US CPI Inflation and Our Inflation Index

February 16, 2011 by Roberto Rigobon Leave a reply »

We have received a lot of emails regarding our index and what it implies for US inflation. In other words, is it time to panic or not? We are showing a lot of inflation in our retailers and the question is if this implies tomorrow the BLS is going to announce the end of the world as we know it.

Well, I will not answer that question directly. There are important things to remember, though. First, our index is not meant to predict the release the BLS does (and will do tomorrow at 8:30). Second, our index is based on online retailers, and the CPI is broader and has many sectors we cannot monitor online (yet!). Third, because we are protecting the companies from which we collect information we cannot reveal which retailers are included, nor the weights. Which makes our index less transparent, but until we incorporate more companies, we will keep it that way.

What does this mean? Our index, as presently constructed, is an “alternative” measure of US inflation, and if you are planning on trading — uniquely basing your decision on this index — I think you will be making a mistake. This is information that should be used as a complement to the macro models used in financial institutions. In other words, this is ONE additional piece of information (a useful and relevant one), but it is not THE ONLY piece of information.

We have constructed tracking indexes of the US CPI announcement, as well as those announcements in other developed economies. Those indexes are not published in this page. We are planning to construct those tracking indexes in as many countries as we can reliably construct them, and I promise we are trying to find a way to distribute that information so they can be used by all. I hope we can make the announcement soon – mid march possibly.

So, going back to the initial question, should we panic or not? well, I leave that to you. I hope the information we produce can allow you to make a better decision, but please, do not assume this index is a substitute for a formal decision process.

  1. William says:

    Roberto,

    Thanks for adding back in the CPI it gives a good comparison to MIT when I show the two measures to my macro classes. Interesting all the conspiracy inflation theories out there.

    First, you can’t annualize January inflation data since January, and February to a lesser extent, are the months that merchants raise prices for the year with Novemeber and December being the reduced price months. Y/Y is the only reliable data which also avoids the problem of SA.

    Second, the chance of the USA going to hyperinflation is as close to 0% as you can get provided we don’t become Luddites or move to a balanced trade position…both of which would be highly inflationary. If China is branded a currency manipulator (along with the other 90 countries we run -Xn against) then, and only then, would inflation explode. On the other hand techonology, coupled with -Xn, outsourcing, and global wage arbitrage are all highly deflationary…which describles to a ‘T’ our current environment.

    Third, if you were Bernanke What would you do? Underemployment is 16%, and core is 1% with 0% short interest rates–QE is his only option…these look like deflationary not inflationary numbers to me. Given that gold is in an epic bubble (since 2002) and should be selling for $150 and ounce a major bear market correction of 90% should take it down to where it belongs. Notice the price of JJC lately? Dr. Copper is suggesting the patient (economy) is about to get deflationary sick again real soon.

    Putting it all together, after our negative Feb. employment report coupled with MIT data and the breakdown in JCC I’ve allocated 70% to TLT, and 30% to TIP with not a $.01 to common stocks for the month.

    • Gabe says:

      “First, you can’t annualize January inflation data since January, and February to a lesser extent,” –

      Well I hoped no one noticed, but my calculation was way off anyway…it only comes out to about 6% when you annualize the ytd #. So I was way wrong. Not the first time :)

      “Third, if you were Bernanke What would you do? Underemployment is 16%, and core is 1% with 0% short interest rates–QE is his only option”…

      I’ll admit what I’d do…I’d front run the shit out of my monterary policy decisions if I were Ben. Of course he can’t do it for his own account, but through less conspicuous means.

      I really don’t even think Ben is doing that, he is to dopey and naive. I DO think that the people with real power use inside info fromt he fed to front run the hell out of the public though.

      Given that I am not Bernanke and I know he is an employee of others to make sure certain banks make a lot of money…well the mos I can hope for is that he sticks with following his own stupid advice written in his books and articles(which i have read pretty much everyone of)….and that advice can be boiled down to this. If there is a supply shock, then QE. If there is a slow down in the economy, then QE. If the stock market goes down, then QE. If JP Morgan has a bad earnings reprot then QE again. If you need to play with the hedonics adjsuter, or the substitution affect or target inflation indexes(instead of inflation rates) then do so. If you run out of interest rate cutting room then buy longer term bonds, buy corporate bonds, buy stocks, buy mortgages….ifr all of that doesn’t magicalyl create economic growth then drop money from helicopters.

      His faith in the goody goodness of monetary expansion is unquestionable. His ideas on how real wealth are created are not much expounded on.

  2. Larry F says:

    Well no answer from the administrators of this project regarding the sudden removal of the China chart and then the sudden removal of the official CPI figures. I used to think this project had some credibility, now I doubt even if the data they report is even true. This project was a fantastic idea, but is useless now, nothing more than a sellout to government funding. Why even continue doing this? We already have phony CPI data we don’t need your phony data as well.

