I think we know the major proponents and opponents of the CPI here on FR. What I want to do here is to accumulate the Third Party, academic, philosophical, and economic records of arguments in favor or opposing the CPI as currently constructed, and especially whether Shadow Statistics is a more relevant data set.
Let's leave the emotions and personal attacks in the locker room, guys. We know how you point / counter-point each time this comes up. Let's have third parties weigh in.
It is critical to my personal and corporate decision making to determine the validity of the CPI and Shadow Stats. I don't have a dog in this fight, other than to truly understand the relative validity of each approach.
So, let's treat this as our Phd Econ class, and bring facts and arguments. Let's take the conversation up a level, and let's have this string stand as a representative of each camp's best data, proofs and arguments.
I'll moderate, if you don't mind, asking questions of both sides if I personally need clarification. Like I said, I don't have a dog in this hunt.
Thanks!
BusinessWeak opened a thread for discussion of this topic here. Feel free to bring this to the thread if it supports your position.
http://www.businessweek.com/the_thread/economicsunbound/archives/2008/09/bls_responds_to.html
I don’t need the freakin’ government to tell me what inflation is doing. I see it every time I go to the gas pimp or grocery store.
Bring your friends, family, and arguments over here, dudes. Keep it FRiendly!
The BLS has attempted to defend against all the Shadow Stats arguments in the linked .pdf. Be sure in your posts that you can overcome their defenses if you wish to defend Shadow Stats.
You can perform a ineternet search on “Shadow Stats”+”Hedonic” and get some get hits.
What Williams presents on his website and what he espouses in the media are not the same, he ALWAYS advocates his political ideology in the media.
One of the first truly comprehensive critiques of Williams CPI method is here:
http://www.econbrowser.com/archives/2008/09/shadowstats_deb.html
September 04, 2008
Shadowstats debunked
Williams presented his repsonse to his critics (and specifically the econobrowser critique) a week later in regards to the topic of your post here:
http://www.shadowstats.com/article/special-comment
Response to BLS Article on CPI Misconceptions
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
SPECIAL COMMENT
September 10, 2008
ShadowStats.com Response to BLS Article on CPI Misconceptions
Reading about the Boskin Commission can make your brain fry and kill your soul, so be warned.
Here is one link regarding the little talked about CPI-RS, one of the effects of the Boskin Commission that turns Williams face red when asked about it:
http://share-ws2-md.aarp.org/research/ppi/econ-sec/Other/articles/aresearch-import-326-DD51.html
Men on the Boskin Commission had some doubts about the CPI a decade after the Commission’s final report and implementation,
former member Robert Gordon of Northwestern
The Boskin Commission Report:
A Retrospective One Decade Later*
Robert J. Gordon
http://faculty-web.at.northwestern.edu/economics/gordon/P376_IPM_Final_060313.pdf
http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=149969
Not intended as a thread hijack but do you know why Toddsterpatriot got banned? I was trying to pin him here for input.
http://www.freerepublic.com/tag/by:toddsterpatriot/index?brevity=full;tab=comments
http://amateurassetallocator.com/2008/04/28/is-cpi-manipulated/
https://www.philstockworld.com/tag/shadowstats/
Staying Neutral on Inflation vs. Deflaton
By James Kostohryz Sep 16, 2009 4:30 pm
Use the core CPI as your guide.
There’s been a heated debate in the financial press regarding the prospects for hyperinflation or deflation, with most pundits usually siding strongly with one camp or the other. Nowhere has this debate been more intense than within Minyanville.
I want to go on record saying that I definitely side with… neither.
I’ve been on record several times debunking the notion of hyperinflation or a dollar collapse anytime in the near future. However, I’ve also been on record many times rejecting the doomsday scenarios of the deflationists.
Framing the Debate
Part of the problem with this debate rests in defining what these various terms mean. For example, I can’t recall a single prophet of dollar doom or hyperinflation maven make a specific prediction citing a number or numerical range.
Thus, if the CPI were to rise above 10% per annum, I have little doubt that the mavens of hyperinflation will be declaring victory. And if the US dollar index were to decline another 10% or so, I have little doubt that the prophets of dollar doom with be loudly celebrating.
