“Core” Problems with the CPI

The Consumer Price Index is out just now, but before we get into it, a couple of “core” problems to be considered so you take the data in context.

The first point has to do exactly with the “core.”  The Federal Reserve uses a variant of the CPI called “core.”  It’s the increase (or decline) in prices less food and energy.  From a policy standpoint, I’ve argued for decades that this make little sense.  People don’t spend or engage the economic system based on a bureaucratic metric.  Food and Energy are huge parts of the average American’t budget.

Depending on income, food is likely to be 25-30% and energy?  Well, that depends where you live.  Areas where weather is more variable will pay more than people in low-variance weather regions.

To gauge what the the real inflation number is, a simple method is to visit the Triple A Fuel Gauge report (here).  Their headline is that today’s National Average is $2.8767 a gallon.  A year ago, by AAA’s tally, prices were $2.36.

Divide the first number by the second and drop the one, slide the decimal two places to the right and you have an inflation rate for gasoline: 21.89% -Which we round off to 21.9 percent.

The problem with the Fed’s “core inflation” number is that by failing to AT LEAST PARTIALLY weight in fuel prices, they’re missing a m ajor look-ahead tool.  After all, when the price of gasoline is up 21.9 percent, that means the inflation rate is very likely this fall to begin overshooting the Fed inflation targets.

The mechanics are simple:  As fuel prices go up, everything that uses energy to get goods moved and services delivered, will go up proportionally.

Admittedly, you can’t use unleaded gasoline as your cost-basis.  But, for things like trucking, agriculture, and power generation, diesel prices – up an even 25% year-on-year – is a better metric.

True, some of the fuel price impacts won’t be felt right away.  After all, when a farmer pre-buys 5,000 gallons of diesel to run equipment, it may not be delivered for 6-months or longer – which is the farmer’s planning horizon for next spring’s planting.  What that rolls out as?  Price is set now, delivery is in spring and fall (planting and harvest) and then it finally gets delivered next fall sometime.

Even then, the delay effects (*hysteresis) are significant.  Take deliveries to the frozen foods processors.  Diesel up now, a year to harvest pricing, and then things are flash-frozen (with higher energy prices, we’d expect) and the retail prices of the  frozen goods doesn’t show up for 18-months to 36-months, depending on spoilage and freezer burn limits.

By now, you should be appreciating that energy really matters.  If you’re half of a working couple and you each use one gallon per day for commuting, the energy costs annually (220-day workyear) would be on the order of $227 bucks per year, but it’s the problem in the longer pipeline.

Airline tickets are much more responsive to fuel prices.  Depending whether you’re moving revenue passenger miles (RPM’s) — butts in seats  – or revenue per kilo — freight in the hold – airline economics can see fuel in the 60% range on the P&L.  High energy prices jack up not just the vacation costs, but they also increase costs of rental cars and mess up equipment utilization plans of airlines since passenger load factors are somewhat price-dependent.

I don’t mean to roll off into the weeds like this, but it’s important that we understand that the headline numbers of this morning are not the ones to watch.  Sure, interesting headlines and all.  But, it’s the longer-view and the diffusion of the prices that modifies consumer behavior and that, in turn, drives cyclical economics.

What I think we’ll see in a couple of years is that the modern Fed made a pseudo-mirror of their rate-hikes in 1928.  There were three hikes in the discount rate and by the summer of 1929 we day short-term New York rates zoom up toward 6 percent.  When that happened, things turned ugly when the market peaked in September of ’29.

My sense – and take it for what it’s worth – is that we are just going into the price peak now and it should culminate late this month.  From there, the die will be somewhat cast by the data this morning on “core” inflation, but also by the “street level economics” of how Mr. and Mrs. America try to engage in the most-beneficial consumer behaviors they can.

Seeing that all fuel-intensive operations will have to adjust prices upwards, we can already see things on the horizon like, oh, Amazon having to raise Prime membership this winter.  No-harm, no-foul on them.  It’s just that shipping is some X percent of their operating pro forma.  If the cost of shipping goes up?  Here’s another pass-through.

That’s why I cringe when the Populist Real Estate President starts to bash and allege that the Post Office is somehow underwriting Amazon at the expense of big mall owners who are being killed by online outlets.  Fact is, Amazon’s providers seem to us likely to raise prices next year and, in order to keep Prime a profit center, all that “free shipping” will have to be paid-for somehow.

There are two things that should contribute to a final market top, then.

