Unfortunately, "Core" Inflation Doesn't Work
in Either Your Stomach or Your Gas Tank!
by Doug Gillespie, Executive Editor
Gillespie Research
May 25, 2005
Summary
On back-to-back days last week, the Labor Department released reports on producer price and consumer price behavior during April. These releases served to make a larger (and ever growing) number of people I know even more "irritated" (euphemism for materially stronger emotions couched in much worse language) about being preached to about "core" inflation.
Overview
For people who do not eat, heat, air condition, drive a car or use public transportation, the "official" U.S. inflation data of the past several months have not been as bad as they have for people who engage in the forgoing. Trouble is, people in the real world regularly engage in those activities!
This clearly explains why people are becoming increasingly perturbed at how big a deal Wall Street -- and the Federal Reserve, too -- make of the difference between inflation results that are computed and expressed both ways, but most particularly, with the inordinate emphasis that is placed on the so-called "core" results. And this does not take into account how few people think that even the higher set of numbers vaguely reflects their own experience.
(As a reference point for what consumers "are told," versus something much closer to what they actually "feel" regarding inflation, have a look at the graph [dark line] on the home page of John Williams Shadow Government Statistics. In addition, later in this missive, there are references and links to some exceptionally good, enlightening work John Williams has done on this subject.)
The government has taken great pains -- over the last decade, in particular -- to advance a new body of math and the language to support it that, in turn, have led more and more people to distrust government economic data to a greater and greater degree. For example, what could be more Orwellean-like doublespeak than something like "Owners' Imputed Rental Value"?
Inflation definitely has been trending up in recent months. Even the minutes of the Federal Open Market Committee meeting of 5/3, released yesterday, acknowledged this. Per those minutes:
"U.S. consumer price inflation firmed in recent months as energy prices rose sharply. Core consumer prices also rose a bit more rapidly recently, but the increase over the twelve months ending in March was little different than over the year-earlier period. According to survey information, expectations of near-term inflation picked up in March, consistent with the increase in energy prices."
However, from a later section of the same minutes:
"Earlier increases in energy prices seemed to be an important factor contributing to an uptick in core inflation and a slower pace of economic activity. With energy prices leveling out more recently, however, and the behavior of compensation suggesting a lack of pressure in labor markets, underlying inflation appeared to remain contained."
As you can readily see, Greenspan's Fed exercised some circumspection regarding inflation, but it also was careful to offset the expressed concerns with language that would permit Wall Street spin surgeons sufficient latitude to downplay the level of the Fed's concerns.
Let's not forget how much Greenspan worries about the stock market. Remember back to the day of the May meeting of the FOMC (on 5/3). Promptly at 2:15 PM (ET), out came the post-meeting statement. After a short period of backing and filling, stock prices began a substantial decline.
Then, with just a few minutes to go in NYSE trading that day, out came a "corrected" copy of the post-meeting statement, containing a sentence ostensibly inadvertently omitted in the original release. The added sentence resulted in roughly a 50-point turnaround in the DJIA in a very, very short time, with the Dow actually finishing the session with about a five-point gain!
Think what you want about this episode. I know that I think it was absolutely bizarre -- even for Alan Greenspan! (You can refer to "A Little Hanky-Panky at the Federal Reserve Banky?" for some additional thoughts on this peculiar event.)
At any rate, inflation surely has been experiencing an up-tick in recent months, and it shows up clearly in the government's own numbers. Following is a summary of three of the measures we regularly monitor to keep track of the situation. (Refer also to the graph on the home page of the GRA website.)
A Look at the Data
Import Prices
Since the United States produces less and less of what it consumes, keeping tabs of import prices is critical in assessing inflationary pressures, especially considering the additional large decline in the dollar's exchange-rate value in recent years.
On Friday, May 13, the Labor Department reported that import prices rose 0.8% during April, aggravated by a 3.1% increase in petroleum prices. April marked the fourth consecutive month in which import prices were up. April's increase compared with a revised 2.0% rise during March (originally reported as +1.9% in last month's release).