Similarly, the doomsday deflationists are equally vague in their forecasts. As long as the headline CPI stays below 0%, the doomsday deflationists will likely continue to declare victory.
This will not do. Forecasters need to define what they’re forecasting and be specific about their predictions. For example, the term “hyperinflation” doesn’t have a specific numeric definition. However, various textbooks and other authoritative sources state that the minimum inflation rate that would qualify as hyperinflation would be over 100% per annum. Indeed, most sources that attempt to define hyperinflation cite monthly rates of 20% at minimum.
Similarly, to speak of a 10% or even 20% decline in the value of the US dollar — relative to a particular currency or a basket of currencies — as a “collapse” is nonsense.
Because the vast majority of the US economy is made up services and other non-tradeables, such a decline in the value of the US dollar would hardly be felt at all at the consumer price level.
Furthermore, such a decline would actually be quite positive for the US economy, as it would contribute to the lowering of the current account deficit — a problem that is at the heart of many important economic problems that the US faces, including excess indebtedness, sluggish job growth, and income inequality.
So a 10% to 20% decline in the foreign exchange value of the US dollar is hardly something that should generate the sort of panic that prophets of dollar doom have been attempting to incite — rather it would be something to be welcomed.
What about the doomsday deflationists? They’re similarly vague in their predictions.
Admittedly, I’ve heard few speak of “hyper-deflation.” So presumably, any inflation rate below 0% would satisfy their criteria.
However, this will also not do. Predictions of deflation need to be specific. For example, many in the deflation camp seem to view today’s CPI figure of -1.5% as confirmation of their views regarding deflation.
However, what should we make of the fact that the core CPI — which encompasses the vast majority of goods and services — is still rising at a +1.4% per annum pace?
The Ideological Mindset
The truth of the matter is that many of the most ardent participants in the debate on inflation versus deflation tend to exhibit an ideological mindset.
There are several traits that tend to characterize such a mindset.
1. They tend to see things in terms of extremes — as black or white; all or nothing.
2. They tend to disregard empirical data, or to “explain away” the data that’s not favorable to their point of view.
Let me cite some examples: A few years ago, the ideologues of hyperinflation were ardently arguing that despite the fact that the CPI was not rising, there really was inflation. One statistic they liked to cite was the growth in the money supply.
The funny thing is that ever since the growth in the various money-supply aggregates started to decelerate — and even contract in some cases — the ideologues of inflation stopped citing this metric.
Similarly, the ideologues of inflation constantly used to cite “asset price inflation” in property values and stock prices as evidence that there really was inflation, despite the fact that there was little or none reflected in the CPI.
However, strangely enough, in the last couple of years since property values and the stock market have been falling, the ideologues of hyperinflation have apparently suffered a case of amnesia and no longer seem to think those metrics are of any importance.
Indeed, when all else fails and the ideologues of hyperinflation are unable to find any empirical support for their claims, they tend to resort to citing highly questionable alternative statistics such as those concocted by Shadowstats.
Despite clear evidence of flat to falling consumer prices and collapsing asset prices, the ideologues of hyperinflation adamantly insist that there really is significant inflation, but the evil government is hiding it from us.
How do you have a constructive argument with people that either refuse to argue on the basis of empirical statistical data or that simply make up their own data?
Similarly, the advocates of deflation have had a bonanza in the past year citing falling stock prices and property values as evidence of massive deflation. Yet, I haven’t been hearing any of these very pundits talking about inflation rather than deflation now that stock prices are exploding and property values are rebounding.
And again, I don’t see many of the ideologies of deflation acknowledging that the core CPI has never once reflected deflation during the recent crisis.
My Own Position
So, let me make my own position clear.
I believe that the core CPI is, in general, the best (although not the only) metric of inflation to monitor given the fact that food and energy prices tend to be volatile. Furthermore, food and energy prices are often driven more by localized supply-side resource constraints than the sort of generalized demand-pull dynamics characteristic of a truly inflationary environment.
It’s my expectation that price levels, as defined by the core CPI, will remain within a range of 1.00% to 5.00% for the foreseeable future. Furthermore, it’s my expectation that disinflationary momentum is probably bottoming out, and that in the short to medium term, core inflation will tend to revert toward its recent norm between 2.0% and 3.5%.
