My Two Cents - "The Spin-Doctors Exposed"

12/22/2006

For those of you who missed last week's column, I'll sum up the data:

The Economist's All Items index as of the December 2nd issue had risen 35.4% y/y. As of this week, the same index is showing at 34.8% y/y. The food index was 27.2% on 12/2, and 25.4% this week.

In contrast, both the headline CPI and core CPI were flat (0% change) in November. From January to November 2006, the headline CPI is sitting at 2.0%, core CPI is 2.2%.

Obviously, one can see that these two sets of data paint two entirely different pictures of the state of prices and more importantly, the impact of prices on the consumer. If consumers perceive inflation to be a threat they will behave much differently than if they perceive inflation as benign.

I emailed the Washington DC bureau chief for bloomberg.com. Below is the thread:

<name withheld>,
I'd encourage you to take a look at The Economist 12/2/2006 issue. In the rear of the publication, they keep various indexes that measure the cost of items. Their all items index is up 35.4% y/y and their food measure is up 27.2% y/y. I'd be curious to hear your take on the discrepancy between those numbers and the government CPI numbers.

Best Regards,
Andy Sutton

REPLY:

One possible explanation.

One survey is done by hundreds of government employees checking thousands of prices at stores all over the country.
The other is done by an intern. But the Economist list is always interesting.

MY RESPONSE:

Funny you say that. I spoke to nearly 100 people in the course of gathering opinions for my weekly column and almost all of them felt that their own personal financial situation reflected The Economist data as opposed to the government numbers. Maybe the interns aren't doing such a bad job after all. You pay for things <name>; look at your own checkbook and see what it tells you. I know you guys get paid to push a certain viewpoint, but the complacency generated by that viewpoint is damaging many families.

Regards,
Andy Sutton

REPLY:

I believe people remember things selectively. Yes, some things are going up in price, but they are also getting better. You and I consider that a price increase, but the government considers it a quality improvement. It's not inflation.

Consider computers, for instance. I'm beginning to shop for a new one. But I'm reluctant to buy now because I know that they will be much cheaper and better in just six months.

Clothing prices are down.
Auto prices are down.
Gasoline prices are down.
McDonalds still has a dollar menu.

And I do not get paid to push a certain viewpoint, unless you mean to try to paint the most accurate view I can of the economy (and the various statistics about it). Anecdotes are interesting, but they are not scientific.

Here is another thread; this one between myself and a senior columnist at Marketwatch:

<name withheld>,
I read with interest your piece on the increase in consumer spending. I think it is at least worth noting the inflationary pressures that exist in the economy despite Fed rhetoric. For example, the Economist, a reputable publication keeps a number of indices on the cost of goods in America. Two really jumped out at me; the all items index saw an increase of 35.4% y/y and their food index saw an increase of 27.2% y/y. This data flies directly in the face of benign Fed numbers, but based on my tabulations more closely represents the situation Americans are facing than the government numbers. Looking
at it from this perspective, a 4.1% rise in incomes does little to soothe cost pressures that most families are facing. I would imagine that much of this spending is being generated vis a vis new credit/ debt as opposed to savings.

Best Regards,
Andy Sutton

REPLY:

Hi Andy - interesting and good points. But the Fed acknowledges that inflationary pressures exist. They said yesterday that `some inflation risks remain,' and have been pretty consistent and unyielding in their caution on this. So I'm not sure what you mean when you say "despite Fed rhetoric."

MY RESPONSE:

You're absolutely right; I guess the difference comes from the way the words are interpreted. Admitting that there are 'inflationary pressures' and saying that the y/y change in the cost of food is over 27% would illicit two very different responses and the public would expect different actions in the face of the information. When I say rhetoric, I mean the Fed is making light of the situation in face of overwhelming evidence to the contrary. The average person (at least the folks who read my column and write in) are hearing talk that 'some inflation risks remain' while they're staring at piles of bills with which they have little money to pay. Realize I am not picking at your reporting; rather I am trying to get a sense of how some members of the press perceive the situation.

Regards,
Andy Sutton

REPLY:

That makes sense. I see your point, and it's a very good one.

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I got the distinct sense that most members of the financial press corps don't view inflation as a problem, and one gentleman even chose to impugn a publication with the reputation of The Economist by saying that their data was anecdotal. So readers, I am going to do my own non-scientific, anecdotal study and ask you what you think. Looking at your own situations and view of the economy, which set of data do you identify with or are you somewhere in between?

It has been my position that the government has a political incentive to understate inflation. By keeping people deceived, the government is able to continue to inflate unchecked. Governments use inflation to pay for things that it cannot afford via taxes. It is ironic that governments have been able to transfer more wealth through the years via inflation as opposed to taxes without the general public even realizing it.

That said, I would like to take this opportunity to wish each of you a Merry Christmas and a Happy New Year. I would also like to thank all the readers as well as the many fine people who have written me with advice, encouragement and even to debate. This 'experiment' has been a true learning experience for me, and I hope to continue the beneficial exchange of ideas and information going forward.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.