Inflation: One More Month of Statistical Wizadry

Posted by urbandigs

Tue May 20th, 2008 10:07 AM

Again, sorry for light content as we are about to install the programming files/coding for the new charting system and contractor directory today. Please bear with me as my programmers install everything and we iron out any bugs over the nest few days. I will publish a post when everything is working properly.

A: We all know that recent employment and inflation statistics have shown a big disconnect with reality! Employment figures are flawed due to the birth/death adjustment model where the BLS is assuming new company births adds jobs to the economy that otherwise wouldn't be picked up for many months. Inflation data is flawed because of the seasonal adjustments; which explains why the last CPI report stated gas prices as down 2%, when in fact they were up 10%. The markets trade on these adjusted data reports you know; and the markets surged that day because guess what, inflation was not so bad! Was it true, of course not! Do we know why, of course we do. Will the wizadry last, yes! But only for one more month!

It's like listening to the weather man tell you it's sunny outside when your getting drenched with downpours. I don't need the government to tell me inflation is or is not a problem; I can see it with my own eyes. Everything that actually is necessary for me to live (health care, food, energy, rent, electricity, etc..), costs more; and everything that seems unnecessary for me to live (flat screens, apparel, cell phone plans, laptops, memory sticks), costs a bit less. I live in Manhattan, and currently rent, and I will tell you that my rental rate is approximately 40% higher today than average rents were for similar unit's 2-3 years ago.

Well, the party is about to be over for all those who enjoyed the tame inflation numbers disclosed to us so far. How do I know this? Because I am listening to what a top government official, who helps calculate the inflation rate is saying.

According to NY Post article, "July Fireworks: Inflation Rate Will Reflect Gas Costs":

A top government official who helps calculate the nation's inflation rate says gasoline costs in the consumer price index will surge in a couple of months - even if prices at the pump don't.

"We are going to show huge increases," predicted Pat Jackman in a telephone interview with me last week. "If gas prices are stable from May forward, we are going to end up showing roughly a 16.3 percent increase [for the period] between May and December."

Why? Because the government changes all of its figures to reflect the seasons. Here's the one thing you need to know about seasonal adjustments: what goes in, must come out. Jackman said gasoline prices were seasonally adjusted into a figure that looked much better than it actually was because the price of gas climbed even more sharply in percentage terms in April 2006 and April 2007.

So when this year's price was something less than the increases in the two previous Aprils, the computers automatically turned the current year's increase into a more favorable number. Jackman said the adjustments will "mute" gasoline inflation for one more month.

But it's downhill from there. "Beginning in June," Jackman said, the seasonal adjustments "will start adding in" inflation, which will be reflected in July's CPI.
In addition to the end of the fluff in terms of seasonally adjust inflation, will come an end to the boosts in jobs assumed by the birth/death model too! I guess that is why Gold has been getting bid up recently; gold is generally viewed as an inflation hedge and safety net for uncertain times.

I discussed the REAL Jobs report on May 2nd, and showed you the wizadry of the b/d adjustment as told to us by the report itself; here is the fantasy adjustment for construction:


Reality ---> Lost 61,000 Jobs

B/D Fantasy ---> Added 45,000 Jobs

These are seasonally adjusted figures using the birth/death model to assume corporate births and new hirees that otherwise would have been missed. It just paints a very misleading picture, and doesn't tell the story of what is really going on out there. While the credit markets have been easing as a result of unprecedented fed actions, housing is still pressured, jobs market is weak, inflation for the necessities of life are surging. But the biggest problem in regards to inflation, is the expectations!

Inflation expectations are rising and in my opinion, will continue to rise as a result of the following:


I don't care how you cut it, how you count inflation, or what the gov't is telling me. Housing deflation + commodity inflation + no wage inflation will give the perception of a major inflation problem. The pain of food/energy inflation hurts that much more when your wage is falling and your house is worth significantly less than it was a few years ago. It's my opinion. Government reports that contradict reality can only go on for so long; if your outside, its cloudy, and your all wet then guess what ---> ITS RAINING!


These Aren't The Prices You're Looking For (Accrued Interest)

PPI April 2008 = 0.2%, 0.4% Core (The Big Picture)

US Inflation Miracle Continues (The Big Picture)