Exactly how much core inflation rebounds from its current level of +1.4% depends entirely on the strength of the rebound in global growth. Liquidity is relatively abundant; therefore a stronger-than-expected global growth spike that puts pressure on certain short-term-supply-constrained goods and services such as natural resource commodities is certainly possible.
However, even in such a scenario, massive overcapacity in most industries, coupled with widespread unemployment, will tend to put an upper lid on any generalized inflation that would propel the core CPI above 5%.
Hyperinflation, although a theoretical possibility that can’t be ruled out in the long term, is an extremely remote possibility in the short to medium term (defined as the next two years).
In terms that might be familiar to fans of the Austrian school, under current circumstances, excess liquidity combined with a surge in aggregate GDP growth (characterized by growth differentials among sectors of the economy) may cause relative price distortions and various concomitant ills. However, it’s unlikely to cause aggregate level hyperinflation.
Disinflation is the term I use most often to describe the economic environment with respect to aggregate prices during the past three decades, including the past year. And further disinflation is certainly a possibility in an environment of weaker-than-expected global growth.
However, massive fiscal and monetary stimulus in the US and elsewhere around the world will also put a floor on the extent of any deflation.
Governments and central banks in the US and around the world have considerable ability through a whole arsenal of measures to prevent deflation and it’s evident from the policy responses of the past year that officials around the world are determined to employ whatever monetary and/or fiscal mechanisms necessary to prevent a severe deflationary scenario analogous to the Great Depression.
Thus, for this reason, and the stickiness of modest inflationary expectations that have been ingrained in the psychology of the US population, core CPI inflation is unlikely to dip far below 0% in the foreseeable future.
Conclusion
It’s my expectation that disinflationary and deflationary pressures are subsiding and are quite likely to have bottomed out for the foreseeable future.
In particular, positive global growth surprises and concomitantly recovering asset prices are likely to create pockets of modest price increases in some sectors of the economy, which should be reflected in a reversion of aggregate core CPI inflation to recent historical norms between 2.5 and 3.5%.
However, because of massive overcapacity, unemployment, and the stickiness of inflationary expectations, a spike in core inflation above a modest 5.00% is unlikely, even if for no other reason than the fact that bond “vigilante-ism” would cause a spike in interest rates that would kill the incipient economic recovery, and with it, any major momentum in demand-side inflationary pressures.
In the end, the extremely heated debate between the mavens of hyperinflation and the doomsday deflationists is probably nothing more than a great deal of sound and fury signifying nothing.
Good graphs and arguments here:
http://nowandfutures.com/key_stats.html
M3 is back
We did some sleuthing and data extraction and put M3 back together from various weekly Federal Reserve reports that are still available.
1.The formula we’re using has five 9s correlation to the original data back to 1980.
2.There is only one missing element that is apparently no longer available (Eurodollars) and an adjustment has been applied to generate it. Its only about 3% of total M3 so should not have a material effect on the total.
Here is our article on M3b, which details our work and notes the sources for the data. Note that as of Nov. 10, 2006 the Eurodollar estimation formula has changed - see the article for details.
John Williams monthly reconstruction of M3 is here. Ours tends to be more volatile than his, partly because it’s weekly and partly because of our differences in calculating the repo and Eurodollar component of M3.
Finally and to put M3 into proper perspective with inflation (as measured by CPI without lies), the M3 and M2 strong inflation link is virtually unquestionable. The longer term inflation picture is clear, although M2 shows a pause and likely temporary disinflation as of 2008. Certain bloggers are incorrect and have continually avoided these facts and the linked chart.
http://bonddad.blogspot.com/2010/01/no-virginia-government-isnt.html
Tuesday, January 5, 2010
No Virginia, the Government Isn’t Manipulating Economic Statistics
Money Quote:
“If the blue line on the shadowstats graph were the correct inflation measure, bond yields would be at least 400 basis points higher. Why? If shadow stats were correct, then bond investors would have been losing money for most of the 2001-2008 period because inflation was higher than the stated interest rate on the 10-year Treasury bond. Simply put, investors would not put up with that and instead would have sent yields far higher for the last decade. Yet they did not. That tells us that Shadow stats CPI number is wrong.”
