CPI, Inflation, and Reality
May 15th, 2008 by Ana
So what do the CPI numbers released yesterday, the inflation that they supposedly measure, and reality all have in common? Apparently, not much … especially between the first and third.
If you’ve been following my ramblings on the CPI and inflation, you were probably as puzzled as I was yesterday when the BLS released numbers way way WAY under what you expected. If you missed the announcement, the official CPI says inflation was only 0.2% for the month of April, with the food and energy prices showing a complete divergence from reality.
CPI and Food Prices
According to the CPI data, food prices only rose a “seasonally adjusted” 0.9% for April. Yet the report admits that fruit and vegetable prices rose 2% for the MONTH, bread prices rose 1.5% for the MONTH, and milk prices went up 1.2% for the MONTH. Apparently what brought the official food inflation measure down was the idea that less people are eating out at restaurants, which only grew at 0.3% (still positive though).
The news media is calling this the sharpest food price spike in 18 years, with the official number of “year-over-year (y-o-y)” food price inflation being 5.1%. That means according to the government, food prices overall were 5.1% more expensive in April 2008 than they were in April 2007.
My personal y-o-y food price inflation looks a lot more like 12.5%, but I don’t count eating out in that figure because eating out is not a necessity. In fact, that is where the “give” in the budget is coming from, partly. Here we do follow the behavior the BLS uses. However, cutting back on restaurant spending is an EFFECT of inflation, not a component of it.
And I haven’t quite figured out just what this “seasonal adjustment” for food prices is. Does anyone have a link that explains it in plain English? In my experience, many food prices go down during the spring because of produce sales. So shouldn’t a seasonal adjustment for the month of April adjust those numbers UP to compensate for the sales?
CPI and Energy Prices
For those who have argued that the BLS’s CPI numbers are accurate, please explain the energy prices numbers released yesterday to me! According to the official report, gas prices went DOWN 2% for the month of April after seasonal adjustment. Of course, before the seasonal adjustment, gas prices show a 5.6% jump … so that must be one (heck) of a seasonal adjustment they made!!
Apparently, the number crunchers at the BLS figure that gas prices always rise in the spring. So they seem to toss out any price rise for April, even though the Department of Energy and AAA say gas prices rose 10% and 9% respectively for April. Also according to AAA, gas prices posted record high prices for SIXTEEN days in a row in April.
I have to really wonder what gas stations the CPI survey-takers are filling up at. I also wonder what kind of discount card they carry … because I want one too! At the beginning of April, I was grumping about gas being $3.28 per gallon locally. By the end of April, that was looking good since gas prices were up to $3.49 per gallon. According to my handy little calculator, which does straight math, that is a 6.4% increase in gas prices for the month of April.
The May numbers ought to be even more interesting, as gas prices have gone from $3.49 per gallon on Monday to $3.68 per gallon last night. Local gas stations usually don’t raise their prices from Monday to Wednesday … they wait until Thursday night after they close to do the weekend hikes. (note to self: fill up again tonight after work!)
Experts Now Questioning CPI Accurracy
It isn’t just me scratching my head over these numbers that have absolutely nothing to do with my reality. More and more economic experts are starting to publicly question the CPI methodology for figuring inflation, with the harshest being Bill Gross of Pimco Total Return bond fund calling the CPI
a “con job” that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low. (source here)
These experts not only question the CPI accuracy, they are also questioning the BLS’s unemployment numbers … and suggesting both are “understated” by the government. The alternative numbers they offer for both statistics suggest the American economy is in deep (doo-doo). I won’t get into the unemployment numbers today, but I totally agree the CPI numbers are completely wacky and don’t seem to reflect reality, even to the most imaginative mind.
So, what do ya’ll think? Am I still a “tin-foil hat” nutjob? And just what is this seasonal adjustment that can swing the gas prices from a 5.6% rise to a 2% decline?? How in the world can the BLS claim gas prices went DOWN? And that food prices rose less than 1%? This doesn’t reflect MY reality … does it reflect yours?
Posted in stagflation survival |
May 15th, 2008 at 11:36 am
I don’t think you are a nut-job. I completely agree that it doesn’t reflect reality and it makes me relly angry. On our local talk news radio this morning they were talking about these numbers, and you could tell that they were trying to make it sound better than it actually was. I think it is total and complete utter crap and they need to stand up and tell the truth. I don’t know anyone who believes their numbers anyway.
May 15th, 2008 at 12:58 pm
I think you summed it all up in your last line
“This doesn’t reflect MY reality … does it reflect yours?”
The problem is that we all live and work in different regions and socio-economic levels so a national number is rather meaningless in my opinion.
Food prices would probably have to increase 100% before I would notice and I still can’t comprehend how people think gas prices are ruining their lives- I pay no attention to it myself. U.S. gas price aren’t very high at all compared to many other nations so take it as an opportunity to be thankful for something.
I will grant you that people with low incomes are going to be hurt by increases in food and gas prices much more than the average or above average earners, but hey if that’s you it’s time to work on making more money. Complaining about it won’t help.
May 15th, 2008 at 1:25 pm
” .. but hey if that’s you it’s time to work on making more money.”
