Summary
Inflation will be a major topic at tomorrow's meeting of the Federal Open Market Committee, with committee members surely taking into account the "official" data in their deliberations. I hope, however, there are at least some FOMC members who also take into account how these numbers have a built-in bias to understate reality.
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Government Inflation Data
Month after month, the Labor Department reports producer- and consumer-level inflation results to which I strongly believe the consumer and business sectors have increasing difficulty relating. In the process, the public's confidence in government economic data continues to erode.
In addition, though, if the numbers are faulty, then it is entirely reasonable to assume the quality of policy decisions (Federal Reserve) and business decisions based on these data is not what it should be.
Tomorrow morning, the Federal Open Market Committee convenes to discuss interest-rate policy. Current and projected inflation certainly will be a key topic. For obvious political reasons, it is difficult for individual members to impugn "official" inflation data in too public a manner, but there must be a few of these people who realize the inherent tendency these numbers now possess to understate the increase in prices.
(NOTE: For those who have not yet visited John Williams' "Shadow Government Statistics" website, this is a good time to do so. In turn, within the context of the foibles of government inflation and other data, I highly recommend a reading of "Government Economic Reports: Things You've Suspected... Series Master Introduction" and "Consumer Price Index".)
Although I believe the PPI and CPI are now materially understating the actual inflation and inflationary pressures affecting the US economy, keeping track of these series remains important anyway. These are the numbers most visible to the public, and they are the numbers hyped incessantly in places like "Tout TV" and the other venues in the regular propaganda loop. They also are among the numbers most frequently cited by Alan Greenspan as the basis for Federal Reserve monetary policy.
There are three government inflation or inflation-related series I monitor regularly: the Producer Price Index, the Consumer Price Index and import prices. Even including the understatement inherent in the first two measures, they still are showing an uncomfortable acceleration.
For instance, through August, the PPI was up 5.1% year over year. As of August 2004, the 12-month change was 3.4%. As for the CPI, through August, it showed a year-over-year rise of 3.6%. For the year ended August 2004, the 12-month change was 2.7%.
The "Core" Rate Flimflam
Of course, one of the giant games played with these numbers is emphasizing their change when the inconsequential food and energy sectors are removed from the calculations. This constitutes the so-called "core" rate.
I have been consistent over the years in expressing the opinion that it is nothing short of moronic to make a big deal of life as a consumer that is void of price considerations relating to eating, heating, cooling, driving, etc., or life as a businessman in which energy costs in particular are taken so lightly.
This is done all the time by Wall Street, however. Well, not quite all the time -- only in instances when the removal of food and energy costs results in more favorable inflation data.
(As an aside, do you imagine that anyone in a position of power at the Federal Reserve really believes this nonsense? If so, the United States is in far greater trouble than is generally realized. On the other hand, can those at the Fed who might fully appreciate how dreadful the accuracy of these numbers is let on? Certainly not in public, which means that monetary policy suffers as a result.)
Nevertheless, even the core rates of both the PPI and CPI are showing uncomfortable trends. As of August 2005, the PPI's year-over-year core rate was up 2.5%. The 12-month change as of August 2004 was 1.5%. As for the CPI, its year-over-year change as of August 2005 was 2.2%, versus 1.7% as of August 2004.
Following are the results for these measures over various periods. (NOTE: The applicable portions of the data shown in the tables below will be posted to the "Data & Charts" section of the GRA website.)
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Producer, Consumer and Import Prices (Com-
posite Results & Annual PPI, CPI Results)
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Producer Consumer Import
Price Index Price Index Prices
Month/ ----------------------------------------
Year Y/Y L3Mos* Y/Y L3Mos* Y/Y L3Mos*
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08/05 5.1% 6.7% 3.6% 4.2% 7.6% 14.0%
07/05 4.6% 1.8% 3.1% 1.9% 7.8% 4.9%
06/05 3.6% -0.5% 2.5% 1.9% 7.4% 5.3%
05/05 3.5% 2.6% 2.8% 4.4% 5.9% 9.4%
04/05 4.7% 6.7% 3.5% 6.2% 8.4% 17.1%
03/05 5.0% 5.4% 3.2% 4.3% 7.6% 15.4%
02/05 4.7% 1.1% 2.9% 1.7% 6.1% 0.0%
01/05 4.2% 2.1% 2.9% 1.3% 5.7% -4.5%
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08/04 3.4% 0.5% 2.7% 1.1% 7.1% 6.8%
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*Trailing three-month com-
pound annual rate of change.
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Producer Price Index
(Finished Goods)
-- Y/Y Change
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Excl. Food
Year All Items & Energy
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2005 -- 8 Months
----------------
[1] 2.8% 1.5%
[2] 4.3% 2.2%
===========================
2004 4.3% 2.2%
2003 4.0% 1.0%
2002 1.2% -0.6%
2001 -1.8% 1.0%
2000 4.1% 1.6%
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Consumer Price Index
(All Urban,
All Items)
-- Y/Y Change
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Excl. Food
Year All Items & Energy
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2005 -- 8 Months
----------------
[1] 2.6% 1.4%
[2] 3.8% 2.0%
===========================
2004 3.4% 2.2%
2003 1.9% 1.1%
2002 2.4% 2.0%
2001 1.5% 2.7%
2000 3.4% 2.6%
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[1]Nonannualized.
[2]Annualized.
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Import Prices (Detail)
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U.S. IMPORT PRICES - % CHANGE
(3-Mo.= Three-month Compound Annual Rate)
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All Imports, Petroleum
All Imports Excl. Petrol. Imports Only
Month/ -------------- --------------- ---------------
Year Mo. 3-Mo. Y/Y Mo. 3-Mo. Y/Y Mo. 3-Mo. Y/Y
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08/05 1.3 14.0 7.6 0.0 -1.6 1.8 7.1 131.8 42.5
07/05 0.8 4.9 7.8 -0.2 -2.3 2.1 6.1 47.2 44.8
06/05 1.2 5.3 7.4 -0.2 0.0 2.3 8.6 34.1 39.6
05/05 -0.8 9.4 5.9 -0.2 2.0 2.6 -4.4 59.2 27.1
04/05 0.9 17.1 8.4 0.4 3.2 3.0 3.6 132.7 45.5
03/05 2.2 15.4 7.6 0.3 2.8 2.9 13.4 120.6 40.1
02/05 0.9 0.0 6.1 0.1 3.2 2.8 5.1 -17.9 29.8
01/05 0.6 -4.5 5.7 0.3 6.6 3.1 2.2 -47.4 24.2
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08/04 1.5 6.8 7.1 0.3 1.6 3.1 8.8 46.7 39.9
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