Excluding food and energy from the overall inflation calculation is absolutely ludicrous and disingenuous to say the least! What a scam to fool the mostly unaware masses.
There is a clarification that should be made here.
Food and energy are not "excluded" from overall inflation, not in the Consumer Price Index nor in the Producer Price Index. Rather, because food and energy historically are far more volatile and price-sensitive than the rest of the categories within the CPI and PPI, the Fed has adopted the position that "core" inflation--in essence the CPI or PPI without the food and energy categories included--yields a more accurate perspective how monetary pressures are causing inflation. Consequently, the Bureau of Labor Statistics reports both the overall indices and then the "core" components of those indices when they do their monthly summaries.
Within a monetarist view on inflation, this argument makes sense and is not without merit. The problem we have here is that monetarist theory simply does not fit the current situation. The primary drivers of the inflation we see are not monetary in nature, but are instead the result of a series of exogenous supply shocks which are disrupting the flow of goods.
Consequently, the significance of "core" inflation is all but eliminated in the current situation.
My fault for saying "overall" inflation. Imho they need to be added to the "core" inflation metric no matter the volatility of that group.It seems food and energy expenditures have steadily risen over the years even without the out of the blue supply shocks.Also the deliberate debasing of the dollar since inception should also be taken into account ,aka stealth inflation tax on the common man.Plus Social Security recipients have been getting screwed over the years due to the phony inflation calculation! Just my lousy two cents worth. Enjoy your articles! Have a good one!
The degree to which the Consumer Price Index accurately captures inflation's impact is a topic of considerable heated discussion and debate.
One reason economist John Williams began producing his Shadowstats series of alternate metrics for things like inflation is because of the degree to which the CPI has been manipulated politically to understate the effects of rising prices, and he has a point.
I use the CPI and its companion index, the Personal Consumption Expenditures (PCE) index, for the simple reason that these are the data sets the Fed claims to use in its decision-making. These are the "official" numbers, and in order to interrogate government policies on matters like inflation, one has to work with the same data.
We should also keep in mind that inflation, while lower than it has been recently, has been a consistent phenomenon from even before the Volcker Recession. Sub 2% inflation year on year, extended over ten and twenty years, produces a considerable degradation in purchasing power by that 20th year. Which means you are correct about food and energy prices--they have risen steadily over the years. Even within the CPI that reality is indisputable.
Yet perhaps the greatest challenge in examining inflation is grappling with the complex nature of price dynamics and price discovery within the marketplace. Not all price rises are due to expansion of the money supply or changes in money velocity--which means that we must either consider various external economic shocks to be a phenomenon other than inflation or we must realize that the monetarist mantra, Milton Friedman's oft-repeated aphorism that inflation is everywhere and always a monetary phenomenon, is fundamentally incorrect.
The economic reality for everyone is that we respond to price rises in largely the same way regardless of the reason for the price hike. If the price of gasoline jumps overnight by a dollar it does not matter that the reason for the hike was the sudden scarcity of gasoline or the sudden increase in dollars in people's wallets available for gasoline purchase. To the consumer looking to fill his gas tank both price hikes look the same, but one is directly caused by money supply fluctuations and one is not.
I take the view that price changes == inflation/disinflation/deflation. I am not a doctrinal monetarist, simply because the extravagant money supply increases of recent years do not have corresponding price hikes--which monetary theory states they must have. Even Shadowstats publicly available inflation metrics do not show changes in inflation that correspond to the Fed's magic money printing since 2008, which is immediately proof that Friedman's view of inflation cannot be correct; inflation cannot be a purely monetary phenomenon when the doubling and tripling of the money supply fails to produce a doubling and tripling of the rate of inflation.
In fact, much of my criticism of the Fed's recent interest rate hikes to choke off the inflation the CPI does report stems from the lack of observable impacts on inflation. Inflation has gotten worse even as the Fed has raised interest rates from near zero to 2.5% over the past few months. We must either conclude that the Fed has not raised rates nearly enough, that there should have been multi-percentage point increases rather than mere fractions of a percentage point, or that inflation is not responding to the interest rate hikes at all. Currently, I subscribe to the latter interpretation.
In my estimation, the corporate media and the government focuses far too much on the headline inflation number and not nearly enough attention on the disparities in inflation rates within the components that make up the CPI. Inflation does not hit all products equally, and the volatility we see in food and energy prices is a prime example of this. It is my contention that these distortion of prices due to inflation are where the real economic damage arises. It is these distortions that result in consumers paying more and buying less--not just of the goods with the extreme price increases but all goods.
