US Inflation Miracle Continues

The BLS reported that prices rose modestly in April, below consensus expectations.

The usually Bullish Michael T. Darda of MKM Partners was rather skeptical of the data:

From the CPI report, “In April, the index for petroleum-based energy fell 1.6%, offsetting a 2.5% increase in the index for energy services. The transportation index declined 0.7% in April, reflecting a 2.0% decrease in the index for gasoline.” And to top it off, the index of commodity prices rose just 0.1%.

Huh? Gasoline prices rose by about 10% in April. Virtually every index of commodity prices is near all-time highs (and up about 30% since the beginning of the year). I’m not sure what the BLS is smoking here, but it must be pretty strong stuff.

I have to agree.

As the chart below shows, Inflation ex "everything except personal computers, apparel, and household
furnishings" is looking great!

Aprcpi2 

Aprcpi 

Charts by Jake

The easy way to disregard seasonal adjustments is to look at unadjusted
year over year changes.

As reported by the BLS for April 08 vs April 07:

Fuels and Utilities………….8.6%
Household
Eneregy……………9.4%
Fuel oil and other fuels…….42.8%
Gas
(piped) and electricity…..6.6%

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What's been said:

Discussions found on the web:
  1. Tom C commented on May 14

    What do you want? A 10% cost of living adjustment on SS?

  2. RichardN commented on May 14

    We know what they’re smoking… U.S Dollars. Oh, strong stuff, you say? Scratch that

  3. Nihilism commented on May 14

    It is the power of positive thinking at fed and the BLS, helping keep the inflation tame.

    Media is delutional and bloggers are just smoking light-crude.

  4. mhm commented on May 14

    They are thinking positively.

    Like that old Neil Young song intro, I imagine the BLS people chanting “No rain, no rain…”

  5. Vermont Trader commented on May 14

    If Michael had spent a few minutes reading some sell side economic research he would have known before the release that the increase in gas prices this April was less than typical seasonality.

    Whether this is accurate or not is another issue altogether of course.

  6. CPJ commented on May 14

    The “Index” for petroleum-based energy? What Index? The one that’s tied to the cost of a fill-up on my amex week-to-week sure hasn’t fallen 1.6%

    Do they cite their data points? Commodity prices up .1%? Laughable. Maybe commodities ex-oil-soy-rice-ng-corn. Perhaps wheat is overweighted in their index. Probably 90% of it.

    Who holds these guys accountable? More to the point, does anyone actually take them seriously when they publish?

  7. pjfny commented on May 14

    Barry,
    I would like to see cpi/ppi as well as payroll/unemployment, using the same methodoly the uk/germany uses….any ideas where?

  8. pjfny commented on May 14

    forgot one question:
    How can germany/uk have higher headline inflation with a strong currency than the us with a weak currency……what happens to the 15% import price yr/yr increase we saw yesterday (after all we are the biggest importing nation in the world)….only two answers: it will leak into cpi or squeeze corporate margins!

  9. JXU commented on May 14

    Barry,

    I have been reading ‘big picture’ for several months. Every time when government releases CPI or PPI, you just criticize the data being inaccurate (understated). Yet market seems to like it and just keeps going up. I wonder if you could point out exactly what is wrong with the data and maybe reconcile it with BLS or FED. Why can’t we get on the same page after all?

  10. Robert- commented on May 14

    Saw this over at Yahoo…

    “Since gasoline prices normally rise significantly in April, the 5.6 percent rise in prices for the month turned into a 2 percent drop after the government adjusted for normal seasonal changes.”

    So when I go to the station I’ll pay the reduced price? I think I’m going to “seasonally adjust” my tax return next year.

  11. Mike J commented on May 14

    Vermont Trader alluded to this earlier. According to an analyst at Dresdner Kleinwort (via Bloomberg), the increase in gasoline prices in April was less than the typical seasonal increase in past Aprils.

    Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aMBZ_Ci6ZHJg&refer=home

    I don’t have the resources to plot a 5 or 10 year chart of wholesale gasoline prices or average retail gasoline prices but my gut would say that the explanation is total bunk. Can anyone with a Bloomberg terminal back me up?

