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Today, the Bureau of Labor Services reported:

On a seasonally adjusted basis, the CPI-U decreased 0.6 percent in November, its largest decline since a 0.9 drop in July 1949.

I will explain my skepticism below.

First, I am loathe to engage in anything resembling tin-foil hat theories.  I find conspiracy theories quaintly amusing.  I watched Oliver Stone's JFK with a great deal of amusement (all except the explanation of the magic bullet theory).  The point is I don't subscribe to much of this "there is a grand conspiracy" thinking.

However, this number just does not make sense to me.

According to the Bureau of Economic Analysis, GDP started to increase in the first quarter of 2003.  That's two and a half years of expansion.  The BEA revised 3rd quarter GDP up to over 4%.  And now inflation is dropping the most in over 50 years?  A growing economy does not create any upward price pressure?

Several months ago, all of the regional economic reports from various Federal Reserve districts reported that input costs were increasing at very high rates.  Now, two months later, costs drop the most in over 50 years.

According to the report, the prime reason for the drop was energy prices.  Energy prices have dropped.  But consider the following.  The forward unleaded gasoline futures contract decreased to $1.45 in late November, but have since rallied to around $1.65.  The forward natural gas contract traded between $12 and $13 dollars.  The forward crude oil contract dropped from $60 to $57.5.  In other words, none of the futures markets are showing a precipitous drop in prices.  

The Federal Reserve has been raising interest rates for the last 13 months.  Their primary reason for doing so was to contain inflation.  This economic expansion is heavily dependant on cheap money.  Now inflation - the primary reason for raising rates - drops the most in over 50 years?

The point of all this is I am very skeptical.  It is always possible there are econometric reasons for the drop that explain it.  While I understand statistics, I am far from an expert practitioner of the discipline.

However, this drop is just hard to swallow given the current condition of the economy.  Simply put, economies growing at over 4% of GDP don't create an environment for prices to drop the most in over 50 years.

Originally posted to bonddad on Thu Dec 15, 2005 at 07:43 AM PST.


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Comment Preferences

  •  as much as I hate asking it... (none)
    what was the CPI-U change without food and energy?
    •  Up .2 (4.00)
      That may be part of the reason.  But that begs the question -- is energy too large a component of CPI?

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Thu Dec 15, 2005 at 07:47:27 AM PST

      [ Parent ]

      •  I'm not sure... (none)
        ...that energy is sufficiently large enough part of the CPI, frankly.  Yeah, the fluctuations screw with the numbers (and I think this was a part of the problem), but it is hard to over-estimate the impact that energy prices have on every consumer and their subsequent purchasing behaviour.

        Bonddad, I know this isn't news to you at all - so it's not a slam of your diary.  Just making the observation that real energy price impact is greater than most people realize - and likely to grow in importance as 'peak oil' starts to roll through our economic models.

        "Sometimes I think we're alone. Sometimes I think we're not. In either case, the thought is staggering." - R. Buckminster Fuller -5.88/-5.23

        by Shadan7 on Thu Dec 15, 2005 at 07:55:50 AM PST

        [ Parent ]

        •  A question on energy... (none)
          since most business costs for heating and transportation is borne by the consumers in higher prices of goods, wouldn't that make for the CPI double counting that good & fuel?  Or are business expenses not a part of the CPI?  
          •  Here is the basket of stuff... (none)
            but it is the consumer end of things, the business end of things gets captured in the producer price index, which is the leading indicator of what to expect for the consumer.

            The data at BLS you can peruse through all you want.

            However, the index is just that, it has already been cleaned and massaged through the magic of statistics to be as benign as possible...

        •  Energy is the single largest swing factor (none)
          As the owner of a small business, I can tell you first-hand that energy costs directly impact prices. Every shipment we get, every month we operate, we feel the energy bite. Fuel surcharges, high heating and cooling costs, all kicks us right in the butt, and we pass the pain on to the customer.

