Results 1 to 4 of 4

Thread: Surprise! Some economists say CPI #'s wrong

  1. #1
    Veteran Member
    Joined
    Sep 2003
    Posts
    744
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Surprise! Some economists say CPI #'s wrong

    Others and myself on this site have maintained that the CPI numbers don't reflect reality for the typical american. Thus their shorthand for summarizing an economic condition is useless. Heres the latest from the experts. We should go back to the previous 1985 CPI numbers and method of calculation, and adjust all data since 1985 to the old calculation methods.
    Here's the story----
    Quirk in Calculation
    May Distort Inflation Gauge
    By GREG IP
    February 21, 2006 4:27 p.m.

    If inflation appears to accelerate in coming months, investors might want to play down its significance. Some economists say that quirks in the calculation of the consumer-price index may be causing inflation to be overstated during the winter and understated in the rest of the year.

    Analysis by the Bureau of Labor Statistics, which calculates the CPI, seems to confirm the presence of the quirk, but the BLS is unsure how the known gaps in its seasonal-adjustment process could give rise to it.

    The quirk appears only in the total index, not the core index, which excludes food and energy. While that means the quirk is less likely to mislead the markets or the Federal Reserve, which focus on the core, it could still leave a misimpression of high inflation in the early months that affects both consumer expectations and pricing in the inflation-indexed Treasury bond market. If it "goes on long enough, there's the possibility of unhinging inflation expectations," says Chris Varvares of Macroeconomic Advisers, in St. Louis.

    Goldman Sachs economist Edward McKelvey finds a strong tendency for the CPI to overshoot its trend in January, March and September, and to undershoot in June, July, August and December. Goldman expects a 0.6% increase in the total CPI for January, compared with 0.5% for the consensus. It expects a 0.2% increase in the core CPI, in line with the consensus. The January index is released Wednesday.

    If you break the year into two periods -- three months ending in March, and nine months ending in December -- the annualized inflation rate has been higher in the first period than the second period in each of the last six years. On average, inflation was 4.3% in the first three months of the year compared to 2.1% in the last nine months.

    No one is sure why this occurs, but it probably crops up as a result of the BLS's "seasonal adjustment" process. This process tries to determine, over a period of years, what movements in prices recur seasonally and aren't evidence of any underlying economic trend. For example, gasoline prices rise regularly in May at the start of the summer driving season, then fall in October as the season ends. The BLS thus makes a downward adjustment in the May index and an upward adjustment in October to account for this. This means any changes you see in those months should be the result not of such seasonal factors but underlying supply and demand. By design, seasonal adjustment factors cancel each other out over 12 months.

    However, the BLS doesn't seasonally adjust the entire index. Rather, it seasonally adjusts the components and adds them up for the total. But it is unable to adjust all the components because some don't have a strong enough seasonal pattern. These unadjusted components make up about 20% of the weight of the index, and that can give rise to "residual seasonality," the BLS says, although it says it isn't clear what effect this would have.

    Another potential source of the quirk is the BLS's use of "interventions" in its seasonal adjustment process. It uses a statistical program to look for seasonal patterns, but then manually intervenes to see if any fluctuations are due to anomalous events. In gasoline, the BLS has regularly intervened to prevent the program from treating one-time events as recurrent, such as the price spike that occurred when Hurricane Katrina shut down refinery capacity.

    The logic is as follows: If left alone, the program would read part of the Katrina-related spike in gasoline prices as a recurring September event. The following September, it would then depress the index accordingly in anticipation of another price jump, while compensating with a slightly elevated index in all the other 11 months. This would tend to understate the inflation rate in that month and overstate it in others. The BLS's interventions prevent that.

    In recent years, though, the BLS has had to intervene frequently on gasoline prices because so many events, often geopolitical in nature, have had an impact. Conceivably, some of these events in fact are seasonal, or coincidentally are occurring in a way that gives the appearance of being seasonal.

    To analyze these issues, BLS economist Patrick Jackman recently seasonally adjusted the entire index, rather than the component indexes, and didn't use interventions. The analysis significantly reduces the tendency of inflation to speed up in the winter. It is markedly higher in just three of the last six years, rather than all six. On average, it is 3.3% in the first three months and 2.5% in the last nine months.

    But here's the irony. Using this alternative approach, Mr. Jackman says gasoline prices would have been even more depressed last December and elevated in January, exacerbating the recent pattern of elevated inflation at the start of the year.

    "Seasonal adjustment is an art, not a science," he says. He says gasoline historically was so volatile that it didn't even meet the normal criteria for seasonal adjustment. But its large, 4% weight in the CPI meant it had to be adjusted to make the overall, seasonally adjusted index meaningful. However, in the last two years it has met the normal criteria for seasonal adjustment, Mr. Jackman says.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Surprise! Some economists say CPI #'s wrong

    I've already had my 'tin foil hat' bombarded with rogue microwaves for insinuating that official gov't figures, CPI among them, are not exactly an accurate picture of what's really going on in the US economy ! You're on your own with this thread (although IMHO the grocery store, gas pump, and US dollar exchange rate seem to be telling their own story !)

  3. #3
    God/dess montythegeek's Avatar
    Joined
    Oct 2003
    Posts
    2,103
    Thanks
    0
    Thanked 9 Times in 5 Posts

    Default Re: Surprise! Some economists say CPI #'s wrong

    This article is of no surprise to me at all as one who knows the math and mechanics involved. Anyone who tries to impose a theory on top of a one-month trend should be examined by a medical professional.

    To provide a non arithmetical interpretation of seasonal adjustment it is kind of like an artificial intelligence that decomposes a time series into trend, cycle, seasonal, irregular, and trading day adjustments. It is only after several years that the seasonal behavior is filtered out from the pure noise. This is why seasonally adjusted numbers are adjusted over history each year. A new seasonal "event" takes a couple years to get distinguished from pure noise.

    An example is new vehicle prices. The last 2-3 years the auto companies have all had MAJOR incentive programs in December, but there is nothing inherent in December, because they did it in the late third quarter rather than December after 9/11/2001. In fact in 12/01 they were raising prices because they were short inventory. Seasonal factors are just estimates, and even year-on-year changes are noisy. The PPI rose in January in part because the filter was lulled into thinking seasonal swings were dampened at year-start, when in fact, the January 1 price increase effect just did not mean much when noone was raising prices.

    There are other arithmetic oddities of seasonally adjusted series, such as a ratio of two adjusted series can still have a seasonal pattern. Seasonal factors are part of a "live and learn" world.

  4. #4
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Surprise! Some economists say CPI #'s wrong

    this appears to be a topic which simply won't disappear ...



    (snip)"Economist John Williams says ‘real’ unemployment and inflation numbers -- figured the old-fashioned way -- may be two or three times what the government admits." (snip)

Similar Threads

  1. chart of the week - China CPI leads US Core CPI
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 06-02-2011, 11:56 PM
  2. Replies: 1
    Last Post: 05-19-2011, 02:49 AM
  3. 'Economists blind to reality'
    By K Sweet in forum Dollar Den
    Replies: 16
    Last Post: 09-09-2009, 06:32 AM
  4. Economists Against Obama
    By 420bUnNy in forum Dollar Den
    Replies: 5
    Last Post: 10-16-2008, 12:01 PM
  5. Replies: 4
    Last Post: 04-21-2006, 02:57 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •