Wednesday, January 13, 2010

Why the Annual CPI Number for 2009 Will Be Down

I caught quite a bit of flack this morning when reporting that the CPI number is likely to be down for the full year 2009. Well, it is very likely going to be down.

It's a good thing though that I added to my earlier post that:
There will be conspiracy theorists who will charge the number is bogus, and there is some truth to the charge in any such aggregate number, especially when compiled by the government.
And, I further added:
I don't buy that there is no price inflation, but it is certainly low.
Since the flack, I checked out the numbers myself and reached this conclusion (Reported in an Update to my earlier post): is tough to see how the CPI number will be negative for the full year.
It is tough to see because the CPI was up every month in 2009, except for March, when it was down by all of 0.1%.

I also contacted the WSJ reporter, Kelly Evans, who originally mentioned the likelihood. She told me she received the input from IHS Global Insight, and there it was:
the biggest story from the upcoming report is bound to be the annual decline of the CPI in 2009—its first drop in 54 years.
I contacted Brian Bethune at IHS Global, who tracks this data for them, and here's how he explained that, barring a huge jump in inflation in December, the BLS will report the annual CPI as being down for the year, despite the number being up every month except March.

Bethune told me that what the government does for its annual number is average the 12 months of the previous year and average the 12 months of the current year. Under this method, because of some strong spikes in oil in 2008, the government calculation will show the annual CPI number to be down in 2009.

"That's why there was no cost of living adjustment for Social Security in 2009," he added.


  1. This is much more clear when read while wearing a tinfoil hat.

  2. what a lot of gobbledygook.
    Who could take this stuff seriously.
    2009 is down because they take 2008 figures as well - what sense does that make?

  3. It probably falls in the same category as measuring CPI based on hedonism (I like that term better than hedonic regression), excluding food & energy, etc.

    When part of your bills are a function of what you measure, then one way to minimize your costs is to just change how you measure.

  4. Deflation: cause, and now cure, of the impending SSA meltdown. How apropos.

  5. Unless California's in a vacuum, general prices for everything but services (plumbing, carpentry) are sky high this year.
    This CPI garbage is another reason why TIPS will always short-change their buyers. Inflation will always be hidden by creative accounting on rent figures or adding value to goods, thus hiding prices. People will buy TIPS thinking they're protecting against inflation when really they're not.