Real World Consequences of Core Inflation Focus

A pair of not unrelated stories:

First, today’s Dumb Headline of the Day, is this annoying piece courtesy of the NYT:

Core Inflation Remains Steady, Presenting a Puzzle to the Fed

The first few paragraphs mix assumptions, info and conjecture into, well, I really don’t know what:

"Hopes that the Federal Reserve will again cut interest rates at the
end of the month were further reduced yesterday after a report showed
inflation holding steady
in September. But a worsening housing slump
and a mixed economic outlook could put the Fed in a difficult spot as
it considers what steps to take in the months ahead.

Prices of consumer goods ticked up 0.3 percent in September, a
slightly higher-than-expected increase that reversed a 0.1 percent
decline in August."

Slightly higher than expected? Consensus was for 0.2% — so this was only 50% above expectations. 

Back to the stenography article:

"The Consumer Price Index’s core rate, a gauge of
inflation that excludes relatively volatile food and energy prices,
held at 0.2 percent, where it has been since June, the Labor Department
said yesterday.

The report suggests that pricing pressures have remained in check.
But the Fed, always wary of inflation risks, prefers a slower rate of 1
percent to 2 percent. Overall inflation was up 2.8 percent compared
with September 2006, its highest 12-month growth rate since March.
Higher prices for rent, gasoline and food, especially fruit and
vegetables, led the increase as consumers began to feel the effects of
surging oil prices and a weaker dollar.

The inflation picture, coupled with recent reports that have
indicated a more resilient economy than analysts expected, makes it
more likely the Fed will keep rates unchanged when it issues its
decision on Oct. 31."

Note that Fed fund futures increased the odds of a cut at the October 31st FOMC meeting . . .


Next, we look at the real world consequences of this artificial self-destructive focus of inflation ex-inflation:

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since ’03

Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.

The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.

The increase directly affects the finances of about 50 million people, including more than 31 million Social Security retirees and 11 million people who receive disability or other supplemental income from the Social Security Administration. It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region.

So despite the enormous rise in energy, food costs, housing expenses, insurance, medical coverage, we see that Social Security is barely budging.

When we said that "Inflation is the cruelest tax," now you know what we mean.

Y’all keep focusing on the core . . .


Core Inflation Remains Steady, Presenting a Puzzle to the Fed   
NYT, October 18, 2007

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since ’03
Howard Schneider and Neil Irwin
Washington Post, Thursday, October 18, 2007; Page D01

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What's been said:

Discussions found on the web:
  1. Morris the cat commented on Oct 18

    tell your grandmas that Friskies is particularly tasty!

  2. Barley commented on Oct 18

    LOL – You crack me up! “stenography” more lol

  3. Jason commented on Oct 18

    I think you’re stretching by getting on people for saying it was slightly higher than expected. While it was 50% higher than expected, 0.3% is the minimum number that it could have been higher than expected by since they work in increments of 10 bps. I guess people should just say it was higher than expected — not slightly higher than expected and not much higher than expected.

  4. Ross commented on Oct 18

    Beware the AARP ( Armed American Retired Persons.)We will no doubt begin a gorilla action and throw bananas at the buggers. Fitting in a Banana Republic.

  5. bsneath commented on Oct 18

    I’m normally not one for conspiracy theories, but that said, I believe that, in the late 90s, Greenspan intentionally bullied BLS into making adjustments to the CPI methodology that understate inflation with the specific objective in mind that an understated CPI would lessen the future impact of social security increases.

    Bull or no bull?

  6. Ian commented on Oct 18

    Would someone please explain to me the “official” reasoning for excluding commodities such as energy and food from the inflation calculation. A calculation that determines how much our seniors will receive in SS so that they can drive their cars to receive health care, and eat nutritious meals to keep them strong. I am a relative newby, so Barry, if you have already explained this elsewhere I will certainly appreciate being forwarded to the article in lieu of an explanation here.
    Thanks all.

  7. Robert commented on Oct 18

    The “official” reasoning for not including food and energy in CPI calculations is that their high volatility has the potential to skew inflation numbers – But if food and energy are experiencing a sustained increase in price due to increased money supply, does it make sense to ignore them? I think not….

  8. Estragon commented on Oct 18


    For a better understanding of the issues surrounding the measurement of inflation, you may want to start with this NY fed paper .

    Long story short, there is no one single best way of measuring inflation.

  9. Ian commented on Oct 18

    Thanks Robert and Estragon for the replies.

  10. cm commented on Oct 18

    Barry: You should consider renaming your site to “Inflation Central”. Not a criticism, that’s indeed big part of the big picture these days … :-)

  11. Doug commented on Oct 18

    As Richard Russell like to say the war cry of the central banks is “inflate or die” Actually the inflation ex-inflation approach is a pretty shrewd, or maybe only, way to get out from under the massive debt and underfunded liabilities. Massive in nominal terms maybe.

    It is a slow motion revaluation/partial default kept from creating a runaway chain reaction panic by having the inflation pop up in places you do not count. Housing, food and energy.