          If we didn't, I'd have to close the doors, and that would be immoral. I'm the only small business in town (that I know of, and I'm involved in several networking and chamber of commerce groups) that offers health care, educational reimbursement, profit-sharing, and career planning to every worker, even part-timers. I'm the lowest-paid employee, simply because I feel that pay should match contribution, and all I do is provide 2-3 days a week of ideas and mentoring. My team is in there 7 days a week making thing happen.

          If we don't pass on the energy costs, I'd have to turn out all our employees onto the street, back to the minimum-wage, no-health-care, no-sick-leave, petty-tyrant-infested hell that is the world of small business.

          No other cost factor contributes as directly, nor swings upward in such great magnitude, as energy.

          The GOP's "Abandonment Society" turns illness, unemployment, or arrest into a one-way trip from the American Dream to a living nightmare. -- Kyle B

          by Kyle B on Thu Dec 15, 2005 at 08:18:18 AM PST

          [ Parent ]

  •  Perhaps another (4.00)
    "mistake" was made in its calculation?  This administration has always had problems with math.

    "If you get an outfit, you can be a cowboy, too..." : The Smothers Brothers.

    by wozzle on Thu Dec 15, 2005 at 07:45:37 AM PST

  •  Retail gas has plummeted (none)
    Unleaded gas futures have rebounded a bit, but the price gouging by oil companies has stopped so unleaded gas at the pump has gone down precipitously. That explains all of it.
    •  Last year? (none)
      What's the difference between November retail and last November's retail price for gasoline?

      Link I found shows $2.01/gallon for November 2004.  sure looks like prices are $0.15/gallon higher than last year.

      Also found this in BLS:

      During the last 12 months, charges for natural gas have risen 36.1 percent, fuel oil prices 26.5 percent, and charges for electricity 11.4 percent.

      Umm, yah, the CPI number looks very, very fishy.

      Only think I can figure is warmer than average weather across parts of US as well as lower demand in Gulf Region -- but would this be enough to pull negative numbers for all CPI?

  •  You asked for it . . . (4.00)

       Nov Consumer Price Index                
       Key Numbers:              Nov    Oct    
                   CPI Index:   -0.6%  +0.2%                
                   Core Index:  +0.2%  +0.2%
                   Energy:      -8.0%  -0.2%

    I agree with Bonddad that the numbers are beginning to look fishy.  The price of energy is so massively in excess of what it was a year ago that it is not credible for the CPI to be dropping as they say.  I'm not sure if the distortion of reality is in the growth rates (which I don't really think are 4 percent - where is it?) or the CPI measures, but somewhere there is a gap between reality and data.

    "Americans can always be counted on to do the right thing - after they have exhausted all other possibilities." Winston Churchill

    by LondonYank on Thu Dec 15, 2005 at 07:50:56 AM PST

    •  Being Slightly Contrarian (none)
      Perhaps this month's figures are perfect examples of why we're always being told to focus on the "core" index, rather than the overall numbers, since energy and food prices tend to fluctuate much more wildly.  Remember also that the CPI utilizes a form of goods substitution, such that as various items become too expensive, cheaper replacements are substituted into the index to reflect similar consumer "decisions".  Given that, there's an automatic brake on the rate of inflation increases.

      As for the growth rate of the GDP, remember that this number is being heavily propped up by:

      1. significant increases in corporate profits (not a bad thing in and of itself, but that money is not being plowed back into the economy in any useful fashion);
      2. consumers spending well beyond their means, resulting in historic highs in household debt and a zero personal savings rate.
      Without these, I'm certain that the GDP figures would be far lower.  In fact, I'd heard a story last night on PBS' Nightly Business Report that the consensus estimate for GDP growth in 2006 has been reduced two-tenths of a percent, to 3.3%.
      •  Corporate profits are not a part of GDP (none)
        GDP is a summation of spending, profits are a source of income.

        GDP is made up of:

        Consumer Spending

        Business Investment

        Net Exports (exports-imports)

        Government spending

        Corporate profits are a good leading indicator of business investment, but they are not the same thing. In the same sense, wages aren't a part of GDP either. They are a source of income, a good leading indicator of consumer spending but not the same thing.

    •  Aren't those (none)
      the monthly change, not annuallized or annualized as the case may be, rather than the change from a year ago?
  •  Bonddad, all I can say . . . (4.00)
    is God bless you for speaking the truth.