  3. Rob says:

    The MIT daily online USA price index chart mimics the Standard Poors 500 (.SPX) stock index with a bit of lead lag. (as does 70% of all stocks on US exchanges).
    Seems like an easier guide to generate with only 500 inputs.
    I like The Economist’s inflation index which uses the cost of a BIG MAC in each country it tracks.

  4. Ezequiel says:

    Is it possible to get the data? The graphs tools seem very useful, but I would like to do some more sophisticated statistics.

    Thank you

  5. ARNO says:

    Like many other commentators, I would be interested as well to know why you took out the blue CPI number relative to the red BPP number? We all know they are different numbers and I thought you had enough disclaimer
    for any confusion not to be made. Removing those without warning/explanation only give arguments to conspiracy theorists/panicky people. It makes the lonely red BPP icon look silly as well. Oh look, I can make the BPP series disappear ! How useful !

    • Gabe says:

      ARNO–crickets.

      We have to think for ourselves. The Federal Reserve recently became THE BIGGEST purchaser and owner of government bonds…surpassing China in purchases and total owned.

      This means our government is down to one last option for financing it’s huge debts…monetization and it is occurring right now.

      Yes it is hard to believe what has happened to America and it would be nice to have someone like a MIT economist confirm our thoughts…but come on, you are a big boy. You know what is coming. This doesn’t end well for the dollar. No fiat currency has ever lasted more than a century or so…especially when government issuing the fiat has debt that is much greater than 100% of GDP.

      The mainstream economist who think seignorage is good idea are not going to admit they are wrong about supporting the central banks all these years.

      You watch, when the dollar dies, they will insist it is because we need an even MORE powerful international central bank. just watch.

    • ARNO says:

      Gabe,
      This is Your government and Your dollars, I’m not involved, quite luckily I have to say. Nonetheless, thanks for proving my point about the conspiracy theorists.
      Regards

    • Gabe says:

      I know these types of guys. They dream of being employed tax free by the IMF/World Bank or the Federal Reserve. They don’t want to get dragged into discussions about problems with the financial oligarchy and they don’t want to embarrass the people they hope to work for.

  6. Mike McCune says:

    Mr. Rigobon, Does your index capture a net present value of losses in pensions that are or will be restructured? And, the CPI-U is now above it’s former high point reached in July ’08; do you have an opinion as to growth rates for our economy at this level of cost? Thank you. -Mike M.

    • Gabe says:

      This is the first time I have not seen the index updated in more than 2 days. Hope it returns soon.

      Are changes to the index being pondered?

  7. Gabe says:

    100 oz Silver bars are selling out all over.

    Anualized inflation since Jan 1 on this site is over 20%. Use the CPI stats with caution.

    • Gabe says:

      Leaving your money in TIPS is not inflation protection. I feel bad for people who think that is protection.

  8. Clay M. Dean says:

    This is very interesting. If you look at inflation less from a price perspective and more from a purchasing power perspective then I would argue housing prices are meaningless to most people who have fixed mortgages and fixed mortgage payments. Taxes and insurance costs go up, which get passed through, but in a world where the currency is being actively devalued, how can we not see that as inflationary?

    In the midwest where I live, housing prices may be flat (and still declining) but land prices are soaring along with other commodity prices to a degree where it is becoming questionable as to whether or not farmland can even cash flow at current rents/prices. Government ethanol subsidies have been lifting prices but more importantly, there is little in storage and ever increasing demand despite prices. This was a year with a relatively bumper crop (especially for beans in some areas) and still prices climbed 60%. What happens next year if there is bad weather (which we’re already worrying about) or further lack of supply?

    I wonder if your index accounts for booze prices? Recently I returned to the east coast to visit my favorite French restaurant (in New Haven) ordered my usual martini and received a glass that was much smaller to the giant ones I was accustomed to seeing. When I inquried about this change (thinking maybe my lack of recent business or my behavior had caused this situation) the barman told me that not only was the glass smaller but so was the pour. More frightening than that, though, was the fact that I was the first person in two months who had noticed. This is proof that not only are we experiencing inflation but that we are somehow not cognizant of it….

  9. William says:

    Gabe,

    I use MIT y/y USA is a subtraction from the monthly employment report ave hourly earning to determine real wage. Paradoxically the higher MIT the lower real pay and thus lower real GDP making 30 yr TIPS…a proxy for GDP trend line, more attractive.

    To answer your question on allocation which changes each month.

    0% Gold–don’t hold it an any form.
    20% Utility stocks
    80% Bonds–bulk in TIPS & straight UST

    I’ll play with tech stocks and gold once the 10 yr. ma on the 10 yr UST is below the current yield and not a day before…until then it’s depression city.

    Gold…The Ultimate Bubble

    • Gabe says:

      I understand the allure of TIPS, but I can’t get over the fact that you are left in a position of having to trust the government to not monkey with the CPI(as the coupons are linked to a number they are free to manipulate). Kinda like lending chickens to a fox.

