CPI: Camouflaging Price Increase

August 18, 2004

Either some journalists have no idea of math or economic numbers, or persistent general price increases do not make good headlines when wages are stagnant.

Yesterday the Bureau of Labor Statistics (BLS) published the newest Consumer Price Index (CPI). Today some media come up with these headlines:

The Journal News – Prices drop in July
Independent – US prices fall as housing market grows
Forbes – Consumer Prices Decline, Housing Rebounds
Reuters – Consumer Prices Drop, Industry Output Up
Toronto Star – US consumer prices dip

These headlines contradict what US friends tell me. What happened? Picked up BLS table CUUR0000SA0 (Not seasonally adjusted, U.S. city average, All items) and crunched it to show the year-over-year inflation rate:

The inflationary year-over-year increase in consumer prices, as measured by the BLS, was 3,0% for July 2004 – slightly smaller than the 3.3% y-o-y increase for June 2004.

BTW: There are valid reasons to believe, that the CPI, as measured by the government, is significantly smaller than the inflation that actually occurs. Well, if you would have to increase your payments for social security recipients, veterans, interests for TIPS-bonds etc. in line with the CPI increases, would you not like to tweak the numbers down a little bit?

Posted by b on August 18, 2004 at 11:10 UTC | Permalink

Comments

Bernhard, this has been touched upon not so long ago (by Billmon? can’t bother to check), but journalists seem to have difficulty grasping the difference between a decrease in the “stock” or underlying variable, and a increase of its “variation” or rate of change/derivative.
Supposing that the numbers in your graph are correct, price inflation (the derivative) did indeed go down in July, but prices (the underlying variable) went up.
We talk so much about inflation that it has become in many discourses to prices, thus “price went down” instead of “inflation went down”
But, but, math is sooo hard…

Posted by: Jérôme | Aug 18 2004 14:27 utc | 1

Why is it my eye’s glaze over when seeing graph’s and charts and statistics?
Could it be as Mark Twain said,
“Most people use statistics the way a drunkard uses a lamp post, more for support than illumination.” and years upon years of lying using same?

Posted by: Uncle $cam | Aug 18 2004 14:35 utc | 2

Exactly, Jérôme. That said, when inflation actually goes down and you have a real deflation, economists and markets act panicked as well, so the main powers behind the economy actually don’t want to see prices drop. Bottom line: whatever happens, the average citizen-customer gets screwed.

Posted by: Clueless Joe | Aug 18 2004 20:27 utc | 3

@Clueless Joe
How does the average citizen gets screwed by deflation?

Posted by: b | Aug 18 2004 20:31 utc | 4

Barnhard: What better excuse do you need to lower wages?

Posted by: CluelessJoe | Aug 19 2004 8:12 utc | 5

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