Inflation Returns. Just Don't Tell The BLS

July Summary A Reminder Of Why The Rule Of Thumb Is YMMV

According to the July Consumer Price Index Summary, consumer price inflation rose year on year a little, while core inflation fell year on year a little.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.

The all items index increased 3.2 percent for the 12 months ending July, slightly more than the 3.0-percent increase for the 12 months ending in June. The all items less food and energy index rose 4.7 percent over the last 12 months. The energy index decreased 12.5 percent for the 12 months ending July, and the food index increased 4.9 percent over the last year.

At this point I will remind readers of a point I made last week: Your mileage will vary.

Keeping It Real: Understanding Income And Inflation

We do well to be mindful of these various and shifting contexts when we look any economic data, whether for a state, for the United States, or for the world as a whole. Not only is the rule “your mileage may vary”, it is almost mathematically certain that your mileage will vary.

We need to be mindful of this because we are faced with aspects of the Consumer Price Index that are at the very least difficult to reconcile to observed prices in the real world.

If we look at just the top level numbers, the inflation report does not seem to be all that bad. It could even be considered somewhat good.

Certainly, that was the corporate media take on the numbers, which looked for the silver lining in headline inflation’s uptick.

Consumer prices in July rose 3.2% from a year ago. The annual inflation rate inched up after falling steadily for the last 12 months.

Despite the uptick in inflation, it's still a modest acceleration and was within what analysts had expected.

The “expert” assessment was that inflation trends were still heading in the right direction.

Analysts had expected the increase in the headline rate, after relatively weak price inflation last July.

But that said the report from the US Labor Department offered other signs that price increases were subsiding.

"Underlying inflation is heading in the right direction," said Hussain Mehdi, macro and investment strategist for HSBC Asset Management, while Harvard economist Jason Furman called the latest figures "unambiguously good news".

Naturally, Dementia Joe’s handlers felt compelled to tweet out yet another undeserved victory lap for “Bidenomics”.

However, when we dig into the numbers a bit, we run into a few challenges with the data. Claiming bragging rights for “Bidenomics” is, to be generous, unjustified.

Let’s start by looking at the energy price index.

If we look at the month on month percent change—the month on month inflation rate—we see the BLS telling us that energy prices rose 0.6% on a seasonally adjusted basis in June, and 0.1% in July.

If we look at just energy commodities, the index increases are a little higher—0.8% in June and 0.3% in July.

There is, however, a small problem with these percentages: actual energy prices rose by a good deal more than that in July.

There is no disputing that energy prices rose in July. Even the spot price data from the Energy Information Administration confirms this to be the case.

Crude prices rose in June and July.

Gasoline and diesel fuel prices moved up in June and July as well.

If we index the EIA spot price data to the beginning of June, we get percentage price increases that are considerably more than what appears in the energy price index or the energy commodities price index.

Based on the spot price for crude, there was almost no price increase in June, and more than a 16% price increase in July.

Gasoline prices also increased, albeit by varying amounts, as did diesel. Gasoline fell by 2% in June according to the New York Harbor spot price, but rose 2.7% in June according the Gulf Coast spot price. Reformulated gasoline in Los Angeles rose almost 10% in June. For July the New York Harbor spot price increased by another 10%, while the Gulf Coast spot price rose by another 23%. The reformulated prices in LA in July rose another 10%.

Diesel prices were similarly higher: New York Harbor showed 6.5% increase in June, and 22.3% in July. Gulf Coast diesel prices rose 4.9% in June and another 24.9% in July. Los Angeles spot prices rose 11.7% in June and 29.6% in July.

Even market prices for Brent and West Texas Intermediate crude show a vastly different percentage change for June and July than is being reported by the BLS.

The energy price indices are not reflecting the behavior observed at the pump for June and July. The EIA spot prices for crude track more or less to the market prices, but the BLS energy price index does not reconcile to either.

Even breaking out the various energy components does not get us much closer to understanding the BLS price metrics for energy. While it does appear that electricity rates in the US are making a significant contribution to the low numbers for the overall energy price index, the indices for motor fuel and fuel oil do not reconcile to the spot prices recorded by the EIA. We’re just not getting there from here.

There is more than a small case to be made that the energy price index recorded by the BLS is off potentially by several percentage points.

If your own observations at the gas pump show a greater price increase than what the BLS energy commodities index shows, trust your observations, not the energy price index reported by the BLS.

Food price inflation is a somewhat more muddled picture. Ironically, this tends to make the underlying data more credible.

