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.