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October 20, 2012 – Comments (7)

Gas is $5 in the little town where I live - at least 91 octane, the stuff I have to put in my turbocharged car, is - and CMG's food input costs have gone up 32% in the last year, according to their recent earnings transcript.

Given these facts, I am delighted to learn that inflation is under control.  See, Mr Bernanke uses the 'core' CPI to track this, on the way to accomplishing his quest for low inflation of 2% and sustainable rates of economic growth and structural unemployment.

Core CPI excludes food and energy.  This has always been explained away as being because food and energy prices change a lot - they are 'volatile' - and so they throw off the CPI numbers.

I look at it differently.  I find that food and energy are pretty much the two things that I have to pay for as a consumer - remember, this is the 'consumer' price index.  I have no discretion about whether or not I have to pay for food and energy.  And I don't just mean my electric bill when I say energy; energy costs go into nearly every good and service that I buy. 

Because of these increases in costs, the static, unchanging money that is sitting in my bank savings account can purchase significantly less of the goods I need, than it could last year at this time.  Because of Ben's low rate policy, the money in the savings account doesn't grow.  And also because of his low rate policy, the costs of food and energy are dramatically inflated.

Low rate policy - called fiscal accomodation, or quantitative easing when the goal is to dip the real interest rate below zero - is a property tax.  I suppose we should be happy about it, because it is very progressive tax - it hits hardest where there is most cash on hand, and that's rich folks.  But I'm not happy about it.  It means my optimal strategy is to live hand to mouth and throw free cash into equities because at least they have a chance of keeping up with the inflation rate in their prices.  I don't like that; it makes me feel like I'm being bullied by my feudal lords into doing only what they want with my money.

On the other hand, maybe it's a good thing.  As Devo says, freedom from choice is what you want.

Right? 

7 Comments – Post Your Own

#1) On October 20, 2012 at 4:22 PM, Valyooo (99.55) wrote:

I dont know about you, but this last week I went from bearish, to mega bearish.  I am opening a massive short on the next bounce we see

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#2) On October 20, 2012 at 5:30 PM, ETFsRule (99.94) wrote:

"Core CPI excludes food and energy. This has always been explained away as being because food and energy prices change a lot - they are 'volatile' - and so they throw off the CPI numbers."

The fact that you put "volatile" in quotation marks seems to imply that you don't really believe that food and energy prices are volatile. Is that the case?

In my view, food and energy prices are in fact very volatile, and over time they do not show any significant differences compared to the core CPI. So, in my view it is perfectly reasonable to use core CPI, especially when performing a short-term analysis of inflation.

Graphs:

http://research.stlouisfed.org/fred2/graph/?g=c1t

http://research.stlouisfed.org/fred2/graph/?g=c1u

If I'm missing something please let me know.

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#3) On October 20, 2012 at 7:28 PM, Melaschasm (52.15) wrote:

Food and energy prices are very volatile and should be excluded from short term measurements of inflation.  However, they should be included in long term inflation measurements.  

Given modern farming techniques, food should probably be included in 2+ year measurements of inflation.  Energy may be best suited for 5+ year inflation measurements.  

Since food & energy prices are a fairly small portion of peoples budgets, and thus a small amount of the CPI calculation, including them both in multi-year inflation calculations would not be a bad thing, and would cut down on criticisms of core inflation numbers.

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#4) On October 21, 2012 at 1:12 PM, somrh (83.91) wrote:

1) I think the key question is to what extent the "money supply" or "monetary policy" has an effect on prices. Food and energy prices are affected by other factors other than money supply (say weather trends affecting food output). I'm guessing their volatility has more to do with that than as a monetary phenomenon.

2) It's called a "consumer" price index to distinguish it from, say, a "producers" price index. It's not exactly a cost-of-living index but it occasionally gets substituted as one. And in those cases, the CPI that's often used is the one that includes food and energy, not core.

See here and here.

3) According to theory, the "price level" is a vector; all of our measures of inflation give us a scalar. So I think there will always be room for criticism of the CPI numbers used no matter how they're measured.

4) I think the role of food/energy both as essentials and as their related costs to other things (how much of our economy is a product of the fact that hydrocarbons allow us to ship products from all over the world?) is probably important and may become more important as resources become more costly/difficult to obtain. But I don't see that as a monetary phenomenon. 

5) As for Melaschasm suggestion, I looked at trailing 5Y inflation for both "all items" and "less food and energy". Here's the result (courtesy of data from FRED):

Including food/energy is still pretty well correlated with core CPI when you smooth it out over 5Y periods.

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#5) On October 24, 2012 at 10:19 AM, JaysRage (90.16) wrote:

Any way you slice CPI, it's a poor metric for consumer inflation.   Even if food and gas are included, they aren't weighted to reflect the impact that they have on budgets.   The mortgage/rental portion of the figure is manipulated and also not weighted properly. It's a metric that has no practical application for use in how inflation is really affecting the consumer.   

Mortgage/Rent + food + gas

If you've got small children, include diapers and day care  

 

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#6) On October 24, 2012 at 10:21 AM, JaysRage (90.16) wrote:

Dang, missed a big one....health care....which is also skyrocketing.

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#7) On November 01, 2012 at 1:51 PM, rfaramir (29.43) wrote:

"Because of Ben's low rate policy, the money in the savings account doesn't grow."

Ben hurts us in many ways. By printing new money units without having earned them (as gold miners do), he defrauds all users of that money (us) by reducing its purchasing power. By buying government bonds with that money, he enables the politicians to do more things to us against our will AND drives the interest rate lower, which incentivizes malinvestments and disincentivizes savers.

We shouldn't have a Federal Reserve. It needs to be ended. Use the money of your choice, whatever you and your transaction partner willingly agree on (probably gold or silver or any more convenient currency you believe to be reliably backed by one of them).

But if we're going to have a politically manipulated money supply (bow to current reality), they should at least keep the interest rate above the rate of inflation so savers are not unnecessarily taken advantage of.

"I suppose we should be happy about it, because it is very progressive tax"

No, it hurts us all, and the most vulnerable the hardest, not the most affluent. People with fixed income and 'safe' nest eggs are directly and negatively affected (read: retirees, disabled, widows, child-support receivers). People with the least salary/wage negotiating power have their real income reduced the most (read: the working poor), as prices rise more than their pay does.

That second group is the target of the "full employment" mandate. Not 'target' in the sense of they are being helped the most, but rather that their wages are the targets of real devaluation. By reducing their real wages, more of them can be hired. A better solution than such fraud is just ending minimum wage laws. They only produce unemployment, guaranteed.

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