Skip to comments.Rotten to the core (Food and energy inflation cannot be ignored)
Posted on 02/12/2011 7:24:14 AM PST by FromLori
Its time to look at all prices including food and energy.
One of the biggest canards ever to be foisted on the American people is the notion that removing food and energy from the price indexes provides a clearer picture of inflation.
In reality, its just the opposite.
The so-called core rate of inflation (the headline price indexes minus food and energy) is grossly misleading. It was designed in the 1970s to take our eyes off whats really happening to prices so the Federal Reserve could maintain an ultra-easy monetary policy.
(Excerpt) Read more at marketwatch.com ...
A good indicator is the price of beer.
Gas pump prices highest ever for this time of year
See full article from DailyFinance: http://srph.it/gJK1JI
Corn Surges on Short Supply
Get ready for higher food prices
For years, I've been telling people to look at the inflation figure that includes food and energy, if they think it's that important. I've never understood why people cannot walk and chew gum at the same time.
Not only have they stripped out food and energy but the Clinton revision to the CPI made in the early 90’s dramatically changed even the so-called core inflation numbers. Real world inflation right now is much closer to 10% than the bogus numbers being reported. I think shadowstats.com which uses the pre Clinton CPI formula for comparison tells the real story.
Not that they are to be ignored, but technically a sound argument can be made as to why they are not tied to the core rate of inflation. Obamma and the fed are just using this as political cover, hoping for some relief in six to ten months, and with QE2, that sure ain't gonna happen.
The CPI that is used to index nearly all items like social security DOES include Food and Energy.
The “Core CPI” is only used for discussion, not real policy or adjustments.
Which index is the “Official CPI” reported in the media?
...while we publish many indexes, our broadest measure of inflation includes all items consumers purchase, including food and energy.
He doesn't use any formula. He takes the current number and adds some fixed percentage. He's selling subscriptions after all.
Now don't insult Lori like that, you'll make her cry.
That's the crux of the issue: people understand the ramifications of QE2, but they are casting-about for reasons inflation hasn't shown up in the figures yet.
So they gravitate toward shyster outfits like shadowstats, that do yeoman's work spreading the "controversy" because it gets them subscriptions.
I use the Candy Bar Index. Which is now 1.05, for a candy bar that was 75 cents 2 years ago, and has risen from 15 cents in the past 30 years. The CPI says that the fifteen cent candy bar should be just 39 cents today, or a premium bar for a quarter would be 65 cents today.
Not really. My bar is offering 16 oz. glasses of Sapporo for $2.00 (it's on special). Last week I was paying $2.50 for Miller High Life. What's my inflation rate?
He never has. Check it out.
This was a great comment.
The first thing that stood out to me about Shadow Stats is that William's figures are usually a constant spread from the official government figures. The derivatives of the graph almost never vary. In order to figure out why this is so, I went hunting through his "about" pages to find his methodology.
It turns out that this is not an accident; the similarity of the graphs is the result of his methodology. It seems that John Williams does not actually recompute CPI etc using the old techniques. What he does is take the current measurements, and then offsets them with a correction factor. This correction factor is derived from some internal government document which was created around the time that the measure is changed (e.g. someone writes a memo claiming that the new CPI will be 2% lower). Hence, his system has the same problems that the new government measurements have, namely that they cannot meaningfully be compared with the original government measurements. They are simply an alternate metric, and one of dubious quality.
This is a really shame. We desperately need a site that actually does what Shadow Stats claims (but fails) to do. If I hear another mathematically illiterate economist/pundit numerically compare 2000s CPI with 1980s CPI (or 2000s unemployment measurements with 1930s unemployment measurements), my head is going to explode. Posted by: Walker at September 5, 2008 06:50 AM
In fact, we should enforce a 25% MMR rule for these items:
1) Stock index futures for certain financial companies.
2) Certain foodstuffs like wheat, corn, rice, sugar cane, sugar beets, oats, soybeans, millet, oranges, cacao beans, tea and coffee beans.
3) Crude oil regardless of source.
4) Certain industrial metals like aluminum, iron, copper, nickel, tin and titanium.
5) Precious metals (gold, silver, platinum and palladium).
These changes would drive out the "make a fast buck" speculators and results in far more stable pricing, with much less risk of sudden inflationary or deflationary spikes and dips.
Watch dry nonfat milk contracts. Those give a better long term picture without the sawtooth daily bounces.