Is the government treating inflation honestly and intelligently? No. The CPI and PCE indices are politically manipulated to understate inflation. Yet even as manipulated as these indices are, they can still illuminate much about ongoing price dynamics. Even if the overall inflation rate is understated, we can still see and examine the distortions presented by the CPI. We can still equate the current 11% food price inflation rate with increases in food insecurity and even hunger. We can still assess the economic impacts of so-called "stimulus" measures by the government to goose the economy.
What bugs me most is that every member of the Federal Reserve Board is essentially saying: "We have to violate one of our mandates in order to fulfill the other. Please avert your prying eyes."
Placing current inflation on an “apples to apples” basis to make historical comparisons: if today’s inflation rate were calculated using the same methodology that was used in the Carter years, today’s inflation rate would be approximately 17%.
That certainly is the claim John Williams makes. Unfortunately, his data sets and computations are proprietary, which makes full scrutiny of his numbers impossible.
I will point out that his own narrative of his CPI calculations includes adjustments and calculations which were NOT part of pre 1990s CPI calculations, which inherently invites a certain skepticism about his numbers.
However, even Shadowstats does not fully capture the "true" impact of consumer price inflation for everyone. It can't. America is too geographically and economically diverse for any single price metric to adequately portray price levels nationwide.
What inflation indices tell us most accurately are general inflation trends at a macroeconomic level. What is relevant about the August inflation number is not that it's 8.3%, but that it's at best a marginal and even statistically insignificant decrease YoY. In this regard, even shadowstats numbers yield that same result.
Which is not to disparage Shadowstats, but to highlight the practical limitations of all economic datasets.
Thank you for pointing these things out! As I’ve told you before, I am not an economist. I am simply a businessman trying my best to stay informed so I can navigate current conditions and reasonably anticipate what’s to come (or what is not to come). I am trying to focus on sources that give honest and independent opinions (like you do) instead of listening to consultants who will take no risk and bleat out narrative BS like “inflation appears to be transitory.” Please keep it coming!
Economic data in particular is challenging to use properly, in part because it is extremely easy to extend the analysis past the point of logical support. The media both corporate and alternative frequently gets caught up in the headline numbers without drilling into the underlying data, which is where the real meat of the story lies.
Excluding food and energy from the overall inflation calculation is absolutely ludicrous and disingenuous to say the least! What a scam to fool the mostly unaware masses.
There is a clarification that should be made here.
Food and energy are not "excluded" from overall inflation, not in the Consumer Price Index nor in the Producer Price Index. Rather, because food and energy historically are far more volatile and price-sensitive than the rest of the categories within the CPI and PPI, the Fed has adopted the position that "core" inflation--in essence the CPI or PPI without the food and energy categories included--yields a more accurate perspective how monetary pressures are causing inflation. Consequently, the Bureau of Labor Statistics reports both the overall indices and then the "core" components of those indices when they do their monthly summaries.
Within a monetarist view on inflation, this argument makes sense and is not without merit. The problem we have here is that monetarist theory simply does not fit the current situation. The primary drivers of the inflation we see are not monetary in nature, but are instead the result of a series of exogenous supply shocks which are disrupting the flow of goods.
Consequently, the significance of "core" inflation is all but eliminated in the current situation.
My fault for saying "overall" inflation. Imho they need to be added to the "core" inflation metric no matter the volatility of that group.It seems food and energy expenditures have steadily risen over the years even without the out of the blue supply shocks.Also the deliberate debasing of the dollar since inception should also be taken into account ,aka stealth inflation tax on the common man.Plus Social Security recipients have been getting screwed over the years due to the phony inflation calculation! Just my lousy two cents worth. Enjoy your articles! Have a good one!
The degree to which the Consumer Price Index accurately captures inflation's impact is a topic of considerable heated discussion and debate.
One reason economist John Williams began producing his Shadowstats series of alternate metrics for things like inflation is because of the degree to which the CPI has been manipulated politically to understate the effects of rising prices, and he has a point.
I use the CPI and its companion index, the Personal Consumption Expenditures (PCE) index, for the simple reason that these are the data sets the Fed claims to use in its decision-making. These are the "official" numbers, and in order to interrogate government policies on matters like inflation, one has to work with the same data.
We should also keep in mind that inflation, while lower than it has been recently, has been a consistent phenomenon from even before the Volcker Recession. Sub 2% inflation year on year, extended over ten and twenty years, produces a considerable degradation in purchasing power by that 20th year. Which means you are correct about food and energy prices--they have risen steadily over the years. Even within the CPI that reality is indisputable.