As of April 2005, the year-over-year increase in import prices was 8.1%, versus a substantially lower 4.6% 12-month gain as of April 2004.
The price of petroleum imports rose 3.1% in April, which followed respective revised gains of 5.0% and 12.3% in February and March. (The March increase was reported originally as +10.6%.)
As of April 2005, petroleum import prices were 43.1% above their year earlier level. This compared with a year-over-year rise of a considerably lower 24.5% as of April 2004.
April import prices excluding the petroleum component rose 0.4%, versus a March increase of 0.3% (reported originally as +0.2%). The April gain resulted in a year-over-year rise in this sector of 3.0%. As of April 2004, import prices with petroleum excluded were up 2.4% from a year earlier.
-----------------------------------------------------
U.S. IMPORT PRICES - % CHANGE
(3-Mo.= Three-month Compound Annual Rate)
-----------------------------------------------------
All Imports, Petroleum
All Imports Excl. Petrol. Imports Only
Month/ -------------- --------------- ---------------
Year Mo. 3-Mo. Y/Y Mo. 3-Mo. Y/Y Mo. 3-Mo. Y/Y
-----------------------------------------------------
04/05 0.8 15.8 8.1 0.4 3.2 3.0 3.1 118.1 43.1
03/05 2.0 14.6 7.4 0.3 2.8 2.9 12.3 110.8 38.6
02/05 0.9 0.0 6.1 0.1 3.2 2.8 5.0 -18.3 29.7
01/05 0.6 -4.5 5.7 0.3 6.6 3.1 2.2 -47.4 24.2
-----------------------------------------------------
12/04 -1.4 -0.4 6.7 0.4 4.9 3.7 -11.4 -26.6 30.3
11/04 -0.3 7.5 9.0 0.9 3.6 3.6 -6.0 35.9 54.5
10/04 1.6 15.3 9.9 -0.1 1.2 2.9 11.1 143.7 67.8
=====================================================
04/04 0.2 5.8 4.6 0.3 3.7 2.4 -0.2 23.7 24.5
-----------------------------------------------------
Producer Prices
Last Tuesday (5/17), the Labor Department reported that producer prices rose 0.6% during April. This was materially faster than a consensus estimate that was looking for an increase of 0.4%.
Excluding food and energy, the famous (or infamous) "core rate," the PPI was up 0.3% during April. This was also a faster pace than a consensus estimate that was looking for an increase of 0.2%.
Consumer Prices
Last Wednesday (5/18), the Labor Department reported that consumer prices rose 0.5% during April, a bit higher than the consensus estimate looking for an increase of 0.4%.
There was much better news in the numbers, however, if you don't eat, heat or cool, or drive! According to Labor, the CPI's "core rate," which also excludes food and energy, registered no change during April.
A Closer Look at the PPI and CPI
As discussed at the outset, the methodology now employed with these measures succeeds at blunting the truth about inflationary pressures. Nevertheless, both measures still have shown disquieting strength in recent months, including during April.
(The "Concluding Comments" section of this missive contains two references to work by associate, John Williams, that are very helpful in understanding the history and nature of the methodology changes.)
I have been consistent over the years in expressing the opinion that it is nothing short of moronic to make a big deal of life as a consumer void of price considerations relating to eating, heating, driving, etc., or life as a businessman in which energy prices in particular are taken so lightly.
However, this is done all the time by Wall Street. Well, not quite all the time -- only in instances when the removal of food and energy costs results in more favorable inflation data.
And as an aside, do you imagine that anyone in a position of power at the Federal Reserve really believes this nonsense? If so, the United States is in far greater trouble than is generally realized. On the other hand, can those at the Fed who might fully appreciate how dreadful the accuracy of these numbers is let on? Certainly not in public, which means that monetary policy potentially suffers as a result.
