CPI: 2008 vs. 1980

by: Barry Ritholtz

Almost overlooked in Friday's mess was the CPI data. It was a classic:

"Consumer prices were forecast to rise 0.3 percent, according to the median estimate of 81 economists in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.5 percent. Prices excluding food and energy were forecast to rise 0.2 percent, according to the survey median.

From a year ago, the cost of living rose 4 percent, compared with a 4.3 percent 12-month increase in January. The core rate was up 2.3 percent in the 12 months to February, the smallest year-over-year gain since October.

Today's report showed energy prices dropped 0.5 percent, the most since August, after a 0.7 percent increase in the prior month. The cost of electricity dropped by the most since December 2005. Gasoline and fuel oil prices also fell, while natural gas expenses jumped."

Why? Despite record gasoline prices, CPI was flat on falling gasoline prices -- and that caused futures to spike until the Bear (NYSE:BSC) announcement).

The usual suspects claimed that the CPI data was the beginning of the end for inflation. Hey, maybe. But remember, a single data point -- especially a suspect one -- does not make a trend. And note that the folks calling for the end of inflation here are, by and large, the same ones who insisted there was no inflation over the past 5 years. These clueless pundits are the "inflation-enablers."

If you want to know why the CPI data was applauded, look no further than Tuesday's Fed meeting. The odds "the Fed will lower its benchmark rate by a full percentage point" jumped to 60% from zero. This may further pummel the dollar, and could help drive Oil to $125 (or even $150); Gasoline at over $5/gal is a very real possibility. And gold? Your guess is as good as mine.


Why has the CPI lagged actual inflation for so long? It's one of the things I haven't seen discussed too much -- outside of John Williams Shadow Stats.

The short answer: Changes have been made in how we measure and account for inflation. Not only do we understate inflation, but we do so in a systemic manner which has led to the current disconnect between government stats and reality.

Have a look at the chart below, via Tim Iacono. It's pretty clear that by prior methods of measurements, inflation has been running much hotter than officially recognized.

What does this official falsification of data lead to? Big Trouble.

Here is what happens when we deny reality, purposefully misstate the truth, and try to hide beneath a series of obfuscations and misdirections: We make policy based upon this false reality.

The drumbeat of bad data, with the imprimatur of legitimacy, an undeserved credibility. That creates a level of acceptance that eventually leads to disaster.

We take rates down to levels that responsible people -- who are aware of reality -- would never even do.

There are obviously many many factors that are coming into play in today's credit crisis -- but I can draw a direct line from the Boskin Commission (who IMO, falsely claimed CPI overstated Inflation by 1.1%) to the Greenspan 1% FOMC rate to most of the residential backed derivatives to the Bear Stearns collapse.

Actions have consequences. Denying reality, falsifying data, gaming the numbers, cooking the books, making believe inflation is more modest than it really is has real world, unintended consequences.

(This latter discussion is worthy of more pixels, and if time permits, I will pull together a more comprehensive analysis).

US Manipulated CPI Inflation Statistics- Stagflation 1980 and Now
Tim Iacono
Mar 14, 2008 - 03:25 PM

The Consumer Price Indexes
U.S. Department of Labor, Bureau of Labor Statistics

U.S. Economy: Consumer Prices Unchanged Last Month
Shobhana Chandra and Bob Willis
Bloomberg, March 14 2008