The first is when Average ‘Mercians see prices beginning to move up.  We’ve been out of the “buy now before prices go up” mentality since about 2009 in the Housing crater.  But since we see energy coming up, that’s likely to turn around.

Then next week, and the week after, when I expect new market highs will be put in (despite the running of fearful shorts today – unless this turned into an Elliott fifth wave failure…a Peoplenomics kind of discussion) – The announcement of new highs will bring in the last of the “weak hands” ready for harvesting this fall.

With that, your choice now is pretty simple:  Stay with the herd and keep looking at the tail (lights) in front of you, or get ahead of things are beat the rush to panic.

Here’s the press release now to help your decision:

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in
July on a seasonally adjusted basis after rising 0.1 percent in June, the U.S.
Bureau of Labor Statistics reported today. Over the last 12 months, the all items
index rose 2.9 percent before seasonal adjustment.

The index for shelter rose 0.3 percent in July and accounted for nearly 60 percent
of the seasonally adjusted monthly increase in the all items index. The food index
rose slightly in July, with major grocery store food group indexes mixed. The
energy index fell 0.5 percent, as all the major component indexes declined.

The index for all items less food and energy rose 0.2 percent in July, the same
increase as in May and June. Along with the shelter index, the indexes for used
cars and trucks, airline fares, new vehicles, household furnishings and operations,
and recreation all increased. The indexes for medical care and for apparel both
declined in July.

The all items index rose 2.9 percent for the 12 months ending July, the same
increase as for the period ending June. The index for all items less food and
energy rose 2.4 percent for the 12 months ending July; this was the largest
12-month increase since the period ending September 2008. The food index increased
1.4 percent over the last 12 months, and the energy index rose 12.1 percent.

Let’s drill-down..

All of which has left the futures a bit down at the mouth, but hope springs eternal…so we’ll see how today’s close looks to shape up. At press time, Dow looked to open down 107.

Turkey’s a Turkey (But, so’s the EU) Dept.

Bank stocks dive, euro falls as Turkey turmoil spreads.”  So the blame game is in place.  Remember, we’ve been outing the EU as a megalomaniacal band of country-stealing halfwits for years.  Turkey fits rights into our model of the EU as a band of highwaymen who need to “eat countries” in order to perpetuate the illusion of growth.

Turkey is one of the EU’s main partners in the Middle East and both are members of the European Union–Turkey Customs Union. … Turkey has been an applicant to accede to the EU since 1987, but since 2016, accession negotiations have stalled.

As we watch the “Turkey getting baked” do try to keep it in the context of two crooks, each trying to out-do one-another.  That’d be how we lay out Turkey and the EU.

Or, will the international banking cabal be able to pull off a world-busting shakedown under the Big Lie of “Too Big To Fail?”

These are your two main world drivers to watch.  Beyond it?  Not much…just more…

“Bull” for the Herd

Petition asks Trump to name LeBron James new education secretary, replacing DeVos.

Check me here, but the LaBron bio on Wikipedia seems only to go as far as high school.  DeVos, on the other hand “… was educated at the Holland Christian High School, a private school located in her home town of Holland, Michigan.[22] She graduated from Calvin College in Grand Rapids, Michigan, where she earned a Bachelor of Arts degree in business economics in 1979.”  If the US Dept. of Education was playing sports?  Hell yes, LaBron.  But, since we’re not….

Division marketing: Spike Lee, David Washington hope to spark conversation with ‘BlacKkKlansman’.

Liberal hand-wringer du jour‘It’s Humiliating.’ Released Immigrants Describe Life With Ankle Monitors.  Don’t think they’d have them if they came in legally – know what I’m saying?

Meanwhile, Judge Threatens to Hold Jeff Sessions in Contempt of Court Over Deportation. This is the judge who let Hillary write answers about the email mess.  Under Oath mind you.

On to the Weekend…

Last eclipse of 2018 comes tomorrow.  And tomorrow night, Look up for the Perseid meteor shower this weekend.

Don’t forget, we now post content on Saturday and Sunday…so back to 7-days a week.  Sunday we get into the mechanics of what restoring a Bug-Out Motor-home might entail.

Peoplenomics tomorrow for subscribers were we’ll size up the week and alook ahead…

Then back here for “moron  Monday…:  Have a great weekend…

20 thoughts on ““Core” Problems with the CPI”

  1. Inflation:

    Three comments:

    1. The FED has no direct control over food or energy production.

    Food is dependent on weather, energy on supply and politics, and less on demand.

