Inflation Reporting Errors, Continued 8 comments
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The first is via PIMco's Bill Gross. In his monthly commentary, Gross observes:
"A bigger threat to asset markets however, comes not from slower economic growth in the short-term, but inflationary pressures towards the end of our secular timeframe. Note first of all the increasing influence of non-core food and energy prices in G-7 nations over the past few years as illustrated in Chart 5 for the United States. Since 1967, average differences in headline vs. core inflation have essentially been zero, despite distinct periods of cyclical variation. Now, however, with globalization so dominant and Chinese/Asian appetites for oil, soybeans, and iron ore amongst other commodities so voracious, it’s hard to envision an extended period of lower headline U.S. increases. This may bias more central banks to begin considering headline numbers in their policy decisions like Japan and the ECB do already."
Gross is referring to the Core/Headline spread we referenced Wednesday. Wednesday's graph was a bit complicated, and the chart below makes it far easier to understand the changing relationship between the Core rate of CPI inflation, and the actual Headline CPI:
As you can see, since 2000 the Core has been under-stating inflation for some time now. And, the amount it is off by has widened dramatically. The gap between core and headline is now greater than it was in the early 1980s, and -- hard as it may be to imagine -- we are only slightly off the spread of the terrible 1970s.
But while we (and PIMCO) focus on the U.S. spread -- the BLS reported, Fed-focused deviation from reality -- others around the world have noticed the same "disconnect." A recent piece in FT by Wolfgang Munchau observed this same disconnect between inflation indices and what is experienced in the real world by consumers:
"The first time I ever began to doubt my country's cost of living index was in 2002 when euro banknotes and coins were introduced. In Germany, where I was living at the time, the prices charged by many hotels, restaurants and dry cleaners effectively doubled. If you spent a lot of time traveling, as I did at the time, the personal inflation shock was severe. I estimated my personal inflation rate in 2002 to be approximately 10 per cent. The central bankers were in denial because the official inflation index did not register any significant movements. It must have been in people's heads.
But this was nonsense. The problem was that the official inflation index no longer reflected many people's personal shopping basket. The index basket is full of manufactured goods largely produced in Asia, while we spend most of our money on services, such as childcare, education, healthcare, transportation, travel and gastronomy."
That very well sums up the U.S. experience. The basket of goods and services that is measured is so massaged and hedonically adjusted, it manages to avoid inflation regardless.
Sometime ago on Kudlow, I debated the topic with Art Laffer (who believes there has been little inflation). But I disagree: The U.S. consumer is confronted with rapidly rising costs for food, energy, health care, housing, education expenses. Indeed, even as both the everyday survival expenses (shelter, food, energy) and the larger family expenses (Doctors, College, etc.) have exploded, there has been little correllation to what Economists and the BLS have informed them. Despite the contradiction, there is little inflation in the official stats. It is as if Economists are asking consumers "Who are you gonna believe, us, or your lying eyes?"
Munchau notes that the issue has become a global one:
"But the problem of a persistent gap between a central bank's target price index and a separate measure used by the public has recently become more acute in the UK and the US. The Bank of England targets the so-called consumer price index, while most people in the UK sensibly rely on the old retail price index, which gives a far truer picture of the cost of living including housing. Both indices have registered increases recently. But whereas the CPI has most recently grown at an annual rate of 3.1 per cent, the RPI has gone up by close to 5 per cent. The gap between the two is large and persistent. When that happens, a central bank has a problem. On a recent visit to South Korea, I was told that the same was happening there: prices were rising everywhere, yet the price index gives the illusion of price stability."
It's time to admit that "the notion of price stability requires a broader definition. Various indices, house price inflation and the cost of rents and mortgages should all form part of a judgment about price stability." Failing to do that risks the ire of the public. They increasingly lack belief in the government statistics in general, and there may develop a decreasing faith in Central Bank's credibility in particular.
To paraphrase Munchau, if we are to judge inflation on a broader scale, we would undoubtedly come to the conclusion that like the rest of the world, the US has an inflation problem.
>
Sources:
How We Learned to Stop Worrying (so much) and Love “Da Bomb”
Bill Gross
Investment Outlook
PIMCO ¦ May/June 2007
http://www2.pimco.com/pdf/IO%20May%20June%2007%20WEB.pdf
The problem with inflation indices
Wolfgang Munchau
Financial Times, May 14 2007 03:00
http://www.ft.com/cms/s/b001b8dc-01b6-11dc-8b8c-000b5df10621.html
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This article has 8 comments:
Yesterday you seemed to trace this problem to the Boskin Commission (see below for your comments).
From the graph above, it is rather clear that this divergence is not a new phenomenon, which makes your attribution to Boskin somewhat suspect. I would guess that you have predetermined that Boskin implementation (1996 ?) was the cause without first looking at the data.
Of course there is no proof here about what the cause of the divergence is, or whether the divergence in the early 70's was caused by the same phenomenon.
However, it should be clear that the divergence in the 70's was not caused by the Boskin commission.
A quick and dirty analysis might conclude that there is a simple explanation of rising oil prices (part of the energy component) causes the divergence.
Anyway, can you defend your attribution of this problem to the Boskin commission ?
Or is this just spurious crapola spewed forth for entertainment ?
