U.S. consumer prices climb 0.5% in March

Marketwatch ^ | 4.15.11 | Jeffry Bartash

[algernonpj]

...I read here on FR that under the old calculations inflation is around 10%.



Here are some of the boring, tedious for those who are interested.

The CPI per the BLS is “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services”.

Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to use a set standard to accurately measure return on investment in relation to inflation, and to accurately measure the standard of living one can afford on a given income in relation to inflation.

The CPI is important because it is used by the Federal Reserve to justify its money printing policies, to set the interest rate on inflation-adjusted bonds known as TIPS, and by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security). The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported. In addition, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year

In addition to separating out the cost of food and energy from core inflation, there are several biases understating inflation that have been built into the CPI.

Through the introduction of hedonics, adjustments for quality change, the substitution effect, and geometric weighting, which are soft metrics that are open to political manipulation and can be used to artificially lower inflation, the CPI has changed from measuring inflation in relation to a set standard of living to measuring inflation in relation to a declining standard of living.

In the early 1990’s the ‘substitution effect’ was introduced as a result of the Boskin Report which deemed the fixed basket of goods was irrelevant. For example if the price of steak went up ‘too much’ the price of hamburger, chicken, or Spam was substituted. The CPI morphed from the cost of maintaining a certain standard of living to the cost of maintaining a declining standard of living.

Information about using substitution is found here (Boskin Commission Report). The example used is chicken vs beef.

The actual steak vs hamburger is found here (Panel Sees a Corrected Price Index as Deficit-Cutter). In the same article you'll see references to substitution and quality change.

Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting which gives a lower weighting to CPI components that are rising in price, and a higher weighting to those items dropping in price. Weighting works in conjunction with the substitution effect, quality change, and intervention analysis.

Hedonics aka quality adjustment is my personal favorite. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from modifications or quality changes to those goods, e.g. if you pay more for gas because of federally mandated additives, the additional cost does not count toward the CPI because of your increased pleasure in breathing ‘cleaner air’.

A Hedonic Price Index for Airline Travel:

Re: Hedonics and Quality Adjustment - QUALITY ADJUSTMENT FOR GASOLINE

"A quality adjustment has been made to gasoline prices used in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent. In those areas required to sell the reformulated gasoline, virtually all of the January price quotes were for reformulated gasoline."

From the 1999 Economic Report of the President: "… reason for the slowing of reported price indexes has been methodological changes to both the CPI and the indexes used in the national income accounts ".

”Intervention analysis seasonal adjustment allows economic phenomena that are not seasonal in nature, such as outliers and level shifts, to be factored out of indexes before calculation of seasonal adjustment factors. (An outlier is an extreme value for a particular month. A level shift is a change or shift in the price level of a CPI series caused by an event, such as a sales tax increase or oil embargo, occurring over one or several months.)” is used to tones down severe upswings.

More details on how the BLS has played games with the meaning of the name CPI and the word substitution are available upon request.

[Toddsterpatriot]

Thanks for the link. Unfortunately, the guy making the claim in your link didn’t do the calculations.

[wolfman23601]

“The only silver lining is that the price of most goods other than food and energy, such as electronics or motor vehicles, have not risen much. “

Unfortunately, those items are not in my weekly budget. Gas, clothing, groceries, utilities and what little I have left over for entertainment are all skyrocketing.

[wolfman23601]

Yes, and the worst part about it is that most people’s annual raises are tied to the rate of inflation from these bogus numbers. Therefore, someone making a decent $50,000 per year will be lucky to get a 2% raise, which doesn’t even cover the rise in electricity prices, much less gas and food.

[algernonpj]

http://www.freerepublic.com/focus/news/2705227/posts?page=21#21

[algernonpj]

Thanks for the link.

[Admin Moderator]

Why don’t you do the calculations and show your work.

[Toddsterpatriot]

I’m not trying to sell a newsletter.

[nascarnation]

If we can’t defeat Baraq based on $5 gas, $1.5 trillion yearly deficits, 10% unemployment, and surging cost of living, we deserve him.

[ClearCase_guy]

I agree 100%.

Similarly, if the GOP cannot defund Planned Parenthood or NPR, and thinks that a bogus $38B budget cut is meaningful in any way, then that party is useless.

[BfloGuy]

the inflation rate is .5%?

Well, that is 6% a year. We're getting into seventies stagflation proximity. In fact, we're there.

[expat_panama]

this 'old calculation' story is a bogus urban legend.

No, it's not.

Most of the talk I've seen is over the CPI's 1998 revision, is that the one you were thinking about?

[C210N]

Whatever is going on in “inflation” is a drop in the ocean of what’s really going on. They could say inflation is at 0% for that matter. For evidence, consider that it takes A LOT more dollars to buy the same amount of gold. Gold itself has the same value its always had. Its the dollar that’s become much much weaker. Along with gold, is silver and oil.

[RetiredArmy]

Counting gas prices and food prices at our local stores, it rose more than a stinking .5% for us. More like 25% when you add up the things in life you ACTUALLY need. Not what you would like to have, but NEED. Those have gone out of sight. This country is going into the tank and Nero continues to fiddle in Sodom on the Potomac.

[Free Vulcan]

Ding! Part of this is too many dollars chasing too few goods mostly due to China. But you are right: a big part of this is the falling dollar and people shifting away from it to other assets. We see it as inflation from our perspective, from theirs is dollar freefall.

[expat_panama]

"...that is 6% a year. We're getting into seventies stagflation..."

This month's CPI index for all items without the seasonal adjustment was 223.467 compared to last month's 221..309 and that represents a yearly rate over 12%.  It's a numbers thing, and March's index is only 2.7% over last year's.

[Free Vulcan]

No he’s referring to another guy who’s calculated it in his newsletter. The guy looks to have experience and seems credible, I’m assuming he has some statistical capabilities, so if he just uses the old formula it should be a decent guage.

[Free Vulcan]

The substitution effect is BS. If Meat A is twice Meat B, and both rise 50%, switching from Meat A to Meat B midstream makes it look like it’s only went up 25%, a totally bogus figure. That and all the other recent adjustments like hedonics are a joke. Hedonics may have a long term effect but that doesn’t do squat for my pocketbook right now.

The other part of this is, and maybe they do factor this in, but say someone with an average 50K income, what is their basket? What I’m saying is, yeah computers are coming down, but I don’t buy a computer every month. I do buy gas and food several times a month.

[expat_panama]

Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment...

This is what a lot of people are saying that's going to end up in 'back-then-we-thought-wrong' bucket.

The CPI's history is on  the BLS website and going over it explained a couple things to me, one is why the CPI goes back to 1913, and the other is why it's the Labor Dept. the does inflation and not say, the Treasury Dept.  The fact is that the CPI came into being during the first World War when the BLS was needed to work with inflation for the military buildup.  Gov't contracts had to keep track of the wildly swinging prices of the gold standard era so wage costs could be met.  There was never an attempt to have a permanent "fixed basket of goods" because measuring consumer prices meant tracking the prices of what consumers bought.  Consumer buying habits have always been changing and the 1998 revision everyone's taking issue with is only the sixth such major revision.

All this explains why the CPI was needed for national defense, and why the Shadow's dishonest for allowing five major overhauls and not the last one.

[expat_panama]

inflation food fight