But the prices of food and energy can rise dramatically even in the absence of inflation. Supply and demand determine that. Of course, in the absence of inflation, rising food and energy prices will necessarily result in a drop in other prices.
Now, it is likely that rising oil prices are due to speculation driven by inflation: banks have gobs of Fed-given money to invest and are helping to bid up the price.
Food prices are more difficult to pin down, though. There have been crop failures due to bad weather around the world and the drop in supply is certainly a big factor. In the US, we're seeing higher food prices, in part, due to the government's foolish ethanol policy -- again, this is a drop in supply causing the rising prices.
So, it isn't altogether foolish to exclude both from the CPI, especially month over month. All that said, the CPI is rubbish anyway. It means about as much as the global average temperature.
Beer is always a good indicator. It’s never really certain what will be indicated, but if you consume enough it’s always interesting.
If you’re drinking to forget, pay in advance!
How does the short term purchase of a futures contract cause inflation? If the buyer does not take delivery and hide the commodity, he has to sell the contract before expiration.
These same people would never be able to grasp the fact that removing the most volatile components of the CPI offers a better understanding of the underlying trends. That's why they do it.
I think it reduces the numbers of players. More predictable.
What, raising the margin requirement?
Or more volatile. Wider spreads.
Which makes people who deliberately ignore the numbers ignorant, or agenda-driven.
(By agenda-driven I don't mean simply profit-driven . . . there are folks who legitimately disagree about how the numbers are calculated, and are using others' ignorance about them to attack the specific one they dislike).
Yes, they include it, but they give them very little weight if in inflation figures.
Nonessential and luxury items should be removed from the CPI, then you would get a better measure of inflation for the majority of consumers.
They are weighted by average consumer expenditures.
Nonessential and luxury items should be removed from the CPI
The CPI should reflect the average consumers expenditures, not be restricted to the bare essentials.
I've yet to find any index that indicates that the value of the US dollar has changed this much in five years. Mostly because of the pressures put on CPI indexes to not demonstrate inflation or reduced purchasing power, as so many other things are tied to CPI indexes, such as benefits increases.
Wouldn't such non-essential products as I've listed here be a more true indication of the relative change in value for the US dollar than the CPIs that you are advocating?
John Williams (Shadowstats) loves these folks.
For a really depressing view of where we stand, take a look at this Freeper’s reply on real inflation in America over the first two years of Obama’s Presidency.
Food, energy, housing, transportation, clothing, health care, etc.
Those are the things that drive inflation in my opinion. Your mileage may vary.
I was at a seminar this week with a respected investment manager/statistician. He says the current rate of real inflation is about 2.5%.
Wow that’s an eye opener thanks!
They should be weighted by % of average consumer expenditures. If based on that, food, energy, transportation, housing,clothing, and health care would be the vast majority of the CPI.
The Fed does not count food or energy in inflation so it doesn’t matter if they publish it or not. If they used it Retired Veterans would have gotten a Cola increase, if they used it the inflater ben bernanke would have to rethink his devaluation of the dollar and he doesn’t want to do that he wants to prop up the stock market and the member banks.
That statement is false.
Has the BLS removed food or energy prices in its official measure of inflation?
No. The BLS publishes thousands of CPI indexes each month, including the headline All Items CPI for All Urban Consumers (CPI-U) and the CPI-U for All Items Less Food and Energy. The latter series, widely referred to as the “core” CPI, is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI.
Most importantly, none of the prominent legislated uses of the CPI excludes food and energy. Social security and federal retirement benefits are updated each year for inflation by the All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W). Individual income tax parameters and Treasury Inflation-Protected Securities (TIPS) returns are based on the All Items CPI-U.
They are as you described.
This information enabled BLS to construct the CPI market basket of goods and services and to assign each item in the market basket a weight, or importance, based on total family expenditures. The final stage in the sampling process is the selection of the specific detailed item to be priced in each outlet. This is done in the field, using a method called disaggregation. For example, BLS economic assistants may be directed to price "fresh whole milk." Through the disaggregation process, the economic assistant selects the specific kind of fresh whole milk that will be priced in the outlet over time. By this process, each kind of whole milk is assigned a probability of selection, or weight, based on the amount the store sells. If, for example, Vitamin D homogenized milk in half-gallon containers makes up 70 percent of the sales of whole milk, and the same milk in quart containers accounts for 10 percent of all whole-milk sales, then the half-gallon container will be 7 times as likely to be chosen as the quart container. After probabilities are assigned, one type, brand, and container size of milk is chosen by an objective selection process based on the theory of random sampling. The particular kind of milk that is selected by disaggregation will continue to be priced each month in the same outlet.