  12. ReturnFreeRisk commented on May 14

    I believe that the UK CPI and Europe’s Harmonized CPI are pretty analogous to US CPI in terms of methodology. UK RPI is the old style (US) CPI index. The biggest difference between UK CPI and RPI is the way these two indices treat housing. Owner’s equiv rent and all that good stuff. The issue of quality improvements and substitution is differently treated in Europe. Substitution is used but quality adjustements to price is not done like in the US. For basis of comparison, use CPI (US and UK) and harmonized CPI in Europe.

  13. Andrew commented on May 14

    The drop in gas was from the seasonal adjustment. The question is, if the prices aren’t seasonal then either a)the CPI should take a hit in fall when that adjustment is removed or b)we have to question the applicability of the adjustment in the first place.

  14. Michael Donnelly commented on May 14

    Let’s see the average seasonal adjustment factor of the past 27 years has been 4.1% (link to that chart in post)

    So the BLS decides to use a factor of 7.5%???? to crush the NSA number of +5.6 to a -1.9

    Sadly it’s understandable when you think how the x12 program works. It’s feeding the past 5-6 years of data in and confusing two trends.

    1. the seasonal trend of around 4%
    2. the secular trend of the last 6 years where gas is straight up (BTW: that isn’t seasonal !)

  15. bruce commented on May 14

    See my comment on the last post…but boys and girls…this is typical stagflation a la Arthur Burns…wages actually FELL .5% last month and the CPI, went up at least .2%…no matter whose numbers you believe…so “REAL” inflation for the wage earner is .7% at a minimum for last month…

    Good luck we will all need it.

    Bruce in Tennessee

  16. michael schumacher commented on May 14

    “the market seems to like it”

    See rabid futures buying for the reason it “likes it”

    Sorry but continuing to celebrate higher costs (all around) is no reason to buy equities.
    It is for some though.

    These numbers are worthless

    Oh I see that Freddie lost “less than the kitchen sick” so no wonder the futures were up. Pathetic.

    Ciao
    MS

  17. CaptiousNut commented on May 14

    Hopefully, y’all have plenty of bullets left and can initiate more shorts on this BS.

  18. Donny commented on May 14

    You know, I’m starting to wonder if we’re all living in Truman’s World … remember the movie “The Truman Show”.

    I’m no fan of conspiracy, but do the powers that be, think we’re all stupid.

  19. ndd commented on May 14

    Again we have the issue of seasonally adjusted vs. non-seasonally adjusted. SA CPI was .2%, but NSA CPI was .6%. As it happens the inflation rate for the first 4 months this year is exactly the same as it was last year (and I’d post it all but the BLS site is apparently overwhelmed and every time I try to access it, it crashes).

    Anyway, of immediate interest is that the rate of food inflation has declined significantly since its peak a few months ago (i.e., food prices are still going up, just not as much). This means that the current slowdown is following the pattern of previous oil-shock slowdowns, where food inflation peaks first, sometimes even before the onset of recession, and energy inflation typcially peaks 3-6 months into the recession.

    The question now is, does the rest of the world slow down enough that parabolic oil prices break down?

  20. jJohn commented on May 14

    And right on cue the markets bounced up. These CPI numbers are such total nonsense why is anyone paying any attention to them. The average Joe on the street thinks they are bs so why aren’t the professionals. Or is it just low volumes and programmed trading. You have to wonder.

  21. ac commented on May 14

    The bls has been dumbed down during the last 15 years, it has become a joke of a organization with these bizzare models and inconsistant equations to compute these stats.

    I mean, no wonder 1984 has become a best seller again(lol).

  22. UrbanDigs commented on May 14

    I think they are smoking that Tie Stick…

    You know, that bud that’s tied to a stick! My mama always yelling tryin to tell me how to live..da na na na na na da da da ! Maui waui man!

  23. Jim commented on May 14

    This market is going higher regardless of datapoints. All news is good right now. Debates about market data mean nothing. If the Inflation numbers were bad, the market still closes green.

    Small Caps going to new highs in July.

