Friday, December 15, 2006

Read the Fine Print of CPI Report

Quite a lot of people seem to have been fooled by today's CPI report, which reported unchanged prices, both with regards to the all-items index and the "core" index. But you can clearly see that there is something strange. Service prices rose 0.3%, which were supposedly cancelled out by a 0.4% decline in commodity prices.

But how could there be a commodity price deflation in the CPI while commodity price indexes show sharp increases? The Economist's commodity price index for example show a 30% increase over the latest year.

This inconsistency, to be sure, is mostly due to the fact that what the CPI report labels "commodities" is finished goods, whereas the commodity price indexes track prices of raw materials. But it is also due to the fact that the Bureau of Labor Statistics uses arbitrary measures of "hedonic adjustments". More specifically, the primary reason why goods prices fell so much was that the introduction of 2007 car models (which the BLS statisticians on unspecified grounds have deemed to be of much higher quality) continued this month.

CPI reports during coming months will apparently also be depressed by this arbitrary "hedonic adjustment". This will likely fool most people that "inflation is low". But the truth is very different.


Blogger Flavian said...

If you read my blog you will see that I produce my own inflation statistics exclusively on the basis of a Big Mac. The Big Mac is not in need of hedonistic adjustment since it is always the same.

However my figures concerning the US are only updated once or twice per annum.

At the same time one has to consider that the price of fast food seems to decline relative to a broader CPI.

3:23 PM  
Blogger stefankarlsson said...

Big Mac-indexes may not be hedonically adjusted, but they are far too incomplete to be used as price indexes.

5:16 PM  
Blogger Flavian said...

The coopoeration of a large number of industries is necessary if you ant to produce a Big Mac. And any other economic good may well be described in terms as of alternative costs.

So if a car costs 320.000 kronor, and a Big Mac 32 kronor, we may say that the alternative cost of producing the car is 10.000 Big Macs.

I will present more about this on my blog, but unfortunatly I dislike to write in English.

5:17 PM  

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