Thursday, June 24, 2010

Here Comes Inflation...

At least based on the wacky seasonal adjustments coming out of the BLS.

Statistical investigator extraordinaire John Crudele explains:
The Federal Reserve has an other problem -- it just doesn't know it yet.

The Fed didn't make any change to the interest rates it controls at the policy-making Open Market Committee meeting yesterday and said "inflation is likely to be subdued for some time."

Well, maybe not for long -- at least as far as the government's statistics are concerned.

Two years ago this column broke the news that something was amiss in the government's inflation reports, particularly the closely watched Consumer Price Index.

In a column on May 20, 2008, I quoted a top government economist who helped put together the CPI for the Bureau of Labor Statistics (BLS) as saying that inflation was "going to show huge increases" in later months.

That was a blockbuster revelation to Wall Street. And it turned out to be absolutely correct.

The reason, the economist explained, was simple. The recession in the spring of 2008 had distorted the seasonal adjustments that are done to the CPI numbers and had caused the increase in energy costs to be understated for several months. Anyone who understands seasonal adjustments knows this: What the adjustment giveth it also taketh away.

So, if energy costs are understated in the spring, they must be overstated in later months until the overall effect of these adjustments is neutral.

And that's exactly what happened in 2008.

Overly mild consumer inflation numbers in the spring were followed by gigantic month-to-month increases of 0.6 percent in May; 0.9 percent in June and 0.8 percent in July. Those three numbers coming in a row shook Wall Street's view of interest rates.

Toward the end of that year the inflation numbers did revert back to normal and showed consumer prices going down. The same trend occurred in 2009 only it was less pronounced. Mild inflation in the spring led to what Wall Street would consider a huge increase of 0.7 percent in June. Then the numbers flattened out for the rest of last year.

This June's consumer inflation figure is scheduled for release on July 17. And there are indications that energy costs were again misrepresented in the spring inflation numbers and, therefore, subject to upward revisions.

After seasonal adjustment, the BLS reported no energy inflation (0 percent) this past March. But without that adjustment, energy prices were actually 2.7 percent higher.

The same thing happened in April, when the government reported a 1.4 percent decline in energy prices after seasonal adjustments instead of the 1.4 percent increase in unadjusted prices.

Ditto May when a real 1.7 percent increase in energy prices was adjusted to a 2.9 percent decline.

Anyone who was alive and on the roads knows that energy costs increased in the spring months and haven't retreated much since. And the government's unadjusted numbers prove it.

If the pattern of the past two years holds true to form, the CPI should tick up over the next few months. And the blood pressure of the Fed's governors should also rise.

Read the rest here.

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