  12. michael schumacher commented on Oct 18

    here’s a prediction:

    Market down 4th day in a row, repo’s oversubbed by almost 15x, Options expiry tomorrow, CFC stock…well who cares…

    The Fed will pull something out of it’s arse after the Chinese markets close in the wee hours tomorrow morning.

    Remember it’s a Thursday going into a weekend. They like to do things when most of the rest of the world is done for the day (and weekend)

    Why do I think this??
    The dollar index spoke and it isn’t pretty today.

    hank and Ben are crafty like that…..pulling stuff like this when they think no one is watching.

    mark this post…..between Hank and Ben something is coming at about 1:30am EST tomorrow morning


  13. ToothFairy commented on Oct 18

    What’s the annualized rate of the CPI for the first 9 months of 2007??
    Quoting from the Bureau of Labor press release——

    “This brings the year-to-date annual rate to 3.6 percent and
    compares with an increase of 2.5 percent for all of 2006.”

  14. Thad Beier commented on Oct 18

    The CPI “market basket” has always conveniently been constituted to understate inflation. For example, as house prices tripled in much of the country over the last 10 years, this is unreflected in the CPI, because they basket includes “rent” and not “house prices”, and there had been a historic disconnect between rents and house prices.

    That said, the food and energy costs will end up reflected in “core” inflation eventually, increased costs for food and energy will cause prices of everything else to rise.

  15. karl smith commented on Oct 18

    First of all with large month to month volatility and 10 bps percission .3% could be characterized as slightly above.

    However, and here is the big deal. Social Security payments are not based on the core. The core is of use by the FOMC.

    There is one and only one issue – Unless you want the FED to respond to an increase in food and oil prices by increasing interest rates then you want a focus on the core.

    Unless you believe that food and oil are being driven up by monetary forces I don’t see why that would be a good idea.

    Focusing on the core does nothing, absolutely nothing, to affect anything except Open Market Policy. This is where the issue is, not with Social Security or real wages or any of that.

    None of that has anything to do with whether or not the FED focuses on the core.

  16. zao commented on Oct 18

    Issue is no longer whether Fed should raise rates if inflation is coming through commodity prices/food. The issue now is whether the Fed should cut rates in the face of continued high food and commodity prices? The ’70s experience shows that the Fed should cut less than in a normal cycle. The experience of Germany and US in the 70s shows that accomodating a commodity price shock by lowering rates is a bad idea. Buba did not cut as much and suffered inflation rates much below US in Germany. That is what Greenspan has been saying as well. BUT LOOKS LIKE THEY ARE GOING TO DO IT AGAIN. nothing learnt from history.

  17. Pool Shark commented on Oct 18

    bsneath wins the thread!

    Just think about it…

    A weaker dollar and inflation eventually push wages up (in nominal terms); everyone feels richer ’cause they’re making so much more than their parents ever did.

    Since tax brackets (especially the AMT) aren’t indexed for inflation, the government takes in record receipts, but because they claim inflation is low (using the phony CPI numbers) they pay out less in government benefits with smaller COLA’s.

    I don’t like conspiracy theories, and I don’t think this is one, but this sure is a convenient way for governments to begin balancing their budgets.

  18. Rick45 commented on Oct 18

    the gubbermint can not allow its official CPI to raise because of automatic increased in SS, Gubbermint pensions and even most Gubbermint pay. These are all tied to CPI so they have been playing a game in disingeniously lowering the standard of living for the average American while also improving the income of those at the top… and this then causes the deficit raise dramatically.

    It is what the rich of the world have always done and why the US fought to remove itself from the control of King George and his group of princely CEOs… Oh yeah, then those cronies were called Lords….

    Problem being that if man doesn’t get paid well for his work, then they only pretend to work. Central Planning and Control has never worked for long but this is where we are today and the numbers published are mostly for a nefarious agenda.

  19. hedgefundanalyst commented on Oct 18

    BR and all:

    Forget about what the government produces, Mr. Market is the ultimate arbiter of inflation. So despite all the conspiracy theories here, why do U.S. bond yields have a 4 handle and why are break-even inflation expectations fairly in-line with reported core inflation?

    The fact of the matter is that inflation in this country is a helluva lot lower than most other countries (except Japan, I guess).

    I know many of the conspiracy theorists will say, “ahh, but look at gold versus the dollar”, but remember, gold is going up against ALL currencies because inflation is MORE of a problem for countries such as China which manipulate their currency.

    US real rates are over 2% in the face of less than 2% growth. That’s fine, in fact it may be restrictive given domestic issues. The Fed should cut and forget about what other nations are or aren’t doing with their interest rate policy.

    When CHINA, Asia and the rest of the currency manipulators decide to get their act together, then we can deal with our “inflation” problem. Until then, enjoy the free money.

  20. Fullcarry commented on Oct 18


    US bond market is controlled by leveraged accounts and foreign central banks. Those entities don’t care about inflation. A levered account cares about financing not inflation. And foreign central banks have to buy bonds because of all the dollars the accumulate in pegging their currencies.