    Here is the letter we just received from the management of my building explaining a 12% common charge increase in January:

    "Our combined electricity and fuel costs are expected to be $3.0 million this year and $3.6 million next year, up 25% and 50% from the 2.4 million in 2004."

    In addition, lets talk about gas prices. In Los Angeles they have come way down from the post Katrina highs, but e-v-e-r-y-o-n-e believes the government is manipulating things, to keep everyone shopping. They'll go up again after Christmas and down again before the election.

    So if you think someone is cooking the books, so do lots of Americans.

    by nyceve on Thu Dec 15, 2005 at 07:52:13 AM PST

    •  Our gas is already going up (4.00)
      Up 10 cents in the last 3 days.

      I doubt it's going to stop.

      My latest heating bill was more than double the month before (it's started getting cold). I don't have a huge house, either. I expect next month's to be well over $200. I can drop the thermostat a little more, close off some areas, and vent my dryer to the house instead of outside, which will help.

      Food's up too. Not a whole lot, but it's up.

      I've also noticed that there aren't many shoppers compared to other years. Black Friday was really busy, but the other weekends have been not much busier than normal. I'm STILL getting sale coupons, $10 off coupons, 1/3 off coupons, good until 12/24. I NEVER used to get those.

      Because of all that, I expect Bush's numbers to start tanking again after the New Year.

      •  Dryer venting (none)
        DON'T vent your dryer to the inside of the house if it is a gas dryer.  You run the risk of killing yourself via CO poisoning.

        Wear more clothes, close off rooms and get used to being cold.  You can do this;  I used to feel cold at 65f, now I feel cold at 55f.

        •  Not gas (none)
          Electric. I'd never think of venting anything running on gas to the inside. Hell, I haven't sealed up my basement windows because that's where the heater/hot water heater is.

          Hot water heater is new, but the heater is OLD. I want to replace it, just don't have the money right now.

  •  i think they should replace some of the Energy (none)
    bundle with iPods and X-BOX 360's

    But given the amounts of gas, oil, etc, that we use in this country, isn't it reasonable that it make a significant portion of the CPI?

    Give me Liberty or give me death! (-6.88, -6.15)

    by guyermo on Thu Dec 15, 2005 at 07:55:02 AM PST

  •  Slightly O/T (none)
    I watched Oliver Stone's JFK after it had been soundly dissed for its conspiracy theory approach. I have a solid scepticism about such matters until I see hard evidence.

    Whilst it did not convince me about anything, it did convince me about the possibilities. Like you, Bondadd, I think it is a healthy thing to always be prepared to question.

    I certainly do believe that an awful lot happens not because of grand conspiracy but by the conjunction of events involving people in power "not minding" if something is a particular outcome.

    Anyhow, it was a damn good film   :)

    New International Times, the place where Kossacks and the world meet.

    by Welshman on Thu Dec 15, 2005 at 07:55:45 AM PST

    •  Memorable... (none)
      ...quotes from JFK:

      Jim Garrison: "One may smile and smile and be a villain."

      X: "The organizing principle of any society, Mr. Garrison, is for war. The authority of the state over its people resides in its war powers. Kennedy wanted to end the Cold War in his second term. He wanted to call off the moon race and cooperate with the Soviets. He signed a treaty to ban nuclear testing. He refused to invade Cuba in 1962. He set out to withdraw from Vietnam. But all that ended on the 22nd of November, 1963."

      All warfare is based on deception. ~Sun Tzu

      by Caldonia on Thu Dec 15, 2005 at 08:37:54 AM PST

      [ Parent ]

    •  ever seen a Jim Garrison documentary ??? (none)
      Oliver may be paranoid, but the events portrayed about Jim Garrison's life were pretty accurate
  •  is it possible (none)
    that after gas prices, in particular, were so artifically raised and now have come back down to "normal" that this is merely an artifact? Not sure how these things are calculated...

    Certainly will wive Bushco something to crow about.