  10. Adam's Myth says:

    Why have you removed the blue CPI chart? Do you think it invites a comparison that would not be legitimate?

  11. William says:

    Yes, MIT and CPI are not comparable. The major difference, as I see it, is that MIT has 0% weigthing in housing/ORE, while the CPI weighting is 30% of the all goods number.

    Should dwelling be part of an inflation number–of course, so if you need to take one number to the bank it’s CPI. Given that housing prices will be going no where fast (Shilling projects a further 20+% decline) there is no reason to ‘panic’ as one comment suggested.

    However, given that housing lags, MIT is a very nice ‘flash’ number so keep up the good work gentlemen, and oh yes by the way, I have (contrary to your recommendation) incorporated MIT USA into my asset allocation model–forward looking and smooth.

    • Gabe says:

      William,
      How much of your asset allocation is in precious metals? How much of that is physical and not paper?

      Gabe

  12. Gabe says:

    MIT gets a lot of Federal funding. They don’t want to embarass them too badly.

    • Gabe says:

      Next will you start adding in the substition effect? Hamburger gets expensive so people substitute with cat food?

      Hedonics too? Corn and soybeans can double in price, but IPhones have tripled the GB so the new adjusted index will show that prices are decreasing.

      We need experts to let us know that the standard of living is actually getting better, can’t just look at simple averages of prices…people might get the wrong idea.

  13. RC says:

    Why did you suddenly take out the blue CPI number relative to the red BPP number?

    • Larry F says:

      Yes I would like to known the answer to this question as well. Also, when will the China chart be back? Remind me again why you removed it in the first place?

  14. Gabe says:

    The Argentine government lies and so does ours. Brandon knows it and so does anyone else who has studied the government stats.

    Mao’s China had “record crops” while 60 million starved to death according to the “official stats” at the time.

    All governments lie. We don’t need MIT to tell us that.

    Real interes rates have been negative for many months now. Cotton, Silver, Corn, Wheat, Rice, Soybeans,Dairy, Pork, Beef, Oil are all up over 100%.

    This useful MIT data set is only confirmation of what we know to be true. Easy money leads to a decline in the value of fiat currency.

    Central Banks, governments and their propagandists will try to deflect blame towards causes other than monetary policy. Global Warming, Terror threats, Islamic Jihad, China, greedy speculators. Any of these excuses can be used to increase the power of those who led us to current conditions.

    It is not time to panic. It is time to continue to accumulate physical silver and to overthrow the central banks who want to continue to dominate us.

    JP Morgan stole trillions from the people with the help of the banksters and as MIT’s own Simon Johnson says:(paraphrased) the problems will not end until the oligarchy is displaced.

    This is not Left vs Right. That is a paradigm used to confuse the week minded. This is the Oligarchy vs you.

    Thanks for the index Roberto Rigobon! Please let us know if you start to feel heat from someone for publishing this data.

  15. Brandon says:

    I noticed in your paper that you were confident the BPP provided an accurate assessment of prices in Argentina (somewhere around 17% inflation) even though the official report was around 9%, rationalizing that the official numbers were widely discredited and false. In a way, BPP might serve to discredit BLS CPI in the same manner.

    • Roberto Rigobon says:

      Thanks for your question…
      There is an important difference between what we do here and what we decided to do in Argentina. In Argentina we took the basket of basic goods that the government uses to assess the impact of inflation on the poorest. Because the items and the weights of the items in that basket are public information, what we did was to compute the average inflation of the basket using the prices we collect, and compare it to the official.
      So, here we have a direct comparison. And therefore, we can show that the Argentinean government is manipulating the statistics.
      In the US we are not performing such exercise. We are just reporting the inflation from our retailers, and comparing it to the official one. They are different basket, and they should have different inflation rates. They should be close but they can’t be identical.
      Does this clarify the differences?

    • Brandon says:

      Understanding that they’re different, what I’m curious about is the relative integrity of the BPP index vs. CPI. There are a number of people out there apparently hungry for some alternative measure of inflation (e.g. Shadowstats using the old Carter-era CPI calculation techniques w/ gov’t data). The BPP seems to be the purest attempt to track inflation without using government data and without BLS methodology. If you took the data you scrape and categorized some of that data along the lines of a CPI component, how would BPP measure up against that component? I.e., what would it look like if you did an analysis against the U.S. (even if only partial) as you did for Argentina?

    • Roberto Rigobon says:

      This is a very good question, and we are constructing the sectorial indexes to do such evaluation across all countries. this needs a lot of data though. in other words, to be able to say statistically that there is a significant difference across indexes we need several years of data. but we will do it, and i promise we will publish the paper/results in this web page.
      thanks again for your questions… and comments.

    • Brandon says:

      Your hard work and ingenuity is much appreciated, even from armchair quarterbacks.

  16. Charlie says:

    Well, that certainly clears things up. Panic!