  24. Mike J commented on May 14

    Using the California Dept of Energy’s numbers for the past ten years and averaging the weekly branded retail number for each month, the average increase from March to April is 8.3% with a standard deviation of 9.3%.

    Anecdotally (and in NJ, not CA), price of gasoline is up 15-20% from March to April.

    CA DoE source: http://www.energy.ca.gov/gasoline/margins/index.html

  25. Carmen commented on May 14

    Disregard seasonal adjustments and concentrate of Y-o-Y changes to get a better picture of what’s going on. So the question is that the April Y-o-Y inflation went down .1 % points relative to March Y-o-Y so is that a credible result?

  26. Brian Jacobs commented on May 14

    One very easy way to disregard seasonal adjustments… look at unadjusted year over year changes.

    As reported by the BLS for April 08 vs April 07:

    Fuels and Utilities………….8.6%
    Household Eneregy……………9.4%
    Fuel oil and other fuels…….42.8%
    Gas (piped) and electricity…..6.6%

  27. michael schumacher commented on May 14

    urban digs-

    a VERY funny movie…….I heard they were supposed to do another soon….hope they don’t as the other’s (at least the first three) were classic and the times that produced them will never be repeated.

    Ciao
    MS

  28. Stefan Karlsson commented on May 14

    During the latest 3 months, the seasonally adjusted CPI rose up 0.5%, while the actual CPI rose 1.8%. But as seasonal adjustment is a zer sum game over the year as a whole, this means that later in the year, the headline seasonally adjusted CPIi will start to rise a lot faster than the actual CPI.

  29. ndd commented on May 14

    In the interest of accuracy, I’ve now been able to get access (again) to the BLS data. The BLS YoY data wasn’t updated when I last accessed, it now is showing YoY food inflation at 5%, and that is a new high. Unfortunately that changes the conclusion, if we follow past patterns we should expect energy inflation to continue to increas.

  30. gustav commented on May 14

    As others have pointed out, the “moderate” increase in the headline is entirely due to seasonal adjustment.

    But there really are signs that inflation, though still high, may be moderating. Sure, gas prices have skyrocketed this spring, but not as fast as last year: see the EIA’s chart here. I’ll be interested to see the Cleveland Fed’s median CPI (a far better measure than the core CPI of pass-through) later today to see if it shows any progress.

  31. ReturnFreeRisk commented on May 14

    Seasonal adjustments took care of gas price increase.
    What about falling hotel rooms and falling airfares? That is strange.

    A word about seasonal adjustments:
    I understand the need to seasonally adjust data.
    In the mid-90s, I went through the X11 seasonal adjustment program that a bunch of government agencies use. It has come to my notice that they are now using a new version known as the X-12. It has seasonal adjustments as well as “trend adjustment filters.” As I understand it, this takes out any persistent drift in the data. Isn’t a persistent drift in the CPI called inflation? And why would you take out a drift (or trend) in inflation data? Can someone please explain this to me?

  32. Chris Noyes commented on May 14

    No worries the bad news is price into the market . .. As always just ask the TV folks

  33. Quiddity commented on May 14

    I have a question regarding Karlsson’s remark that “seasonal adjustment is a zero sum game over the year as a whole”.

    Let’s say that in the past 10 years (or more) that in the U.S. nominal prices for all goods never rose at all, with the exception that between March and April, prices rose 5%.

    Does that mean that in the 11th year, with an identical 5% Mar/Apr rise, that the seasonally adjusted inflation would be zero? Seems like it. Would the y-o-y number be 5% and if so, where would it show up among all the other months?

  34. Quiddity commented on May 14

    Re my above post: I guess I’m wondering about ReturnFreeRisk’s comment about “persistent drift”.

  35. Bob A commented on May 14

    Pretty funny to see every clown in the media jump on the ‘Inflation ex-inflation’ bandwagon lately.

    Come on over to the Big Picture folks, where you too can see tomorrow’s news today.

  36. ac commented on May 14

    But there really are signs that inflation, though still high, may be moderating. Sure, gas prices have skyrocketed this spring, but not as fast as last year: see the EIA’s chart here. I’ll be interested to see the Cleveland Fed’s median CPI (a far better measure than the core CPI of pass-through) later today to see if it shows any progress.