As I detailed last night, grocery prices in the US have risen slightly—either risen or remained more or less constant.

Inflation, Disinflation, or Deflation?

We see this when we look at the independent grocery data organized and maintained by analytics firm Datasembly.

We see a somewhat similar picture when we look at the food price inflation sub-indices within the CPI.

While some aspects of food price inflation are worse in July than they were in June, others are still improved. This is more or less what we see with the Datasembly data.

While the food price inflation data is muddled within the CPI data set, it is at least broadly consistent.

Let’s round this out by casting a somewhat wider net, and consider the CPI inflation metrics in light of an alternative price and inflation metric.

If we compare the BLS CPI numbers to the Everyday Price Index maintained by Peter Earle of the American Institute for Economic Research, we see an alternate view of consumer price inflation which argues inflation has been both higher and lower than the CPI metrics indicate.

Year on year, the EPI declined in July by 0.05%, after shrinking by 0.98% in June.

Month on month, however, the overall EPI rose by 0.34% in July, after posting a rise of 0.04% in June.

The EPI as a rule tends to be more volatile than the CPI, even with food and energy factored in. It should not surprise us, therefore, to see that the EPI prints divergent numbers for year on year and month on month price inflation.

Still, the EPI numbers help bolster the case that “actual” consumer price inflation for the month of July was significantly higher than reported by the BLS.

When we look across the totality of inflation and price data, not just from the BLS but from other sources as well, we see a considerably divergent set of pictures on consumer price inflation.

According to the EPI, the United States actually saw year on year consumer price deflation in July (with the Producer Price Index data for July due out shortly, I expect I will have more to say about deflation in the US economy tomorrow). At the same time, the EPI posted a month on month inflation metric for July that is significantly higher than the “official” CPI month on month inflation metric.

Energy price inflation was almost insignificant according to the CPI, but when we look at the spot prices for various energy commodities, we get a picture of energy price inflation that is significantly more pronounced. Our inflation perspective shifts when we are gauging the actual price data as opposed to the BLS defined metrics. The energy price index very likely understates the rate of true energy price inflation in this country, which also means that overall inflation could be understated somewhat as well—which is also implied by the Cleveland Fed’s InflationNow nowcasting July inflation at 0.41%, rather than the reported 0.2%.

How do we know which one to trust? How do we know which numbers are the best representation of actual price shifts in the US economy?

Quite simply, we don’t. Nor should we worry about which metric is the “best”. The various metrics we have on inflation—including economist John Williams’ ShadowStats alternate inflation indices—give us a certain confirmation of the broader trends visible in the “official” data. Regardless of which data set we use, one point is always clear: consumer price inflation rose in July. The question that matters going forward is whether the July increase is a reversal of disiinflationary and deflationary trends of the past several months, or is merely a momentary hiccup in those trends. From a macroeconomic perspective, the trend is far more important than the discrete data points.

Still, between the EPI and the discrepancies in energy price inflation, there is little doubt but that the margin of error in the CPI measurements for July is significantly wider than we might assume for earlier months. We should not take the CPI at face value and presume prices rose by the percentages reported in the CPI; it is quite clear just from observed energy price data that this is not the case.

Moreover, that same observed energy price data strongly suggests that energy price inflation could become a significant factor in the overall inflation picture over the next few months. Energy price inflation is poised to pull the headline inflation metric up—something it has not done for months—as markets digest rising challenges to supply.

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The observed energy price data also reminds us yet again that many of the most significant inflation drivers are not related to demand-side concerns, but to supply side issues. This is particularly true in energy, but arguably is also true in food prices, and other areas as well. We do well to be mindful of this, as the influence of supply-side over demand-side factors is a gauge of how much the Federal Reserve can bring down inflation rates with its strategy of trying to push up interest rates.

Is inflation coming down in the United States? For some people in some areas, probably. For other people in other areas, inflation is potentially getting worse. Your mileage may vary.

Is inflation “heading in the right direction”? Ultimately, the most likely answer is “probably not.” Energy price inflation is on the rise, and is will continue to rise as long as oil prices trend up. Food price inflation may also prove to be on the rise, which would be a particularly distressing data point, as food price inflation overall is still considerably higher than either headline or core inflation (and today’s food price inflation is tomorrow’s food insecurity).

Contrary to the Federal Reserve, the Biden Regime, and the corporate media, inflation is far from being under control. It is for now lower than it has been, but that is all that may be said about consumer price inflation in the US. It certainly cannot be said with confidence that consumer price inflation will be lower tomorrow than it is today—we may find the exact opposite to be the case.