  21. stormrunner commented on Oct 18

    Estragon said
    Long story short, there is no one single best way of measuring inflation.

    Maybe not but the removed stat of M3 indicating expansion of credit which pours into the economy inducing inflation is a good start, so much for a useless statistic.

    In order to support a modest standard of living, this report

    estimates that:
    A single adult needs an annual income of $28,336, •
    equivalent to an hourly wage of $13.62. Regional
    estimates range from $23,815 to $30,262 ($11.45 to
    $14.55 per hour).
    A single-parent family needs an annual income of •
    $59,732, equivalent to an hourly wage of $28.72. Regional
    estimates range from $49,672 to $65,864 ($23.88 to
    $31.67 per hour).
    A two-parent family with one employed parent needs an •
    annual income of $50,383, equivalent to an hourly wage
    of $24.22. Regional estimates range from $44,448 to
    $54,815 ($21.37 to $26.35 per hour).
    A family with two working parents needs an annual income •
    of $72,343, equivalent to each parent working full-time for
    an hourly wage of $17.39. Regional estimates range from
    $62,624 to $77,069 ($15.05 to $18.53 per hour for each

    In other word a single male head of household renting driving a clunker to work needs 60K

    If he sends his wife they need 72K

    I remember just 10 years ago 60k was a decent living enough to even buy a condo, this is how you gauge inflation.

  22. Das Gherkin commented on Oct 18

    Hey MS…without a total sell off into the close today I am not sure about your prediction.

    HOWEVER, if GOOG disappoints and the market tanks after hours/tomorrow I can see them getting tricky.

    Tracing out this head and shoulders in the DJIA is going to take f-o-r-e-v-e-r. :)

  23. Woodshedder commented on Oct 18

    Karl Smith, I like your input.

  24. Rick45 commented on Oct 18

    head and shoulders, more like a double-top.
    save your powder for 1250!

  25. Costa commented on Oct 18

    The rally will be on goog earnings.

  26. PrahaPartizan commented on Oct 18

    The “substitution” provision really rocks. What does the Fed do with the CPI when we’ve all substituted down to living on bread and water, living on the street and walking? That’s the bottom line on using the “substitution” effect for calculating inflation. It’s the equivalent of the king’s gradually replacing precious metals with base metals when minting coins in the medieval period.

  27. David commented on Oct 18

    The dollar continues down and CPI is so far out of touch with reality it’s not even funny. I don’t believe in conspiracies, but something is going on.

    “O conspiracy! Sham’st thou to show thy dangerous brow by night, When evils are most free?” Shakespeare

  28. NoFate commented on Oct 18

    Usually when you have a volatile series of numbers you create a moving average instead of throwing the numbers out entirely.

    This just seems like a conspiracy to screw old people and foreign investors, so we don’t have to pay back a huge chunk of our debt.

  29. CSR commented on Oct 19

    Inflation-ex-inflation and lower indexed benefits are not unrelated. Call me cynical, but there is a reason the gubment likes to underestimate inflation. Who wouldn’t take the opportunity to underestimate their required payments?

  30. Bill King commented on Oct 19

    The Ministry of Truth, AKA the BLS, has CPI up only 0.3% for September. This is so ridiculous; it’s laughable and infuriating. The BLS has food prices up only 4.5% y/y and energy +5.3% y/y!!!!

    Long-time readers will recall that we usually mention that Q3 CPI is used for COLAs so the Q3 months are the most deceitful of the year.

    The BLS has apparel prices down 0.3% m/m. But unadjusted, apparel prices are +4.45%. For August the unadjusted apparel price index is 114.439, for September it’s 119.535.

    Because of this orchestrated CPI deceit, Social Securities benefits will increase 2.3% or about $24/month for the average check. This is the smallest increase in 4 years!!!!

  31. michael schumacher commented on Oct 19

    I did say it would have been artificial……

    The planets sort of appeared to be lined up though…that’s for sure.


  32. ALLAN TURNER commented on Oct 20

    I wrote an article ont hat very subject this week:

    Social Security recipients feeling the squeeze

    Living on a fixed income has left Diana Weeks in a fix.

    Each month, the 72-year-old widowed playwright dips into her savings to supplement her meager Social Security income. Loathe to spend scarce cash on expensive gasoline, she often leaves her Dodge sedan parked in the drive. She pinches pennies at the grocery store.

    In January she’ll be looking for a new home as the Montrose fourplex she’s managed for two decades in return for reduced rent is being demolished.

    On Wednesday she got still more bad news: The Social Security Administration announced that next year’s cost of living increase will be only 2.3 percent — the lowest hike in four years.

    Nationwide, the increase, calculated from the Consumer Price Index’s level from June to September, will add an average $24 to Social Security checks per month.

    Weeks, whose monthly check is smaller than $1,000, will get even less.

    “I think this is government genocide,” Weeks fumed. “They don’t like children, and they don’t like old people.”

    Weeks, whose journalist husband, Jack, died in 1995, is among 50 million Americans who receive Social Security payments. Much of the increase will be negated by a 3.1 percent Medicare premium increase announced earlier this month.

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