    Incorrect on gas prices. We saw a correction of oversold gas prices in the winter of 2007 through May move higher. But in the summer, prices fell back down. 75% of the economy is in deflation, it is that nasty 25% that isn’t. It is the inability of the bls to give inflation with straight numbers ala 70’s. When oil is going down in September, they will be saying inflation is soaring.

  37. Eric commented on May 14

    Brasil. Yes, Simons is one of a shrinking list of reasons I keep my RealMoney sub. The performance/picks of most of their contributors has been so bad it’s just embarrassing. But you’d never know it to listen to them.

  38. Just4Laughs commented on May 14

    BLS and Fed are not in the business of spreading bad news. Those inflation statistics really mean nothing to the average person because they do not reflect reality. You should not take seriously their figures. Just use your own common sense and figure out where things are heading.

  39. Robert- commented on May 14

    Bob A wrote

    “Come on over to the Big Picture folks, where you too can see tomorrow’s news today.”

    Well I just filled the company truck with diesel @ $4.799/gal in Sacramento, CA. Last year if I remember correctly diesel was about $1 less per gallon which equates to +$30 (+26%) per fill now. I fill up about 4 times each week. Now that’s today’s news :)

  40. AGG commented on May 14

    As long as wages aren’t going up, the BLS is happy to stomp the numbers. Imagine all the ammunition the BLS is providing management at collective bargaining sessions.
    The BLS automatons don’t understand that they are the single biggest factor in the massive turnout to oust incumbents this november. Next year, having worked at the BLS will be a black mark on a resume.

  41. ReturnFreeRisk commented on May 14

    Quiddity,
    The sum of seasonal adjustment factors over the tweleve months in the year is by definition zero. In your example, the seasonal adj factor (SAF) will be -5/11% for Apr and +5%/11 for all other months. This will smooth out the change in Apr and it would appear in other months in the adjusted series, leaving the total 5% over the year. My question was (using your example) if the Apr chg was 4% one year, 5% the next, 6% and so on, do they take the increasing trend into account and smooth that out as well. I hope not. But with these government efforts to smoothen and smush every economic statistic so that they all seem moderate – who knows? My opinion is food and energy inflation still rears its ugly head because they have not found substitutes OR arguments that today’s gasoline is higher quality than before. But I am sure they are working on it.

  42. kio commented on May 14

    I would guess that according to the flawed CPI estimate stock market indexes are also faulty. So, should we expect a bear market in the near future?

  43. Lord commented on May 14

    Question. If prices rise because people are buying more and prices fall because they are buying less but the basket remains unchanged, doesn’t this lead to understating inflation similar to substitution leading to overstating inflation? Cars may have declined as fewer are buying them but the rise in gas would lead to more spending on it. I wonder how much of an effect this is.

  44. MarkTX commented on May 14

    “Next year, having worked at the BLS will be a black mark on a resume.”

    AGG,
    The way things work in the US, those people will be the first hired-it will not be a “Black Mark on their resume” as you say, it will be a “Gold Star.”

  45. Todd commented on May 14

    I hate it when my intelligence gets insulted like this. The government statistics have zero credibility. Why does the stock market give it credibility?

  46. Quiddity commented on May 14

    ReturnFreeRisk: Thanks for that explanation.

  47. BigBrotherLover commented on May 14

    You guys are crazy conspiracy theorists. The government never lies to anybody. Go home and put on your tinfoil hats you bunch of crazies!!

  48. flubber commented on May 14

    While I don’t, tempermentally, agree with the doom and gloom around these parts generally, I believe the deflation in “personal computers” sector, and technology output in general, are driven by the hedonic adjustments.

    There’s definitely an issue there. Memory and speed are rising with Moore’s law, but are the products adding utility at that rate?

    Business investment is ~25% of GDP (can’t remember exactly), and information and communication technology is the majority of that. So these hedonic adjustments are huge. They’re probably bigger than total GDP growth right now (well, not hard to do).

  49. David Gaffen commented on May 14

    Inflation a Greater Global Concern

    PulseGlobal fund managers in April were worried about a recession. Now they’re worried about inflation. According to Merrill Lynch’s monthly survey of global investment managers, 53% believe inflation will be higher 12 months from now, while 27% believe inflation will be low.