John
**********************...
If you want to trace this widening spread back to its origins, it coincides with implementation of Boskin Commission changes in CPI. (About as intellectually dishonest analysis of Inflation as has ever been penned -- its goal was to reduce Social Security payments and avoid bankrupting the US Treasury -- not measure inflation accurately). Since then, the spread between the core and headline data have only grown further apart.
This simply reflects the government's BLS inflation data diverging from reality.
Here's the problem with people who are intelligent, but think they are more intelligent than they actually are:
1. Frequently they are not used to getting challenged on their half-baked ideas, which leads them to the false belief that their half-baked ideas have merit.
2. They grasp for convoluted answers to questions and often ignore simplicity
Your attribution of the core-headline diversion to the Boskin commission seems lazy, half-baked, and probably based on a predisposed bias. Presumably, somewhere in your thousands of internet posts you have identified flaws in the Boskin implementation. That's fine.
But now bias creeps in, and instead of doing serious statistical work OR examining simple relationships you identify the Boskin commission as your version of the boogey man.
Boogey man, Barry. Boogey Man.
Your diatribe fails to mention this phenomenon has occurred before, and if it weren't for cutting and pasting clear descriptions and charts from PIMCO (thank you for that, because the chart you previously provided was simply unreadable) that would not be clear to your audience (you included, since I presume that much of what you print is directed at yourself).
Also, we hear nothing about the possible simple explanation that such divergence between core (excl. energy and food) and headline is based on rising oil prices.
Wouldn't this be a simple, non-convoluted explanation ?
Oil prices rise
Food prices rise as transport is a large component (larger than most goods)
Gap between core and headline increases
Voila.
The boogey man is not the answer to every question, Boskin or otherwise.
Warm Regards,
John
...lazy, half-baked, and probably based on a predisposed bias
...now bias creeps in
...Your diatribe fails"</i>
Funny, but these style-based criticisms apply more to johnrightwing's own ranting than Barry's carefully researched facts and reality-based analysis. Pot calling the kettle black syndrome, it seems.
Or are you just presuming that Barry's research is careful and reality-based.
Just curious because one of the phenemena observed with media personalities like Ritholtz is that they gain a following of ignorant fools who are in no position to question the authority of any analysis, let alone the statistical slingings of casual market musers.
Its highly unlikely in my estimation that implementation of Boskin is responsible for the discussed divergence for the simple reason that this is not a new phenomena yet Boskin is (1996 ?), as it was observed in the early 70's. And since that period experienced are rapid rise in oil prices and inflation (no doubt caused in great part by the oil price rise and the flow through other goods in the economy).
Do you have any reasonable basis for believing Barry's analysis with careful or even researched ?
Or perhaps you just like him.
Its OK to have idols as long as you are ignorant and wish to be a subserviant.
But if you want to learn something, you might let your idol respond rather than having your own opinion.
Most idols do not want protection from their flocks of fools, but rather a simple admiration and willingness to believe the Word !
In any event, I am sure that if Barry wishes to address these questions, he will be in a much better position than you to deal directly with the questions themselves.........and you may just sit back in rapture as he spews the Word.
cheers,
john.
You net surfing, cut-and-paste monkey, you.....
You are to be congratulated for your ability to find obscure information that is readily available from PIMCO, or Doug Kass, or whoever........
Any chance you might surf over to Morgan Stanley and cut and paste Stephen Roach's commentary.....my mouse isn't working very well.
On a serious note, though, Bill Gross/PIMCO's presentation does appear to be professional and somewhat thoughtful: At least Gross noticed that the divergence (between headline and core) had "distinct periods of cyclical variation".
At least he has the common sense to look at the data before slinging statistical inferences from his a..
Anyway, let us know when you have some more cut-and-paste because the internet really needs to know your personal fetishes for market commentators.
Cheers. John.
Didn't Socrates say something to the effect of 'an intelligent man is one who knows (or acknowledges) he doesn't know everything'?
"ACCURATE inflation reporting"?
What's that? Oxymoron?
Re: Does anyone really believe the Fed can maintain price stability? How many prices are in the economy? It would make more sense to focus on the one price they control, the price of the dollar.
1. You bring up the age-long issue of Fiscal vs Monetary policies and their effectiveness...there are many factors and consequences. If price stability is the objective, you might lose out on say growth...look at europe as a whole and its individual economies since they joined the EU...that group inflation target of 2% really makes for a conflict of interest, doesn't it?
2. It's not just about how many prices, but also what is selected to be included in that basket that then determines the figure we all look at - Barry did mention this one above. Inflation might be made to look less than it is by the simple elimination of essential goods that we use daily, that might have quadrupled over time period X. I exaggerate, but I guess you get the idea. There was another very insightful comment here about how cigarettes were apparently included and other essential items left out. Like we would all choose cigarettes over water because we would rather die of dehydration...I exaggerate yet again...but the point is how valid is the data?
But what do I know?
I think I'll just *sit back in rapture*...
PS:
"Barry's carefully researched facts and reality-based analysis."
I especially liked this one! Of what use is a purportedly 'carefully researched' amalgamation of facts when it adds no value/doesn't offer anything unique that wasn't already out there as facts would be?