Inflation Stats=Eating Soylent Green
What does everyone think about the inflation statistics that we are being fed by the gov't? I personally can't believe that we are under the impression that inflation is "low" or "manageable". In fact, I think it is pretty disingenious (hence my "soylent green" headline)
Take a look at how inflation is calculated. There are two measures:
- Core inflation is a measure of inflation which excludes certain items that face volatile price movements. This is the one that the fed reports
- Headline inflation refers to the rate of change in the consumer price index (CPI), a measure of the average price of a standard "basket" of goods and services consumed by a typical family
So the difference between the two is that "Core inflation" excludes food and energy - which are supposedly highly volatile, so including them would mask the underlying trend of what is going on with prices. Now my understanding of the reason these are excluded is that the change in price oscillates +/- zero - so over time the net effect should be close to nil.
However... in reality, since 2000, these change in these components has almost always been positive. Check out the chart below, which shows the impact of these "volatile" goods that has been netted out of the 2-3 percent inflation number we all take as gospel.
Eyeballing this, it looks like, on average, the "headline" inflation rate has been approximately 0.5% per month higher than core since 2000. I'd call that a trend - how do we justify netting it out? Overall, that's six percent a year people - meaning true inflation has been running at 8-9% per year! It makes inflation look like the seventies (when, by the way - they still used "headline" inflation. Those bad old days are why they changed the calculation)
And of course, this doesn't include the hokey housing calculation that is included in the core number. It's based on an "imputed rent" for owned housing. But of course, we all know that the cost of ownership has been rising much more than rents (contrary to the persistent rantings of a few on this blog). And since 69% of households now "own" instead of renting - much of the country is feeling this cost in their pocket book as well. Given that we had several years of 5-10% average housing price increases - I'd guess that 30-40% of "owners" are probably feeling even more hidden inflation there.
The big question is - why aren't we feeling this in terms of interest rates - like back in the seventies and early eighties? After all, aren't interest rates made up of the "real" rate + inflation? I think the answer to that question is dollar deflation. The greenback is sliding against foreign currencies and the fed has the printing presses working overtime. The net impact is that there is less demand for more dollars - so the dollar drops (except for against the Yuan and Yen, which the Chinese and Japanese have effectively pegged because both CBs are willing to stomach sub-market interest rates in order to keep their export economies going). We happily binge on artificially low-priced chinese cr@p and Japanese electronics - while housing, energy, and food shoot through the roof. All the while we are hearing that "inflation is under control" and leveraging ourselves up to invest in inflated housing.
Who knows, maybe in a few years hyperinflation makes all of us saving our money look like fools and the debtors look like geniuses. If that happens, there are probably worse problems. More likely the fed has to put the brakes on money supply in order to support the dollar, and we are back to 1979.
I know many of the regulars on this board know all this - but since I'm just kind of putting it all together, I thought I'd share my thought process.
Take a look at how inflation is calculated. There are two measures:
- Core inflation is a measure of inflation which excludes certain items that face volatile price movements. This is the one that the fed reports
- Headline inflation refers to the rate of change in the consumer price index (CPI), a measure of the average price of a standard "basket" of goods and services consumed by a typical family
So the difference between the two is that "Core inflation" excludes food and energy - which are supposedly highly volatile, so including them would mask the underlying trend of what is going on with prices. Now my understanding of the reason these are excluded is that the change in price oscillates +/- zero - so over time the net effect should be close to nil.
However... in reality, since 2000, these change in these components has almost always been positive. Check out the chart below, which shows the impact of these "volatile" goods that has been netted out of the 2-3 percent inflation number we all take as gospel.
Eyeballing this, it looks like, on average, the "headline" inflation rate has been approximately 0.5% per month higher than core since 2000. I'd call that a trend - how do we justify netting it out? Overall, that's six percent a year people - meaning true inflation has been running at 8-9% per year! It makes inflation look like the seventies (when, by the way - they still used "headline" inflation. Those bad old days are why they changed the calculation)
And of course, this doesn't include the hokey housing calculation that is included in the core number. It's based on an "imputed rent" for owned housing. But of course, we all know that the cost of ownership has been rising much more than rents (contrary to the persistent rantings of a few on this blog). And since 69% of households now "own" instead of renting - much of the country is feeling this cost in their pocket book as well. Given that we had several years of 5-10% average housing price increases - I'd guess that 30-40% of "owners" are probably feeling even more hidden inflation there.
