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“Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).”
― Mark Twain
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The 11/14 US Consumer Price Index (CPI) from the US Bureau of Labor Statistics (BLS) has trader, investors, and nearly everyone on Main and Wall Street scratching their heads. How does the CPI contract so rapidly given the currency inflationary backdrop? It doesn't. Inflation reported today, no longer compares to data after the late 1970s, and does not reflect reality like it once did when the series was created in 1921. Methodologies that include geometric weighting, substitution, and hedonics favor price reductions and significantly understate price increases. The original design of the CPI, a time series that helped businesses, individuals and the government consider inflation in their financial planning, died after the Boskin Commission 1996 made the CPI unrecognizable to the old.
The US CPI no longer reflects reality. Followers must recognize the biases and remove it from the decision-making process. Statistical techniques such as geometric smoothing, substitution, hedonics, and new additional methodologies* continue to overstate and understate deflationary and inflationary trends, respectively. Hedonics, for example, represent a statistical fantasy. If the price of the car increases from the previous year, the BLS likely adjusted this price increase downward to reflect the pleasure of owning and driving a new car. Green plastics cost more? The CPI likely does not recognize them if people enjoy the benefits of a cleaner environment. If you're shaking your head, it gets worse. The price of oil, gasoline, and food are rising fast? No worries, the core-CPI strips them out. An underreported CPI also overstates real growth. Gross Domestic Product (GDP), the US national income, is often reported in Real GDP. Real GDP, or inflation adjusted growth, is derived from price deflators which are influenced by the CPI.
Lowering the CPI accomplishes the following:
(1) Social Security Payouts based on CPI
(2) Union Contracts are based on CPI
(3) Commercial contracts often contain cost adjustments based on the CPI
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* A new methodology change appears to be using healthcare profits rather than prices. Whose healthcare premiums fell 34% last year?
Goldman Sachs notes there was some kind of change to data sources and other "methodology changes"
— Brian Sullivan (@SullyCNBC) November 14, 2023
Still trying to better understand what the change was.
PS: If your health insurance costs fell 34% from last year, please hit me up .. love to hear your story! https://t.co/uwMogQOjvo
Follow me on Twitter or Facebook for further discussion.
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