Inflation Spin

Barron’s Alan Abelson shares my disdain for ginned up CPI data:

When it comes to the so-called professional response to economic news, spin is the key word. Retail sales were up 0.2% in September, not the kind of performance that would merit a flourish of trumpets. The drag was miserable auto sales. But, don’t despair, because if you exclude autos, last month’s retail sales gain expands dramatically to a heartening 1.1%, which is now the prescribed way to view retail performance. Funny thing is that when autos were tearing up the pea patch a few months ago and bulking up the retail totals, the idea of leaving them out of the final count wasn’t anywhere nearly as popular.

In like vein, to our untutored eye, the rise in consumer prices in September of 1.2%, the biggest monthly jump in more than 23 years, and 4.7% greater than in September of 2004, was something more pungent than a little whiff of inflation. And that’s the way it likely strikes any number of bakers, butchers and whatever passes in this technological age for candlestick makers. But, ah, we poor innocents don’t or can’t grasp that was the "headline" rate, which includes food and energy. When you take those patently non-essential items out, last month’s reading of the CPI is a cheerfully reassuring 0.1%.

The very label, "headline," reeks of superciliousness. The presumption obviously is that it attracts the attention of the great unwashed, while those properly initiated into the mysteries of economics disdain such a vulgar measure in favor of the more subtle and somehow invariably subdued "core" index. Never mind, as we’ve had occasion to point out in the past that the way that the "core" itself is calculated is quite dubious, most glaringly understating the rocketing rise in housing prices.

But we think it’s quite instructive to examine how and why and even when the "core" Consumer Price Index came into being. For this we’re indebted to our old friend Marc Faber for reminding us in his latest "Gloom, Boom & Doom Report" of Steve Roach’s description of its genesis. Long before Steve became the top economic seer for Morgan Stanley, he put in time as a baby numbers cruncher for the Federal Reserve. The imperious pipe-smoking Arthur Burns was chairman.

In 1973, the Yom Kippur War between Israel and an Arab coalition led by Egypt and Syria and an embargo by the big Mideast producers, sent oil quadrupling. One day, Steve recalls in a piece he wrote back in 2000, Mr. Burns summoned his underlings to a meeting at which "he demanded they present him with a CPI stripped of energy costs." And they scurried to comply.

"A few months later," Steve continues, "Burns called us back again and noted an alarming pick-up in the rate of food inflation. Weather conditions had turned severe and the Fed chairman was particularly distraught over the disappearance of the anchovies off the coast of Peru — a development he felt long held the key to agricultural price cycles. But the Fed can’t react to weather, Burns argued. So he instructed us to take food out of the CPI as well. And, of course, we did."

So here we are, as Marc Faber observes, three decades after the anchovy shortage and the Bureau of Labor Statistics feeds us the consumer price index — ex-food and ex-energy.

You might think that this acidic smackdown was sufficiently dead-on to bloody its intended targets enough to call it a day.

You would be wrong:

Another cogent example of why economics is called the dismal science. Our only reservation to that designation is the "science" part.

Tee hee . . .


Having a Ball
Barrons, MONDAY, OCTOBER 17, 2005

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What's been said:

Discussions found on the web:
  1. Big Al commented on Oct 16

    Don’t forget, if inflation goes up, so does payments covered by COLA.

  2. Danielle commented on Oct 16

    If inflation keeps on being understated, those who depend on COLA will see lower disposable income, spend less and negatively impact the economy. Pay me now or pay me later.
    Now on housing inflation… Everybody looks at housing affordability on a “spot” basis and compares it to historical trends. That is so myopic. My dad took on a big mortgage but ended up paying if off in 10-15 years. Thanks to inflation , his monthly burden quickly shrank relative to his income. This lower mortgage burden permitted him to buy other stuff which stimulated the economy. I just don’t see how the next 20 yrs could be as strong as the last 20. The economy was stimulated by huge growth in the working population (baby boomers) plus women entering the workforce. This double impact will not be there in the next 20 years. In fact, the group of workers entering its most productive years (Gen-X) is smaller than the one getting out. This hasn’t happened since the 30s. This should start to hit sometime within the next 5 years. Currently, the dependency ratio is at its lowest and will start to rise imminently. Is it just a coincidence that productivity rates have been at their highest in the last few years? For productivity to be maintained, we need to allocate capital more efficiently. It is not clear that this is what is happening right now. If the war in Irak makes the US stronger, then it will have been worth it but it looks like a red herring right now. Logic tells me think a 30-50K kitchen is unnecessary when your pension is unfunded. The real estate is currently being propelled by want instead of need. Technological advances will be necessary but we’ve been producing more MBAs than scientists because money in the last decade has been flowing through the banking system. I’ve lieved long enough to know that mother nature always wins. After excess, there is always a purge.
    In a low inflation world, mortgages won’t get paid off nearly as quickly. That means the affordability of a home is MUCH lower than it was in the past. On the other hand, if inflation picks up it could be very positive for the affordability index. But I get the feeling that if inlfation picks up, there will be a shakeout before we see the benefits.

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