The big question is - why aren't we feeling this in terms of interest rates - like back in the seventies and early eighties? After all, aren't interest rates made up of the "real" rate + inflation? I think the answer to that question is dollar deflation. The greenback is sliding against foreign currencies and the fed has the printing presses working overtime. The net impact is that there is less demand for more dollars - so the dollar drops (except for against the Yuan and Yen, which the Chinese and Japanese have effectively pegged because both CBs are willing to stomach sub-market interest rates in order to keep their export economies going). We happily binge on artificially low-priced chinese cr@p and Japanese electronics - while housing, energy, and food shoot through the roof. All the while we are hearing that "inflation is under control" and leveraging ourselves up to invest in inflated housing.
Who knows, maybe in a few years hyperinflation makes all of us saving our money look like fools and the debtors look like geniuses. If that happens, there are probably worse problems. More likely the fed has to put the brakes on money supply in order to support the dollar, and we are back to 1979.
I know many of the regulars on this board know all this - but since I'm just kind of putting it all together, I thought I'd share my thought process.
Comments
Thanks, DJO!!! Now I'm going to have nightmares!!!
Actually, I love how the gasbags on TV talk about inflation with food and energy stripped out. Thinking about inflation like that is really only relevant to a relatively small portion of the population: specifically chlorophyll-enhanced individuals who drive electric cars fueled by their homes that are made out of solar panels. I mean, I know of only two guys that fit in that category, so they're pretty rare.
"It's the bunk I tell you, the bunk!"
I learned of the stealth inflation from the pricedoutforever.com rent/own benefit calculator that inflation at least since 2003, has been at least 8% a year. Here's an article by Larry Chin.
Here in the U.S. it's like "you have free speech, but you can't say anything truthful about how the war is going, what inflation is like when food and energy are factored in, you can't be factual about days on market for a lingering property, you can't remind people that when food and energy were factored in the federal economists would quietly substitute ground beef for steak in their food calculations, you can't say anything honest about how the people are being governed." It's like pretending the 'hangin' out and proud' emperor is wearing Hugo Boss from top to toe, or pretending the drooling idiot child of someone at a party is the heir to Stephen Hawking.
Even Target brand mouthwash is up 25% in the past 2 years.
But on the bright side I picked up an HD Plasma for $799. Asian electronics are the only things that seem to be going down in price.
http://bigpicture.typepad.com/comments/2007/05/oer_cpi_and_new.html
Doesn't look like any bigger of a trend than we had throughout the 70s or from 85-99. That, to me, suggests exactly the sort of volatility you're trying to dismiss.
Keep in mind that inflation itself is change over time, and this graph is a difference of inflation rates. In calculus terms, this graph is a difference in derivatives. You might be tempted to draw a trend line from '86 all the way to the present day, but all that would really represent is that '86 is when headline inflation's rate of pulling away from core inflation started to drop (a second derivative.) It kept pulling apart until about 2000.
I might worry about this as a "trend" if it got to be larger than past "trends" -- if it stays positive for 35 years, for example, or gets well above 1% for an extended period. But as it stands right now, the "trend" is unimpressive, at least to a math nerd like me.
Good point, but in the seventies, we didn't talk about core inflation, we talked about CPI - which included those volatile components.
Re 85-99 - I guess when I look at that graph (of the derivative, I'll grant you) I see a pretty steady trend from 1985 to 2007 of the rate of change of energy & food costs gradually moving from deflation to inflation.
I'm personally not betting that energy is going to get cheap again.
What you actually should see is not "deflation to inflation", but "slower inflation that other stuff" to "faster inflation than the other stuff".
From 1983 to 2000, not-energy* was outgrowing energy each year. The biggest year of outgrowing was 1986, but not-energy was consistantly outpacing energy over that time period. From 2000 to 2007, energy has outgrown not-energy. The trend over the past 7 years is barely enough to make up for the trend over the 90s.
Integrate the function and you should get a very different picture.
* shorthand. Technically imprecise, but that's not the point.
I'm with you there. It's not what the graph says, but I do agree with you.
I am interpreting that to mean:
Total inflation (which includes the volatile bits) - Core Inflation (only the non-volatile bits)
= net impact of just the volatile bits is shown
Based on that, the impact of Energy and Food added to inflation in ~73-85, lessened the impact in 85-00, and added again from 00-07.
But since it is a 5 year rolling average, and the trend has been moving up for ~20 years - I am thinking that the monthly number was, on average, closer to zero or positive in each subsquent month.
more than this and my head may explode.
Not to mention the fact that understating inflation has the side-effect of also overstating the real GDP. That 0.6% restatement for Q1? Oh yeah: we've been in a recession for at least 6 months by even conservative measures.
Check this site for some reality:
http://www.shadowstats.com