OT Government says gas prices have declined since July
- From: Don Tiberone <s_knight8@xxxxxxxxxxx>
- Date: Sat, 17 Nov 2007 11:11:55 -0800 (PST)
http://www.safehaven.com/article-8848.htm
Cooking the Inflation Books
Just for the record, I want to state that I know as does nearly
everyone else who pays attention to the CPI statistics that they are
bogus. They do not reflect the real world that you and I, gentle
reader, live in. So, while it may look like I take them at face value,
I do so only because the Fed pays attention to the number, (nod, nod,
wink, wink) and makes policy based upon it. So, let's look at how the
calculation of the CPI has been politicized and how much of a
difference it makes, and then go on to the expectation for statistical
inflation in the near future.
John Williams writes an excellent monthly letter on all types of
government statistics called the Shadow Government Statistics at
www.shadowstats.com. One of the things he points out that during the
Clinton administration, the way the BLS calculates inflation was
changed. He calculates his own inflation number using the old pre-
Clinton inflation model. Using that methodology suggests that
inflation is at 7%. And if you use other methods, inflation might even
be substantially higher. Look at the chart below.
Chart
Since the CPI is used to calculate the increase in Social Security
payments and a host of other items, calculating inflation is
important. I the early 1990s the arguments in the press was that
inflation was over-stated. Michael Boskin, chief economist in the
first Bush administration and Alan Greenspan were among the chief
proponents for a new methodology of accounting for inflation.
Quoting Williams: "Up until the Boskin/Greenspan agendum surfaced, the
CPI was measured using the costs of a fixed basket of goods, a fairly
simple and straightforward concept. The identical basket of goods
would be priced at prevailing market costs for each period, and the
period-to-period change in the cost of that market basket represented
the rate of inflation in terms of maintaining a constant standard of
living.
"The Boskin/Greenspan argument was that when steak got too expensive,
the consumer would substitute hamburger for the steak, and that the
inflation measure should reflect the costs tied to buying hamburger
versus steak, instead of steak versus steak. Of course, replacing
hamburger for steak in the calculations would reduce the inflation
rate, but it represented the rate of inflation in terms of maintaining
a declining standard of living. Cost of living was being replaced by
the cost of survival. The old system told you how much you had to
increase your income in order to keep buying steak. The new system
promised you hamburger, and then dog food, perhaps, after that.
"The Boskin/Greenspan concept violated the intent and common usage of
the inflation index. The CPI was considered sacrosanct within the
Department of Labor, given the number of contractual relationships
that were anchored to it. The CPI was one number that never was to be
revised, given its widespread usage.
"Shortly after Clinton took control of the White House, however,
attitudes changed. The BLS initially did not institute a new CPI
measurement using a variable-basket of goods that allowed substitution
of hamburger for steak, but rather tried to approximate the effect by
changing the weighting of goods in the CPI fixed basket. Over a period
of several years, straight arithmetic weighting of the CPI components
was shifted to a geometric weighting. The Boskin/Greenspan benefit of
a geometric weighting was that it automatically gave a lower weighting
to CPI components that were rising in price, and a higher weighting to
those items dropping in price.
"Once the system had been shifted fully to geometric weighting, the
net effect was to reduce reported CPI on an annual, or year-over-year
basis, by 2.7% from what it would have been based on the traditional
weighting methodology. The results have been dramatic. The compounding
effect since the early-1990s has reduced annual cost of living
adjustments in social security by more than a third."
Then to confuse the process even more, the BLS uses something called
hedonics, from the root word hedonism. Essentially, the adjust the
price of an item based on the "pleasure" or increased value you get.
Thus, they don't price automobiles based on the sticker price, but on
what you get for your money. If the manufacturers load in more items
like new electronics or anti-locking brakes that were not standard the
year before that means you are getting more value for your dollar, so
therefore the price in terms of inflation goes down even though you
may be paying the same or even more to get out of the car show room.
The same is true for computers. We clearly get more power every year,
so for the BLS the price of computers are going down, although it
seems to me that the price I pay for a top of the line computer is
about the same as it was five or ten years ago.
If the government mandates an additive to gasoline that costs 10 cents
more, that is not included in the inflation numbers, because we get a
new, improved gasoline that pollutes less. Supposedly the pleasure of
breathing cleaner air reduces the costs to our pocket book, or
something like that.
My health insurance costs have tripled over the last ten years, and I
know that is the experience of many of my readers. Yet, the BLS has
medical costs rising by less than 50% for the last ten years. Their
data suggest the cost of housing has risen by about 30% over the last
ten years. Again, that is not the experience of many of my readers.
Social Security expenses are $657 billion per year. If Williams is
right (and I think he is) that under the old methodology that expenses
would have risen by a third, then that means we are spending $200
billion a year less. Add $200 billion to the deficit. And then watch
politicians panic.
I am not one to suggest conspiracy, but if the CPI reflected the real
world, the US government would be spending far more money on Social
Security and a host of other pension programs. The crisis we will be
experiencing in about 8 years would have already hit us. Thus, there
was an incentive for leaders to find economists who could argue for
new, more "progressive" methods for calculating inflation. Notice that
this was done by the BLS without any protest from Congress.
None of this was done behind closed doors. The BLS, to its credit, is
extremely open about how it calculates CPI, and you can get an
enormous amount of detail on their web site about prices of things
like tomatoes in very part of the country going back for decades.
But the way we calculate the CPI is not going to change. No
administration will want to go back and add in an extra 4-5% a year to
Social Security and other government pension programs. So, let's
return to the prospects for a rise in the CPI in the near future,
which will have policy implications for the Fed.
Gaming the Producer Price Index
On Wednesday, we got the Producer Price Index. After the above notes
on the CPI, it will probably not come as a surprise that there may be
some problems with the PPI. The PPI rather oddly has the price of
energy going down in October. PPI is important, as it is in indication
of the trend of inflation in consumer prices in the future.
As friend Bill King notes:
"Since June, BLS has energy prices declining in all three PPI stages:
finished, intermediate and crude. For June finished energy goods the
index is 160.9, for October 159.5; the intermediate prices are 179.9
vs. 178; for crude it's 238 vs. 232.9. BLS has energy prices DOWN
3.64% since July!!
"Oil has rallied from ~$75 to the mid-90s since July 9. Over the same
period, gasoline has rallied from $1.95 to $2.35; heating oil has
rallied from $2.15 to $2.55; natural gas has fallen from $8.50 to
$8.25."
.
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