  •  What is the context of the report? (none)
    What did it drop from?  The preceding month?  Where does it stand in relation to, say, last year at this time?  Unless there is some baseline by which to compare, a rise or fall in the CPI does not mean much, at least to me.  However, all the Holiday, oops, christmas, oops, CHRISTmas merchants are, I'm sure, ecstatic that people will read:  Prices drop!!! Go out and SHOP!!! And next month we'll see: Consumer debt has largest historical increase!!!  (Not to worry, Joe Biden took care of that!)
  •  hey bonddad.... (none)
    with my tinfoil hat firmly in it possible that since the cpi is the measure that the govt uses to adjust entitlement programs like ss and adjust their inflation indexed securities... that they are wanting that number to remain as low as possible for as long as possible?
    •  Not likely (none)
      Is there any group in America with more political clout then the elderly. If AARP thought the number was being cooked, they would scream bloody murder.
    •  Absoutely... (none)
      That is a significant factor in Clinton's success in reducing the deficit as he changed the CPI measure significantly which resulted in significant decreases in the payouts to Social Security benefactors.

      Do you remember the Boskin commission?

      Although it was not officially enacted the recommendations have been implemented differently via stasticial massaging.

      Most of this was accomplished via substitution and hedonistic adjustments...

      Do a google search on it...

      Here is a pretty good write up on it

  •  damn lies and statistics (none)
    It's bullshit.

    I'm paying 50% more for stuff now than I was two years ago.

    In many cases I'm paying double what I was just a year ago.

    I've got some shocking news for everybody:  The government lies sometimes.

    •  Yes... (none)
      But 0.6% is the difference between what you were paying in October against what you're paying in November.  

      Energy is a big part of the CPI because its a big part of consumer expenditure.  Not every consumer's expenditure, but enough for it to be a driving factor.  The number is accurate, its just the interpretation you're all missing.

  •  Well, with an 8% drop... (none) energy prices from October to November, it's easy to see how the overall CPI has dropped .6% from October to November.  You can bet the December CPI number will be positive again, as will every month into the foreseeable future.  This is a freak aberration (and will probably be "corrected" in a few months, anyway, when no one is paying attention).

    "When the intellectual history of this era is finally written, it will scarcely be believable." -- Noam Chomsky

    by scorponic on Thu Dec 15, 2005 at 08:14:23 AM PST

  •  Look at the surge from the hurricanes (none)
    on the food/energy component.

    THEN once the public caught on and saw how the GOP/bushCo was profiting from it, how fast those prices came down?

    Who wins?  The GOP/bushCo coming and going.  It's not tinfoil to state the facts.  They MADE money at the expense of the public in the form of price gouging AND they can claim that "inflation" is "falling" because once they were called on the price gouging, they lowered prices drastically to 'make up for it'

    The culture of corruption is in reality just one large GOP/bushCo looting franchise operation.  Any GOP with creds can start their own franchise.

    •  Oil prices rose (none)
      in September and October because we lost about a million barrels a day of production roughly 20% of US domestic production.

      Its simple economics, supply suddenly disappears and prices of anything will go up. Had prices not gone up then there would have been more shortages then just the spot shortages that we did have.

      •  Yes but they also (none)
        TOOK ADVANTAGE of the supply/demand shocks.  I'm not saying the gouging preceeded or followed the supply disruption, just that they profited from it at the expense of Americans and now want to take credit for the price dropping.
  •  I'm not sure why you think that you have to... (none)
    be a tin-foil hatter to believe that the fed is screwing with the numbers to make the economy look much stronger than it is.

    You do enough analysis to know the reality is quite different than the bls's world but yet you have some confidence in what the bls puts out?

    Not to mention that the method in which they calculated CPI-U in 1940 is completely different than it is now, but there have been significant adjustements to the stasticial methods, in addition to the introduction of hedonistic and substitution adjustments to name a couple that were not even in place before Clinton.

    The same exists for the GDP measures, much of what occured in the 3rd quarter was bad inflation deflators.

    I recommend a review of the background material at  the Grandfather Economic Report and of course John Williams, Shadow government stats, where there are two primers on both GDP and CPI that are enlightning to say the least.

