Getting to the "Core" of Inflation Propaganda

[idlisambar]

Yesterday the Labor Department reported that July Consumer Prices rose by 0.5%. Today we were informed that July producer prices rose an even sharper 1%. Though these are very serious numbers, indicative of a chronic inflation problem, Government officials, Wall Street strategists, and the financial media tell us not to worry. Excluding energy prices, the so called “core” CPI rose a benign 0.1% and the “core” PPI a somewhat less benign 0.4%. Measuring inflation while excluding energy prices makes about as much sense as dieters weighing themselves while excluding all the fat around their stomach, hips and thighs. Just how did this ridiculous concept get started in the first place?

Food and energy prices have historically been quite volatile, up big one month, down big the next. To prevent economists from jumping to erroneous conclusions the concept of the “core” CPI was developed. It has been argued that by looking at the monthly numbers without these volatile components, economists get a more accurate read on the true impact of inflation on consumer prices. Excluding food and energy in no way implied that such prices were not important components of the indexes, just that their prices tended to be more volatile, and hence less relevant on a monthly basis.
.......
.......
Since 2002, oil prices have been anything but volatile. They have in fact been quite predictable, rising steadily for four years. In such an environment, excluding them when measuring inflation is a farce. Yesterday, CNBC showed a graphic which revealed the divergence between oil prices and the over-all CPI. Though historically the two have been highly correlated, recently they have diverged. CNBC’s conclusion was that the U.S. economy was now so efficient that oil now has less influence on over-all consumer prices. Far simpler and credible an explanation is that either the data is being manipulated, or the lag between rising oil prices and rising consumer prices in general has lengthened.

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=45710

[Sven77]

1. oil and inflation

the news can find no corelation between record gas prices and record profits by oil companies.

[Shipwack]

2. I'm no fancy economist, but...

... if all are in agreement that food and energy are important, couldn't they just use some sort of 'weighted' value... maybe the average energy price of the previous 6 months? That would show trends, but still not be overly skewed by anomalies.

[sendero]

3. The government....

.... has a huge vested interest in the CPI being low, because entitlements are indexed to that value.

Since as far back as Kennedy, they've been jacking with the numbers, lately it has gotten ridiculous with concepts like underweighting the quickly advancing components and overweighting the slowly advancing.

Rest assured, the CPI has been neutered, this guy (link below) who has been following govt statistics closely for decades, estimates that the CPI underestimates the real CPI by 3%.

http://www.financialsense.com/Experts/2005/Williams.html