Monday, October 27, 2008

CPI fun and the mismeasurement of all things

So for the past number of years, reporting of CPI has slowly transitioned to media reporting core CPI (not including energy and food). The rationale is that including those highly volatile commodity-based components brings unnecessary volatility to the understanding of longer trends of CPI. This is understandable when you think of gas prices going from under $2 per gallon to over $4 per gallon and back again over the past few years.

Yet those swings in gas prices we all know has had a real effect on our personal pocketbooks and the economy as a whole. So for me, give me the volatility, and let me know how much my purchasing power is changing. But that is not how concensus has seen it in the past few years.

But now we have a funny change of sorts. The Fed is introducing substantial liquidity by working the currency printing press overtime. In equilibrium (a term I learned about in econ that has never existed in the real world of greed and fear), increasing liquidity causes inflation. But the Fed has said they are not concerned about inflation because of the substantial drawback in energy prices.

So now we use total CPI because it suits our position. This is nothing new. In fact, numerous 'improvements' to the calculation of CPI have occurred in the past, and critics were dismissed as
anti-establishment zealous lunatics. Until Bill Gross spoke out, nobody considered that CPI might be understated. Yet consider the benefits to our government just from fractionally smaller increases in social security benefits.

Unemployment is another substantial funny number. Historically, anyone who was unemployed was counted. Now we only count those who receive unemployment, not those who are still unemployed after unemployement insurance benefits expire (they are counted instead as employed). Also, when created the figure considered those who had part-time employement but were desiring full-time employment as unemployed. Now they are employed. But the biggest misrepresentation is the fact that a household with both spouses working counts as two people fully employed, but the divisor for unemployment is the number of households. So are we in a recession?

One observer believes using original calculation methods, we currently have 15% unemployment, CPI of about 13%, and GDP contraction of 2%. So yes. For more information visit here. Depressing (or maybe depression).