    “What is particularly striking is the way that managers are now less worried about the possibility of a global recession,” writes Karen Olney, equity strategist at Merrill Lynch.

    The survey notes that the percentage of managers who believe a recession is likely around the globe fell to 29% from 40% in April, helped in part by better economic readings out of the U.S. Wednesday’s report on U.S. consumer-level inflation may assuage fund managers, but the Bank of England gave a gloomy forecast on inflation this morning, while the euro zone has been struggling with higher inflation and slowing economic growth.

  50. David Gaffen commented on May 14

    Inflation a Greater Global Concern

    PulseGlobal fund managers in April were worried about a recession. Now they’re worried about inflation. According to Merrill Lynch’s monthly survey of global investment managers, 53% believe inflation will be higher 12 months from now, while 27% believe inflation will be low.

    “What is particularly striking is the way that managers are now less worried about the possibility of a global recession,” writes Karen Olney, equity strategist at Merrill Lynch.

    The survey notes that the percentage of managers who believe a recession is likely around the globe fell to 29% from 40% in April, helped in part by better economic readings out of the U.S. Wednesday’s report on U.S. consumer-level inflation may assuage fund managers, but the Bank of England gave a gloomy forecast on inflation this morning, while the euro zone has been struggling with higher inflation and slowing economic growth.

  51. sfm commented on May 14

    Have you come across coverage of today’s release of Real Earnings ANYWHERE? Not quite bullish, to say the least, so, I guess, it doesn’t fit well with the CPI news and the market’s mood.

    The latest Real Earnings news release was issued today by the Bureau of Labor Statistics.

    ——

    Real average weekly earnings fell by 0.5 percent in April 2008. The change resulted from a 0.1 percent increase in average hourly earnings, offset by a 0.3 percent decrease in average weekly hours and a 0.2 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Real earnings were down 1.0 percent from a year ago.

  52. Innocent Bystander commented on May 14

    Screw BLS, I just paid $4.10/gal premium at Costco, thats the highest price ever. Luckily I was able to get away before they wrote my license down.

  53. Bruce commented on May 14

    Exactly sfm…so even if these numbers are correct…if wages fall by .5% and core inflation “truly” rises by .2%…then you are .7% poorer than your were a month ago…ergo stagflation is in your pocket…

  54. muckdog commented on May 14

    “Everything is a lie.”

    But if everything is a lie, then that’s a lie. But if that’s a lie, then it’s true. If it’s true, then it’s wrong.

    ARRRRRGGGGGHHHHH!

    Just stick with the real numbers to avoid falling down the conspiracy rabbit hole.

    Very little inflation out there, folks.

  55. sfm commented on May 14

    Bruce:

    The .2% has already been discounted by the BLS in the earnings figure, since these are “Real Earnings” and the earlier text explicitly accounts for the “0.2 percent increase in the Consumer Price Index.”

    In principle you’re absolutely right — about 80% of the work force (mostly blue-collar production/non-managerial workers) managed to pocket a nice “negative earnings gain”! Not the .7% you mention, but “only” 0.5% in April, or “just” a full 1% over the last 12 months.

  56. me commented on May 14

    Scilian Olives $3.69 last month, $4.59 this month.

    Sams Club Members Mark toilet tissue. 3 months ago 1562 SQ FT for $15.37. This month 880 sq ft for $14.87

  57. BigBrotherLover commented on May 14

    There would be blood in the streets if people understood that they were being stripped of their wealth and income by inflation. But that’s the insidious nature of inflation. It’s so indirect that only the few are astute enough to understand it.

    I’m still amazed at how many pre-eminent economists just blow it off like it’s no big deal or that it’s just a natural property of an economy. It might not be a big deal to those sitting in their ivory towers at prestigious colleges or on Wall Street but it’s a very big deal to the other 90+% of the population!

  58. Ivo commented on May 14

    Many people claim that CPI is obviously too low for the average citizen, but how could Wall Street not see this?

