virginia, there is a Santa Claus who brings presents to all the unquestioning little boys and girls. Take note for any letters you may want to send him -- he's moved his workshop from the North Pole. In the future, you should address your letters to:

Postal Square Building
2 Massachusetts Ave., NE
Washington, DC 20212-0001