CPI, Inflation, and Reality

So what do the CPI numbers released yesterday, the inflation that they supposedly measure, and reality all have in common?  Apparently, not much … especially between the first and third.

If you’ve been following my ramblings on the CPI and inflation, you were probably as puzzled as I was yesterday when the BLS released numbers way way WAY  under what you expected.  If you missed the announcement, the official CPI says inflation was only 0.2% for the month of April, with the food and energy prices showing a complete divergence from reality.

CPI and Food Prices

According to the CPI data, food prices only rose a “seasonally adjusted” 0.9% for April.  Yet the report admits that fruit and vegetable prices rose 2% for the MONTH, bread prices rose 1.5% for the MONTH, and milk prices went up 1.2% for the MONTH.  Apparently what brought the official food inflation measure down was the idea that less people are eating out at restaurants, which only grew at 0.3% (still positive though).

The news media is calling this the sharpest food price spike in 18 years, with the official number of “year-over-year (y-o-y)” food price inflation being 5.1%.  That means according to the government, food prices overall were 5.1% more expensive in April 2008 than they were in April 2007. 

My personal y-o-y food price inflation looks a lot more like 12.5%, but I don’t count eating out in that figure because eating out is not a necessity.  In fact, that is where the “give” in the budget is coming from, partly.  Here we do follow the behavior the BLS uses.  However, cutting back on restaurant spending is an EFFECT of inflation, not a component of it.

And I haven’t quite figured out just what this “seasonal adjustment” for food prices is.  Does anyone have a link that explains it in plain English?  In my experience, many food prices go down during the spring because of produce sales.  So shouldn’t a seasonal adjustment for the month of April adjust those numbers UP to compensate for the sales?

CPI and Energy Prices

For those who have argued that the BLS’s CPI numbers are accurate, please explain the energy prices numbers released yesterday to me!  According to the official report, gas prices went DOWN 2% for the month of April after seasonal adjustment.  Of course, before the seasonal adjustment, gas prices show a 5.6% jump … so that must be one (heck) of a seasonal adjustment they made!!

Apparently, the number crunchers at the BLS figure that gas prices always rise in the spring.  So they seem to toss out any price rise for April, even though the Department of Energy and AAA say gas prices rose 10% and 9% respectively for April.  Also according to AAA, gas prices posted record high prices for SIXTEEN days in a row in April.

I have to really wonder what gas stations the CPI survey-takers are filling up at.  I also wonder what kind of discount card they carry … because I want one too!  At the beginning of April, I was grumping about gas being $3.28 per gallon locally.  By the end of April, that was looking good since gas prices were up to $3.49 per gallon.  According to my handy little calculator, which does straight math, that is a 6.4% increase in gas prices for the month of April.

The May numbers ought to be even more interesting, as gas prices have gone from $3.49 per gallon on Monday to $3.68 per gallon last night.  Local gas stations usually don’t raise their prices from Monday to Wednesday … they wait until Thursday night after they close to do the weekend hikes. (note to self: fill up again tonight after work!)

Experts Now Questioning CPI Accurracy

It isn’t just me scratching my head over these numbers that have absolutely nothing to do with my reality.  More and more economic experts are starting to publicly question the CPI methodology for figuring inflation, with the harshest being Bill Gross of Pimco Total Return bond fund calling the CPI

a “con job” that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low. (source here)

These experts not only question the CPI accuracy, they are also questioning the BLS’s unemployment numbers … and suggesting both are “understated” by the government.  The alternative numbers they offer for both statistics suggest the American economy is in deep (doo-doo).  I won’t get into the unemployment numbers today, but I totally agree the CPI numbers are completely wacky and don’t seem to reflect reality, even to the most imaginative mind.

So, what do ya’ll think?  Am I still a “tin-foil hat” nutjob?  And just what is this seasonal adjustment that can swing the gas prices from a 5.6% rise to a 2% decline??  How in the world can the BLS claim gas prices went DOWN?  And that food prices rose less than 1%?  This doesn’t reflect MY reality … does it reflect yours?