    Wall Street is perectly happy about the number. Lower CPI -> lower IR -> higher corporate profits (as long as GDP nominal growth is positive and the system can somehow handle even more new credit creation the party goes on)

    I also wonder which IR they use in their DCFs, theoretically the risk free rate should be rather close to the Fed Funds rate / T-Bill (lowest risk), but in reality companies do not borrow at it, so rather 10-yr Treasury rate should be used. But using the low (and manipulated by Fed)Fed Fund rate / T-Bill in DCF makes stocks look “cheap” (no matter that the whole credit system is clogged).

    At times like these you see the complacency, incompetency, arrogance and irresponsibility of both politicians and “industry captains”.

  59. gordon commented on May 14

    I wonder if they incorporate the aggressive reduction in weight of food products that’s been going on. Anyone here remember back when ice cream was 1/2 gallon? The widespread reductions in ounces are going largely unnoticed, food producers way of maintaining profits.

  60. pft commented on May 14

    Consider that Oil was 60 dollars a barrel a year ago today, and oil is 124 dollars a barrel. Good thing gasoline is no longer tracking oil prices, must be tracking gold.

    Our reality is a lie, everything you believe to be true is not. The Matrix lives. Turn off the TV, and put on your tinfoil hat to protect yourself as you search for the truth. Actually, better stay in the lie, the truth is dangerous. ET go home. LOL.

    Sorry, the BLS lies and CPI have driven me insane.

  61. Expat commented on May 15

    Wall Street is not deluded. They know the numbers are bogus, but they like the results. Low posted inflation keeps government spending down. It reduces wage increases (not for bankers, but for peons). If I weren’t so hungover, I might come up with other reasons.

    There are plenty of morons who believe in the numbers and they contribute to the rallies as well. Then there is Ben Stein who is telling us that all our economic woes are in our head. Does that work both ways? Because it certainly seems like the economic expansion of the past ten years was only in our heads as well.

  62. Blissex commented on May 16

    «they have not found substitutes OR arguments that today’s gasoline is higher quality than before. But I am sure they are working on it.»

    ShadowStats says they did in the past — gasoline virtual price went down when some additive was put into standard gasoline as that was meant to improved performance, but when the additive was shown to make no difference, the virtual price was not raised.

  63. Blissex commented on May 16

    «As long as wages aren’t going up, the BLS is happy to stomp the numbers.»

    Well, there is a deep and dark secret here that perhaps Monetary Economists are not so willing to discuss.

    “Inflation” for Monetary Economists is a technical term, which excludes price changes due to intrinsic reasons, and it has nothing to do with the general level of prices or a given standard of living.

    So for example if people bought less cars and more airplanes, the lower cost of cars due to lower demand would not be deflation, and the higher cost of airplanes due to increased demand would not be inflation; it would be just a perfectly natural adjustement in relative prices, a sign of a working market.

    In practice this means that inflation happens only when unit labor costs go up, because the price of labor is sort of an independent variable, and thus inflation, in the narrow sense of Monetary Economics, can only happen when unit labor costs go up.

    In other words what Monetary Economists are interested in preventing is not normal adjustement of prices dues to varying scarcities, but price-wage inflationary spirals, and these can only be caused by increases in unit labor costs. An only in the unit labor costs of wage earners, because the unit labor costs of high income earners are always low, because they are much more productive. Of course :-).

    So if food prices go up because demand increases faster than supply that’s NOT inflation — it is just market repricing. But if car prices go up because factory wages go up faster than factory worker productivity, then THAT’s inflation.

    So according to Monetary Economists the Fed should only watch core prices, that is largely prices that depend on the general level of unit labor costs, and raise interests whenever unit labor costs increase to cause a recession to increase unemployment and thus reduce unit labor costs thanks to falling wages.

    Naturally the above is not symmetrical: because while the Fed punishes workers with higher unemployment via higher interest rates whenever their wages grow faster than productivity, it does not punish asset holders when asset prices grow faster than their productivity, and does not try to raise employment when wages grow slower than productivity, because neither is “inflation”.

    I hope this makes people understand why Monetary Economists look only at core CPI — because that is a proxy for labor costs, and labor costs are the only cause of inflation, as defined by them.

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