In sum, price changes are weighted by the importance of the item in the spending patterns of the appropriate population group. The combination of all these factors gives a weighted measurement of price change for all items in all outlets, in all areas priced for the CPI.
“Januarys CPI data is due out next week. Owners equivalent rent, what a homeowner would expect to earn from renting his or her home, is a quarter of CPI and 40 percent of core CPI, which excludes food and energy prices.”
is a quarter of CPI and 40 percent of core CPI, which excludes food and energy prices.
The phrase "which excludes food and energy prices" is applied to "core CPI", not the whole sentence. Do you need someone to show you how to diagram sentence structure?
Core CPI is reported, but it is not the Primary CPI which is reported as the headline, or used for social security and federal retirement benefits.
Maybe you need someone to explain to you what the whole article is about. Like I said it doesn’t matter if they report them or publish if they don’t use them.
p.s. if you really need someone to explain the article I will but I don’t think that’s the case is it? I know who you always agree with on site you two should post to each other.
You simply refuse to understand and accept that it IS used. It isn’t used for EVERYTHING, but the federal COLA calculations DO use it. I don’t know how to help you if you won’t read.
I understand Toddsterpatriot previous comment far better now.
lol I knew you were todds lackey did he tell you how I pointed out what a liar he is? Like I said you two should post to each other instead of continually harassing others.
One of her favorites was the claim that banks were borrowing from the Fed discount window (at 0.75%) to buy long term Treasuries, because that was risk-free, easy money.
I reminded her that Bear Stearns and Lehmann Brothers thought that financing a long-term bond portfolio with overnight loans was a good idea too.
If I feel like it, maybe I'll show her how much those "risk free" long term Treasuries have dropped in the last few months. Show her how much that strategy would have lost since she first posted it, but the math would probably make her cry.
What you apparently refuse to acknowledge is that federal COLA's are based upon each 3rd quarter CPI-W.
Prices have not gone up from that point in time, hence no COLA.
What did happen is those people got that price spike locked in for two years after gasoline prices went back down.
For reference while you explain that 5.8% COLA.
I profoundly disagree with your assumptions. Because in our economy, we do not have a singular choice, we have multiple choices for our 'standards.' If the rents are too high in the area I want to live, I choose a different place. If electricity goes up, I don't run the air conditioner as much, or make sure lights get turned off. When gas prices go up, I refrain from driving as much.
Your basket of goods is most affected by my consumer choices. And likely has the most competition in a consumer driven economy, and also has some of the most regulated prices. The true value of my dollar isn't reflected, nor is comparison even likely to be useful. The rents where I live would buy a large home in most parts of the country, but have been stagnant for the better part of three years. My electricity rates are far lower than most parts of the country, and my home heating costs are negligible.
But you can go down to your mom and pop convenience store and tell me what the price of a candy bar is, and likely, it's going to be the same price as it is here. Or go to the market and tell me what the prices are for cans of cat food, and probably will be the same price here as well. Both are less likely to be a loss leader to camouflage the actual value of the dollar, and even when on sale, both will have the normal retail price on the shelf.
Another example would be movie tickets. Five years ago, I'd grump that they were $7, sometimes as much as $8. Today, I'm lucky to find a movie for less than $14. Competition for our entertainment dollars hasn't changed, it's extremely strong, yet going by the CPI, that movie ticket has risen far in excess of the justified change in the value of the dollar.
I submit that the CPI computing, with or without food and energy prices, is pretty useless. I know as a consumer my dollar has lost half it's value in five years. I feel the pressures as a parent as everything costs tremendously more. Sure, the loaf of bread I buy is costing me slightly more than what it did five years ago, mostly because I changed what brands of bread I buy, and I'm getting only 16 ounces instead of the 24 oz I used to. That matches the CPI, but the bread I used to buy is now twice as expensive than it was five years ago. And there the departure comes from CPI vs real value.
Want a real indicator, just go by the local Home Depot and look at the empty parking lot. Two years ago, you would be circling the lot competing for a space. At least where I live.
check out this website for real inflation and unemployment rates
It was too-low minimum margin requirements that caused the “bubble” that preceded the 1929 stock market crash. And the 2008 market crash happened for almost the same reason—remember the run up in the price of rice and crude oil in the commodities market during the first half of 2008?