The government released the Consumer Price Index for January on Wednesday, February 15. The CPI is an index that measures a basket of consumption goods chosen by the government to supposedly represent how urban consumers, broadly speaking, are experiencing increases in what used to be called the “cost of living.”
This report is issued by the Bureau of Labor Statistics, which some observers have called the Bureau of Liar Statistics. In the case of CPI, that may be unfair. The BLS reported that CPI rose by 0.6% in February on a seasonally adjusted monthly basis.
Yes, they present seasonally adjusted data. By now you are familiar with my views on seasonal adjustment, but if you are new to these pages, suffice to say that I think it stinks. In any given month SA data is as likely to give a misleading view of the trend as it is likely to present something resembling reality. I have gone into more detail on the vagaries of SA data in a number of my past posts on jobs, retail sales, housing sales, and a whole variety of other series that the government reports on an SA basis. One of the biggest problems is that the media focuses only on the SA data. They ignore the actual, not seasonally adjusted data, even when the government reports it alongside the SA data. It does so with the CPI.
No, the purpose of this post is not to harangue again about the sin of Seasonal Adjustment. The purpose of this post is to hector, harangue, and rant about the economic establishment and the Wall Street media calling CPI something it ain’t. They have carried on a gross, obscene, long running charade around their deliberately fostered misinterpretation of what CPI is.
Here’s how the Wall Street Journal headlined the CPI story on Wednesday:
U.S. Consumer Prices Up 0.6% in January
Jump in gasoline prices helped push inflation to its strongest monthly gain in almost four years
The Journal went on to say:
A jump in gasoline prices helped push inflation [increase sound volume, add echo] to its strongest monthly gain in almost four years in January, a sign of steadily rising price pressures that may support additional moves by the Federal Reserve to raise interest rates this year.
Wait. What? Who said anything about “inflation?” Certainly not the BLS.
Here’s how the BLS describes the CPI. “The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.”
Last week’s BLS press release totaled 1,390 words. Do you know how many times it used, referenced, or even mentioned in passing, the word “inflation?”
That’s right. Zero, as in zilch. Nada. Nowhere does the BLS refer to CPI as measuring, or meant to measure, “inflation.” With the entire economics and media establishment viewing the CPI as representing “inflation,” you would think that the BLS might use that word as well. But again, they never use it. That’s not an oversight.
That’s because CPI was never meant to measure “inflation.” It’s an index that is meant to measure the price of a specific basket of consumer goods to a specifically defined set of urban consumers, in an attempt to represent the changes in the usual cost of living of typical urban workers.
During and after World War II, there were organizations called “labor unions” representing workers in collective bargaining with employers. During that long-lost era, the primary purpose of the CPI was to index labor contracts to the worker’s cost of living. Then a few years later in the 1950s the CPI was applied for another purpose, which today has become its most important. That was the indexing of government benefits, government worker wages, and government contracts to the cost of living. The purpose of CPI has never been specifically designed to measure general inflation. It is limited to measuring the price level of goods used and consumed by consumers in the course of everyday living.
Somehow over time, that became, to the economic establishment, a measure of “inflation” as they now view it.
Inflation has many definitions. Probably the most popular is a “rise in the general level of prices.” But economists have narrowed the definition from a rise in the “general” level of prices to a rise in “consumer prices.”
Why is that a critical distinction? Because under that definition they are able to conveniently exclude and ignore asset prices. Why would asset prices not be included in the “general level of prices?” Because they have the convenient and readily available CPI, which measures prices of consumption goods and services only. Since the economic priesthood has a very good reasons for wanting to exclude asset prices from the definition, the CPI gives them the perfect vehicle. But I submit to you that if CPI measures only consumption goods and excludes assets, then it does not measure inflation.
Economists don’t want to even think of rising asset prices as being “inflation.” They have another name for it entirely. They call it “appreciation.” Not only can we ignore it when we’re supposed to be thinking about inflation, but we should actually “appreciate” it!
That’s insane. The massive, prolonged, rarely interrupted inflation of asset prices of all kinds, whether real or intangible, has been directly responsible for the immense economic distortions of our era. Those distortions have enriched capitalists, financiers, bankers, hedge fund managers, and private equity profiteers, while labor has gotten slaughtered and been devalued. Unions and collective bargaining have all but disappeared from the private market.
Academic economist central bankers who fail to see the dangers of massive asset inflation have enabled and promoted these trends. Asset price inflation has both accompanied, promoted, and been enabled by an equally massive expansion of debt. Even that debt has inflated in price. The price of debt has risen to the point that buyers of debt receive nothing of value in return for their purchase other than the promise that the asset will continue to inflate.
Not only does the CPI not measure asset inflation, the BLS eliminated the rising prices of housing from the CPI in the early 1980s. It did so because they said that in theory, houses were assets, not consumption goods.
The real reason it did so was because house price inflation was pushing the CPI up so fast, that the costs to the government in salaries, procurement contracts, and particularly government benefits were growing out of control. The easiest way to slow them down in a big way was to substitute a controllable, phony construct for housing costs. They called that construct, Owner’s Equivalent Rent. Once they substituted that for actual housing prices in the mid 1980s, lo and behold, “inflation” as falsely construed under the CPI, began coming down. That made economists happy. They could conveniently ignore housing and financial asset inflation.
But had inflation really come down, or had it just continued where it always had been after a brief detour into things measured by CPI?
We’ll get to that, as well as some current data on not only CPI, but actual inflation, in Part 2 of this exposé.
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