Nevertheless, even the core rates of both the PPI and CPI are showing uncomfortable trends. As of April 2005, the PPI's year-over-year core rate was up 2.6%. The 12-month change as of April of 2004 was 1.4%. As for the CPI, its year-over-year change as of April 2005 was 2.2%, versus 1.8% as of April 2004.
Of course, including food and energy, the comparisons are appreciably worse in both indexes. The PPI, as of April 2005, showed a year-over-year change of 4.8%, versus 3.7% as of April 2004. For the CPI, the April 2005 year-over-year gain was 3.5%, compared with 2.3% in April of last year.
NOTE: The applicable portions of the data shown in the following tables will be posted to the "Data & Charts" section of the GRA website.
Producer Consumer Import
Price Index Price Index Prices
Month/ ----------------------------------------
Year Y/Y L3Mos* Y/Y L3Mos* Y/Y L3Mos*
------------------------------------------------
04/05 4.8% 7.0% 3.5% 6.2% 8.1% 15.0%
03/05 4.9% 5.1% 3.2% 4.3% 7.4% 14.6%
02/05 4.7% 1.1% 2.9% 1.7% 6.1% 0.0%
01/05 4.2% 2.1% 2.9% 1.3% 5.7% -4.5%
12/04 4.4% 7.7% 3.3% 3.4% 6.7% -0.4%
11/04 5.2% 10.1% 3.6% 4.1% 9.0% 7.5%
================================================
04/04 3.7% 4.7% 2.3% 3.9% 4.6% 5.8%
------------------------------------------------
*Trailing three-month com-
pound annual rate of change.
------------------------------------------------
Producer Price Index
(Finished Goods
-- Y/Y Change
---------------------------
Excl. Food
Year All Items & Energy
---------------------------
2005 -- 4 Months
----------------
[1] 1.8% 1.4%
[2] 5.5% 4.3%
===========================
2004 4.3% 2.2%
2003 4.0% 1.0%
2002 1.2% -0.6%
2001 -1.8% 1.0%
2000 4.1% 1.6%
---------------------------
Consumer Price Index
(All Urban,
All Items)
-- Y/Y Change
---------------------------
Excl. Food
Year All Items & Energy
---------------------------
2005 -- 4 Months
----------------
[1] 1.6% 0.9%
[2] 4.7% 2.6%
===========================
2004 3.4% 2.2%
2003 1.9% 1.1%
2002 2.4% 2.0%
2001 1.5% 2.7%
2000 3.4% 2.6%
---------------------------
[1]Nonannualized.
[2]Annualized.
---------------------------
Concluding Comments
Sometime over the next few weeks, John Williams and I will be communicating some rather important developments relating to our joint research activities. We feel strongly that these will further enhance our ability to deliver straightforward, timely and intellectually honest economic and financial-market research to our clients -- information absolutely essential to people's economic and investment well-being.
If you would like to be apprised directly of this material when we release it, please use the "Contact Us" link of John's website to provide us with at least your e-mail address. If you are willing to leave a name behind, this would be quite helpful. Databases are a good deal more accurate and efficient to use when e-mail addresses are matched with name entries. Or if you wish, you may e-mail me the information at: drgillespiesr@aol.com.
In addition, John will be publishing a special paper on the federal budget deficit. This work will not be for the faint of heart. However, it is still better to know the truth about this exceptionally disquieting area of the country's financial affairs. A complimentary copy will automatically be sent to everyone leaving behind an e-mail address. Again, simply use the "Contact Us" link of John's website, or e-mail it to me at: drgillespiesr@aol.com.
Within the context of the inflation discussion in the above article, readers will find both of the following articles written by John to be of interest and benefit. The links provided will take your directly to the articles on John's website:
"Consumer Price Index"
"Government Economic Reports: Things You've Suspected but Were Afraid to Ask!"
© 2005 Doug Gillespie
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