Yet perhaps the greatest challenge in examining inflation is grappling with the complex nature of price dynamics and price discovery within the marketplace. Not all price rises are due to expansion of the money supply or changes in money velocity--which means that we must either consider various external economic shocks to be a phenomenon other than inflation or we must realize that the monetarist mantra, Milton Friedman's oft-repeated aphorism that inflation is everywhere and always a monetary phenomenon, is fundamentally incorrect.
The economic reality for everyone is that we respond to price rises in largely the same way regardless of the reason for the price hike. If the price of gasoline jumps overnight by a dollar it does not matter that the reason for the hike was the sudden scarcity of gasoline or the sudden increase in dollars in people's wallets available for gasoline purchase. To the consumer looking to fill his gas tank both price hikes look the same, but one is directly caused by money supply fluctuations and one is not.
I take the view that price changes == inflation/disinflation/deflation. I am not a doctrinal monetarist, simply because the extravagant money supply increases of recent years do not have corresponding price hikes--which monetary theory states they must have. Even Shadowstats publicly available inflation metrics do not show changes in inflation that correspond to the Fed's magic money printing since 2008, which is immediately proof that Friedman's view of inflation cannot be correct; inflation cannot be a purely monetary phenomenon when the doubling and tripling of the money supply fails to produce a doubling and tripling of the rate of inflation.
In fact, much of my criticism of the Fed's recent interest rate hikes to choke off the inflation the CPI does report stems from the lack of observable impacts on inflation. Inflation has gotten worse even as the Fed has raised interest rates from near zero to 2.5% over the past few months. We must either conclude that the Fed has not raised rates nearly enough, that there should have been multi-percentage point increases rather than mere fractions of a percentage point, or that inflation is not responding to the interest rate hikes at all. Currently, I subscribe to the latter interpretation.
In my estimation, the corporate media and the government focuses far too much on the headline inflation number and not nearly enough attention on the disparities in inflation rates within the components that make up the CPI. Inflation does not hit all products equally, and the volatility we see in food and energy prices is a prime example of this. It is my contention that these distortion of prices due to inflation are where the real economic damage arises. It is these distortions that result in consumers paying more and buying less--not just of the goods with the extreme price increases but all goods.
Is the government treating inflation honestly and intelligently? No. The CPI and PCE indices are politically manipulated to understate inflation. Yet even as manipulated as these indices are, they can still illuminate much about ongoing price dynamics. Even if the overall inflation rate is understated, we can still see and examine the distortions presented by the CPI. We can still equate the current 11% food price inflation rate with increases in food insecurity and even hunger. We can still assess the economic impacts of so-called "stimulus" measures by the government to goose the economy.
I'm glad you enjoy my articles. Thank you.
Well stated and spot on! Thanks for the detailed insightful reply! Have a great weekend!
What bugs me most is that every member of the Federal Reserve Board is essentially saying: "We have to violate one of our mandates in order to fulfill the other. Please avert your prying eyes."
The irony is that in violating the one mandate they are NOT fulfilling the other.
Placing current inflation on an “apples to apples” basis to make historical comparisons: if today’s inflation rate were calculated using the same methodology that was used in the Carter years, today’s inflation rate would be approximately 17%.
http://www.shadowstats.com/alternate_data/inflation-charts
That certainly is the claim John Williams makes. Unfortunately, his data sets and computations are proprietary, which makes full scrutiny of his numbers impossible.
I will point out that his own narrative of his CPI calculations includes adjustments and calculations which were NOT part of pre 1990s CPI calculations, which inherently invites a certain skepticism about his numbers.
However, even Shadowstats does not fully capture the "true" impact of consumer price inflation for everyone. It can't. America is too geographically and economically diverse for any single price metric to adequately portray price levels nationwide.
What inflation indices tell us most accurately are general inflation trends at a macroeconomic level. What is relevant about the August inflation number is not that it's 8.3%, but that it's at best a marginal and even statistically insignificant decrease YoY. In this regard, even shadowstats numbers yield that same result.
Which is not to disparage Shadowstats, but to highlight the practical limitations of all economic datasets.
Thank you for pointing these things out! As I’ve told you before, I am not an economist. I am simply a businessman trying my best to stay informed so I can navigate current conditions and reasonably anticipate what’s to come (or what is not to come). I am trying to focus on sources that give honest and independent opinions (like you do) instead of listening to consultants who will take no risk and bleat out narrative BS like “inflation appears to be transitory.” Please keep it coming!
Thanks for the kind words.
Economic data in particular is challenging to use properly, in part because it is extremely easy to extend the analysis past the point of logical support. The media both corporate and alternative frequently gets caught up in the headline numbers without drilling into the underlying data, which is where the real meat of the story lies.