Official US Deficit Put At Staggering $202 Trillion
Posted by EU Times on Aug 25th, 2010 // 7 Comments
The Congressional Budget Office (CBO) forecasts the U.S. budget deficit will hit $1.3 trillion this year. An astronomical figure, to be sure, but that’s lower than was projected in March. It’s also less than last year’s record $1.41 trillion deficit, which was close to 10% of GDP.
And, that’s the good news.
As the deficit grows so does the national debt, which is currently more than $13.3 trillion, according to official figures.
But the situation is actually much, much worse, according to Boston University economics professor Laurence Kotlikoff.
“Forget the official debt,” he tells Aaron in this clip. The “real” deficit – including non-budgetary items like unfunded liabilities of Medicare, Medicaid, Social Security and the defense budget – is actually $202 trillion, the professor and author calculates; or 15 times the “official” numbers.
“Congress has engaged in Enron accounting,” says Kotlikoff, who recently penned an op-ed for Bloomberg entitled: The U.S. Is Bankrupt and We Don’t Even Know It.
Yet, the debt market continues to have an insatiable appetite for U.S. Treasuries; heading into Monday’s session, the yield on the 30-year Treasury bond (which moves in opposition to its price) was at its lowest level since April 2009.
Kotlikoff says that’s because the market is focused on the “mole hill” of official debt. In time, the U.S. will have a major inflation problem to rival that of Germany’s post World War I Weimar Republic, he predicts. “We have to think about the fact that unless the government gets its fiscal act in order we’re going to have the government printing lots and lots money to pay these enormous bills that are coming due over time.”
America is in need of major reform of the health-care, retirement, tax and financial system, Kotlikoff continues. “We need (to perform) heart surgery on this economy, not putting on more band-aids which is what we’ve been doing.”
Barring that, your hard-earned dollars will soon be worthless, he declares.
A very interesting read. I will quickly though disagree with the report on one critical matter:::
There is no universe in which Yogurt is a reasonable substitution for Chocolate Ice Cream.
Here’s another approach to explaining why hedonics / quality adjustments and substitution / chained dollars put into using geometric weighting have corrupted the CPI.
According to the BLS, the CPI is the most commonly used indicator of inflation, i.e. the average change over time in the cost of goods and services.
As such it influences interest rates, the stock market, and a host of salary and pension negotiations each year. 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
All these uses require an index that measures the consumer cost of a set standard of living, i.e. an apples to apples comparison.
Concepts such as hedonics, quality adjustment, substitution effect, chained dollars, and intervention analysis are all soft metrics that introduce changes to actual consumer’s cost of purchasing a fixed basket of goods. The specious changes that reflect subjective value judgments from a government agency staffed with people who have more education than common sense and real life experience. When the CPI is calculated, these value judgments determine what quality changes are worth to you, when you will substitute one item for another, which items you will substitute for one another, and when a price goes up ‘too much’.
How for instance is the mandated replacement of incandescent light bulbs with CFL’s valued? Which does life experience tell you happens: a positive quality change is determined because of the PC impact on ‘climate change’ and the CPI is adjusted downward, or a negative quality adjustment is determined because of mercury added to land fills, increased electric usage for those places where lights are routinely only turned on briefly, increased headaches and even seizures in those who are sensitive to the flicker inherent in CFL’s and the CPI is adjusted upward?
How do the mandated low flow toilets affect the CPI? Is the CPI adjusted downward because each flush uses less water and ‘helps save the environment’? Is the CPI adjusted upward because it often requires more than one flush to get the job done, or because when added to older plumbing the new toilet is prone to problems overflowing?
How about the substitution of PE for PPA, an OTC decongestant the FDA removed from the market for political not scientific reasons? Is the CPI adjusted downward because PE is politically correct and therefore represents a quality improvement or is it adjusted upward because PE is an inferior medication when compared to PPA?
Whether a quality change is positive, negative, or neutral is up to the individual consumer. When and what substitutions occur as a result of price change again is up to the consumer, based upon a host variable unique to each person.