    But the larger point is to believe that your government is lying to you is not tin-foil stuff, it is classic liberalism and we need much more of it...

    •  OK But Why This Much And Why Right Now? (none)
      Is it as simple as being a little hard to steer and so they needed to get a start now for the 2006 elections?

      I'm convinced that much more than just the Republicans are a mafia enterprise, but I like to know as much as possible about what the shakedown scheme actually is, for sheer self protection.

      We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy....--ML King, "Beyond Vietnam"

      by Gooserock on Thu Dec 15, 2005 at 08:25:20 AM PST

      [ Parent ]

      •  asdf (none)
        BLS is non-partisan, so while methods may have changed which make things difficult to compare for long-term data... it's hard to make the "tamper" label stick for month-to-month stuff like this.  i'd suggest reading the CPI report.
        •  That's just plain wrong... (none)
          the data coming out of the BLS is increasingly subjected to political influence, the employment numbers are a great example...
          •  Care to provide some hard proof (none)
            of this allegation?
            •  Uh ok... (none)
              but your capable of doing it yourself.

              But as an example, the seasonally adjusted employmnent data added up from the states file, which you can get fron this location


              (its the current file) is 814,000 less than the same data published by the BLS for October. In September it was 835,000.

              In September the state data showed a loss os 200,000 jobs, but the offically published data showed and increase of 17,000

              And as to the below, I do agree that out government agency's are staffed with some very loyal people and know many of them myself, but the political side of the equation has infested ever single outlet for government stastistics over the past 20 years or so and continues to get worse.

              Read through the Shadow Government Stats link I linked above...

              PS, I maintain the states file in a mysql database for ongoing analysis of the employment picture in America, as I do with many other economic datasets...

    •  Just because our government lies to us (none)
      from time to time, does not mean that everything that comes out of the government is a lie.

      Yes the methodologies have changed over time, but not nearly as much as the nature of the economy itself has changed. In 1940, the US economy still had a large farm sector and services were relatively small. The information economy was all but non-existent.

      While there are serious methodological arguments to be made on both sides, these are more technical issues as opposed to being political.

      Like the poster below, I know that the BLS, Census and the other statistical gathering agencies of the US government are non-partisan and staffed by career civil service employees, most of whom that I have met and gotten to know are Democrats.

  •  Actually Inflation did not drop (none)
    in the most recent month.

    The core inflation rate actually kicked up a tick from 2.0% to 2.1% year over year.

    Energy prices tumbled in November, no surprise there. The average price of gasoline fell from $2.73 to 2.26 a gallon, a 17% decline, the surprise should be that the top line number did not decline more.

    Once again the MSM financial press will focus on the top line number and miss the underlying trend.

  •  Gas (none)
    Could it be that the huge drop in gas prices has impacted the economy across the board?  Gasoline here has dropped 70 cents per gallon in the past month.

    Please pray for the safe release of the Christian Peacemaker Team and an end to violence in Iraq.

    by Sharon Jumper on Thu Dec 15, 2005 at 09:25:47 AM PST

  •  BD... (none)
    Thank you so much for your skepticism.  It reassures me that I am not always living alone in my parallel universe.  When you work in an area where brand new 6,000 sq. ft houses sell like hot cakes and the restaurants are always full and the streets are full of Lexus's; it's easy to feel alone.  

    Fringe is the new black. - Me

    by chillindame on Thu Dec 15, 2005 at 09:34:10 AM PST

  •  hey bonddad (none)
    I know you don't give investment advice, but would you care to recommend any books generally, for those who are worried that the party might be winding down?

    (Also, why "bonddad"?)

  •  Two questions occur to me (none)
    Which have subquestions:

    First of all, CAN they screw with the numbers? (How many people does it take? Is it possible?)

    Second, if they are screwing with the numbers, what is the result? (Aren't they screwing with their base, the investors and business? How does this impact anyone's belief in our government--since these numbers are SUPPOSED to be reality based if anything is? What would be the impact if it were proved?)

    Resistance to tyranny is man's highest ideal. --Emma Goldman

    by Siusaidh on Fri Dec 16, 2005 at 07:27:41 AM PST

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