CPI: 2008 vs. 1980

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 (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).

Sources:
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

Comments

[sammyg123:]

I suppose another way to measure inflation is in the price of gold and commodities.

2008 Mar 16 10:06 AM

[sammyg123:]

I guess prices don't lie. You can also just watch prices at the grocery store.

2008 Mar 16 10:09 AM

[GKM:]

I suppose if people didn't continue to ignore the old adage "those who forget history are doomed to repeat it" then history wouldn't repeat and the saying would be meaningless.

Do the vast majority of people really believe that the Japanese experience could in no way ever happen in the US? Following burst housing and stock market bubbles, those resulted in severe stagnation. So Bernanke, probably recognizing this, is going to inflate us out of that possibility. Instead you get stagflation rather than a natural correction. We get a double dip recession (or worse) as ultimately the consumer is going to be so worried about the rising cost of things and the dwindling real value of their assets that they stop discretionary spending all together. Also, exporting inflation around the world won't be good for what ails you.

I guess we are so far removed from an historical perspective where the omnipotence of the Fed did not provide a "benefit" to the economy that we are doomed to find out how truly disastrous their manipulations can be.

You have Bush cautioning about "unintended consequences". Hmmm, maybe Bernanke and Bush should get on the same page.

2008 Mar 16 12:32 PM

[scobbydube:]

You hit the nail on the head, these 'false' statistics will give the Fed the cover they need to lower interest rates on Tuesday.. It is all a big scam.. Who can you believe anymore, not anyone in the government.. Watch the Fed say that inflation is under control..

2008 Mar 16 01:15 PM

[Tony Soprano:]

Mr. GKM: What happened in Japan in the early 90's doesn't mean the exact same thing will happen in America. I did not forget my history and more importantly my American history.

I remember in the early 60's to 68, the Cuban Missile Crisis, the assassination of Kennedy, Vietnam, the murder of Dr King and Bobby Kennedy. Then came the riots across our nation.

This was a very dark and gloomy time and when I first started buying STOCKS!!!

Warren Buffett says that he made most of his money in the 1973-74 period. Another very ugly period. Its time to start buying long. Buy America!

2008 Mar 16 01:53 PM

[Tony Soprano:]

While we are talking about history this is a must read it was published today:

"Bear Stearns Bailout Was `Finger in the Dike,' Historians Say
By Elliot Blair Smith" Bloomberg.com

It points out how every single Fed or Treasury intervention has worked going back to 1914. We have one hell of a brilliant system. Never, ever, sell America short.

2008 Mar 16 02:12 PM

[GRGOLD:]

Mr Soprano (nice name!) I'd like to buy America! What would you have me buy? Banks (Bear Sterns) perhaps? Do you honestly consider the Fed and Treasury a "brilliant system?" Why are so many people loosing their homes to foreclosure? Is that part of that brilliant system?

2008 Mar 16 03:43 PM

[Ganesh Kumar:]

Tony,
It is great to see some optimism about USA from some one. But I wonder whether you have looked at all angles. I am sure Big American companies will do very well no matter what as they are very well diversified internationally but I am not sure whether the same is true for a common man in America. Just look at the s&P 500 companies and calculate how much of their revenues and profits come from outside USA you will know what I am talking about.
One possible difference between the past and now could be "trade". I strongly believe if a country imports more than it exports, its greatness cannot last for ever without a painful correction.

We all know that the standard of living or per capita GDP of BRIC countries are far behind the US and they have a lot to catch up .
As long as US consumes more than it produces why do you think the world will keep financing the debt of US?

2008 Mar 16 03:44 PM

[Tony Soprano:]

I've heard all this talk many times before and long ago. America will recover and still be strong. There are many good stocks out there to buy with safe dividends. The bric countries have there problems. The dollar will recover and the bubble in commodities will burst. Every Fed or Treasury intervention has been successful all the way back to 1914. The sentiment on this site is so bearish that it makes bullish.

2008 Mar 16 04:38 PM

[A.S.D.:]

Buying stocks is not the issue. We all want to buy-that is why we are here. But if you can buy for another 10% discount, why not. That's a year's worth of gains for the typical investor. the trick is not to get too greedy on the down side- you can't buy something good for nothing.

2008 Mar 16 09:02 PM

[Karl M.:]

Soprano, you must be massively long. You are as out of touch with reality as our federal reserve. Upon reading this, i'm sure you've already been exposed to the news that JPM is offering BSC 2 dollars a share, the fed cut the discount window .25, asian markets are crashing, the dollar is down big, gold is at 1027 and u.s. futures are down huge. This is exactly how i envisioned this week going, with the fed rate cut backfiring because the world knows every solution the fed has is highly inflationary and counterproductive.

Frankly, you are way way too optimistic, and that sort of looking at the glass half full is reserved for a much future date, not the onset of the worst financial crisis in history. Misery loves company. Keep funding the exit of these rich executives in U.S. companies, especially the financials. They will thank you profusely later while you watch your life savings dwindle away.