    2. The state price chart seen is more an indicator of state taxes than price of gasoline. State taxes need to be teased out in order to make the state gasoline price meaningful.

    3. Social Security retires are being given the short end. The deflator used takes into consideration much fewer items than the general deflator. Meaning, in real money terms the income of retirees declines steadily (falling real Social Security payments).

    • Hold the Phone!
      1. I NEVER asserted they did. ONLY that the cost of money is one of THE major considerations in an investment including plant, equipment, and production.
      2. State taxes don’t go up 25% in a year…wanna rethink that>
      3. a) The deflator is calculated once per year so not a factor monthly. We agree on it short-changing people who are living purely on SocSec. However, when one takes into account the aging who live in mortgage free homes that continue to appreciate, the use of the core is a bit less crazy (though it is): Since our little trailer in the woods went up at least $10,000 in retail valuation last year and maybe more like 30K. This is not direct “income” but when we downsize that gain will fall – less commissions – to our bottom line.

      • I was scanning the rentals as I waited for my pizza..( ever notice the crust is getting thinner and the sauces) the rental costs are just about sixty percent of an average laborers income

  2. George, excellent lately on economics. Thanks. Glad you’re off that deep state nonsense.
    To your point, Dimon too sees really big interest rates coming. https://www.cnbc.com/2018/08/07/bove-jamie-dimon-knows-what-he-is-talking-about-on-danger-warnings.html
    I’m not anticipating any spending cuts to Medicare or SS, and tax receipts have fallen off cliff since the tax cuts. https://m.dailykos.com/stories/1787094
    So something has to give. Ouch.
    Yes, looks like this one will be a big one, and hoping you’re right that ‘Too Big to Fail’ won’t be needed. Best, Mike.

    • Shouldn’t Jamie Dimon be in jail or at least on the moron list. I am not sure he understands what interest rates mean. Thanks to the “Deep State” he still has his job & got a Hilary get out of jail free card.

    • Mike, Nonsense. Individual tax receipts are up 7.9% ytd 2018, largely due to $32billion in additional withholding according to the CBO. People are working again.

    • Lol lol … Old uncle Harry…pull my finger I have a cramp trick…
      Medicals gone through the roof..

  3. Did I hear today that some educated liberal woman said that if everyone was given free health care, the decrease in funeral costs could pay for it? Last I remember, death & taxes are the only sure thing in life. I doubt she is an accountant; maybe a lawyer.

    To add more, She said that the number of funerals has risen since President Trump watered down Obama care. It was rumored that a person who lived to 186 died after Obama Care was watered down.

    • People who resent other people having freedom, prefer to “scale” the funeral business. There’s a scene in Man In The High Castle where ash is raining down…. It’s Wednesday the guy says…guess what happens on Wednesdays.

  4. “Since our little trailer in the woods went up at least $10,000 in retail valuation last year and maybe more like 30K.”

    That is how daily (even the smartest of us!!) fool themselves (and others) in their vernacular ‘-). Currency looses its PURCHASING POWER, nothing went up but inflation. I will never understand why people in general are so docile with regard to inflation?! C’est la vie.

      • I’m glad for you, but that wasn’t the point I was trying to make. ;-( People, by looking at their (presumable) gains in personal assets like stocks, real estate, etc., constantly mitigate the negative effect inflation has on the community at large. I was just pointing out this flaw in our communication. I wish money growth would have been linked to population growth, but the “more edjucated” thought otherwise.

      • Late to the party on that! Went over that years and years ago! Yeah – what is an ounce of gold from 1970…will it buy any more after tax, lol…yep it’s a con job

  5. You are doing an article on a bug-out motor-home this weekend ? George- you are already living in the East Texas hinterlands. The next step beyond that is to swim naked across the river to Louisiana with a bushcraft knife clenched in your teeth. Is the motor-home for your wife to follow behind in at a safe enough distance for plausible deniability?

  6. I’d rather see kids shoot baskets than other students:

    Devos/School Safety Commission can offer no comment on restrictive gun purchases for 18 yr olds:

    https://www.washingtonpost.com/news/answer-sheet/wp/2018/06/05/senator-asks-betsy-devos-if-her-school-safety-commission-will-look-at-role-of-guns-her-answer-not-per-se/?utm_term=.53032617acc6

    Trump (with NRA approval) wanted to arm schoolteachers (guess they can shoot backwards while they’re writing on the blackboard):
    https://www.npr.org/2018/02/26/588865775/renewing-call-to-arm-teachers-trump-tells-governors-the-nra-is-on-our-side

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