Eden, that IS me, and that is why I am back in college. Now that I’ve switched majors I only have five more semesters … BUT tuition is expected to rise 13-16% for the next school year. At least that’s the number my professor friend quoted today over lunch. So improving my job prospects is costing more as well!
This underreporting is a double whammy to the “working poor” because it doesn’t take much to make a difference in our budgets when we run small numbers to begin with, and also government programs (like my VA disability and hubby’s Army pay) base their “cost-of-living” increases off those official numbers.
May 15th, 2008 at 2:24 pm
Whoa, you are kicking inflation butt with this post. A lot of good work and thought went into this. Great job.
May 15th, 2008 at 2:34 pm
I think it would be better if they stopped trying to hide the problem and started trying to fix it. You ignore a leaky roof and the leak gets bigger. Then again, their attempts to stave it off have not been…confidence inspiring.
May 15th, 2008 at 7:55 pm
Ana,
If you’re a tin-foil-hat nutjob, then so am I! I haven’t had a hand in raising a garden since I was 5, but I’ve got a mega-garden planted now! My hubby and I have been talking about the “state of things” lately and we’re both agreed that there are some big and NASTY things coming.
All of our discretionary money is going to things like bio-diesel (for his truck), gardening (plants and accessories), and reducing use on everything. We’re in FL and are refusing to use our air conditioner because we know that higher electric bills are just not an option for us.
I run a small home-based business and I’m really feeling the pinch. I’ve called all of my vendors and asked for discounts, or cut out services entirely, just to keep my head above water. Yeah, unemployment is real…and it’s not going to get better in a hurry.
May 16th, 2008 at 7:09 am
The way inflation is calculated is designed to make it seem low so that the government fat cats don’t have to face the music when voters go to the polls. Let gas hit $5/gallon and bread hit $5/loaf and you’ll see every incumbent thrown out of office…which wouldn’t be a bad thing.
May 16th, 2008 at 1:01 pm
Well, I don’t really know if they are fixing the books but I can’t see how any sane person could say gas prices decreased. That’s tin foil nuttery right there. Gas is at $3.87 a gallon where I live and I’m sure it will be up again by the time I go home tonight. It went up 5 cents in one day this week. And I really don’t know why. I don’t believe it’s some big conspiracy of the oil companies but it is painful regardless of the reason.
And it’s not that the gas price really affects our budgets all *that* much. But it’s one of those things that I see every single day and it *seems* more painful every time we fill up. We paid $100 to fill up the truck. I seriously consider NOT going on trips to see family because it will now cost about $25-$40 per trip. My car gets better mileage but it still costs me almost $50 per fill up - times four fill ups per month. Not a bank breaker but still somewhat painful.
I have not been one to jump on the “recession” band wagon but the longer this downward market continues the harder it becomes to stay optimistic.
May 18th, 2008 at 4:52 am
You raise some excellent points Ana and this is also the case over in the UK where I live. Goverment figures are usually inaccurate because they don’t want to panic the general population and want to maintain the image of stability. Official inflation rates are always way off the mark especially as in the UK our inflation rate is 3% but the cost of gas, electricity and food has soared by around 10-12% this year alone.
May 18th, 2008 at 7:40 am
You are not a nut-job. These figures are always spun until they are so dizzy they can barely stand. I just listened to three economists on NPR yesterday still debating whether we are in a recession or not. Hello? Who comes up with all this nonsense? How do they sleep?
May 20th, 2008 at 7:35 pm
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May 24th, 2008 at 8:55 am
[…] Revolution - CPI, Inflation, and Reality I was waiting for you to use your favorite ’stagflation’ word somewhere in there. What […]
May 27th, 2008 at 10:11 am
I disagree. I’m planning on writing a post about this in the near future, hopefully next week sometime. I will say this though: CPI numbers aren’t meant to jive with what you or anybody else experiences. They are aggregate national numbers and are unlikely to match anybody’s experiences closely even if you assume they are 100% accurate and truthful. For instance, my food costs have actually gone down over the past few years even though officially food inflation has been high. Why? I live in a different region and have different habits from you. My decling food costs offset your higher food costs. I’m more or less a vegetarian for health reasons, and the particular foods I eat haven’t suffered much of a price increase. I’ve also gotten better at shopping for value. So my experience doens’t match the CPI either, but then again, I don’t expect it to. Because I don’t behave in an average manner. Few do.
May 27th, 2008 at 10:58 am
Kyle, you’ve addressed the food costs in a satisfactory manner … but you didn’t touch the energy/gasoline issue.
May 28th, 2008 at 7:07 pm
I think we need to quit expecting the government to tell us what we already know. I’m not sure about the rest of you but I am in a Recession and frankly maybe a depression as it has certainly lasted more than a few months.
I would also respectfully disagree with Kyle as just because his food costs have been going down, it does not mean that the cost of food has gone down. If we all quit eating, that would not change the cost of food. It just means that we are buying less but again, I think that would be a symptom of recession and not a measure of it. If that were true then they could make gas $100 a gallon and say that it has gone down because no one could afford to buy it.