All these warnings over the last 20 years about excess, too much liquidity, dangers of inflation, the dollar headed for a fantastic crash and perhaps the fall of our great nation into second rate status are coming to fruition. Why are the implications so dire now? Because the Fed has been totally compromised, and the U.S. is broke. We don't have a huge surplus to fall back on, a new war to conjure up to kick start the economy or cushion with our currency to fall back on temporarily until we get back on our feet. Every desperation effort the fed makes to bail us out is further doom for the usd and our great nation.

2008 Mar 16 10:05 PM

[DougM:]

Measuring inflation by any single item, e.g. the price of gasoline, or milk, or gold, isn't very meaningful since most people consume all manner of goods and services. What's your single biggest expense every month? For most people it's shelter, which is declining. Re. all the fuss over hedonic adjustments, consider something that is rapidly inflating like health care. If you needed care, would you like to go back to, say, the 1970s standard of care? How much of the average person's income was spent on, say, food, 100 years ago, and how much on health care? In short, measuring inflation is anything but easy and obvious.

2008 Mar 17 12:13 AM

[DenisL:]

It may be OK to pick a few specific individual stocks that you believe will do well ( I have some pharmaceutical favorites) and buck the trend but for now buying any stock index funds is not logical. They are gong down a lot more. The interest rate cut is not likely to do much tomorrow. As Greenspan has said, gold is well known as a long term protection against inflation and as a safe haven.
Currently with REAL US inflation at nearly 10% it is foolish to TODAY have money in T-bills, US stock funds (some foreign funds, as well as currencies, are still doing relatively GREAT), bonds or CDs. Buy gold. The price of gold has more than tripled since 2000, Up 30% in 2007 and up more than 15% just this year alone. The nuts in DC have still not understood that we can not inflate our way out of the economic problems that are being caused BY the inflation of currencies world wide.

When Bernanke and the gang get serious about inflation like Reagan and Volcker did in the early eighties and RAISE interest rates 3 successive times, THEN it will be time to sell your gold. I would NOT hold my breath. They just do not get it. If you buy gold you will have some capital left to help rebuild America and the world when the dust settles on the remaining economic rubble.

2008 Mar 17 08:12 AM

[Tony Soprano:]

Karl M. said:
All these warnings over the last 20 years about excess, too much liquidity, dangers of inflation, the dollar headed for a fantastic crash and perhaps the fall of our great nation into second rate status are coming to fruition. Why are the implications so dire now? Because the Fed has been totally compromised, and the U.S. is broke. We don't have a huge surplus to fall back on, a new war to conjure up to kick start the economy or cushion with our currency to fall back on temporarily until we get back on our feet. Every desperation effort the fed makes to bail us out is further doom for the usd and our great nation.

Karl,

You said the US is broke. Not true. Government checks are going out and payment on our Treasury’s debt continues.

During World II my father was very worried about the war. There was very little money to pay for a mammoth Army, Navy, and Air force. Where did we get the money – US savings bonds. We were still coming out of the great depression and the US had very little intrinsic value. Today the US has much more value. I will not be able to detail all of it because it will take a lot of time. However, I will use a couple of areas of value and there are many, many more.

Before World War II we had practically no armed forces. Ships for the Navy had to be built, tanks for the army were need and so on. Today we have a military some hate it but it is there. The same is true of our Colleges, Space Program, Highways and Roads. I remember when it took 8 to 9 hours to drive to Washington from New York. We had to drive through Baltimore and many other towns on the way and take two ferry boats. All of these things and some are hard to describe have added value to America. This value called infustructure is getting older, but we still have it. The newer stuff, telecom and the things that are going on in Silicon Valley and agriculture like Monsonto are not that old. The factories at CAT and DE have improved. GM and Ford reached an historic agreement last year.

Also, if the US was going broke why would the safe money run to our treasury bonds? If there really was fear that we are going broke soon the big money would not be running to buy our bonds. During the Carter day’s I bought treasury bonds yielding 14 percent. There was great fear then and these bonds were coming to auction very often and fear that the govt would not be able to pay up or catch up with inflation was there as well. The media coverage was not nearly as good as it is today. Again, all of these things that we take for granted today have added value to our country.

Finally, down the road, perhaps in ten to twenty years we will have to pay up for Medicare and Social Security or cut these entitlements or both. The good news about this crisis today is that it is happening now during a period when we still have enough prosperity and time to fix it. We have the greatest government system in the world. A government that can work with business and knows business this is value as well. We make mistakes but the important thing is that we can fix them and find a way to stop them from happening again. We are not clairvoyant, things change and we get ahead of ourselves. Not every one is fair, there will always be greed, apathy, and dishonesty. We will prevail: God Bless America.

PS: It is normal for the currency of a country to devalue when going into a recession. Jan Hatzius (gs) stated this last Friday.

2008 Mar 17 04:36 PM