3.1% GDP growth overstated -CPI index understated - Bloomberg's Baum

[papau]

This discusses the changes in the way the CPI is computed post the Reagan changes in method in 1983(an actual annual reduction of 0.6% for housing lies, and 0.2% for subsitution of hamburger for steak, and then toss in the quality improvement CPI decrease that ignores the fact you can not buy anything without the "quality improvement"), and then discuss the appropiateness of excluding food and energy prices because they are volatile (when the the fact is that food prices haven't declined on a year-over-year basis in at least 40 years), as the Bush folks try to sell us the "chained CPI and personal consumption price index" which incorporate "upper-level" substitution bias -- apples for oranges, chicken for beef - so that last years 3.5% CPI is really only a "chained CPI of 3.1 percent for the year ended November, 04." all according to BLS economists Kenneth Stewart and Stephen Reed, who constructed a historical CPI series using current methods ("Consumer Price Index research series using current methods, 1978-1998," June 1999),

http://seattlepi.nwsource.com/business/207970_cpi17xx.html

Monday, January 17, 2005

Consumer price index isn't what it used to be

By CAROLINE BAUM
GUEST COLUMNIST

Every month, the Bureau of Labor Statistics reports the change in retail prices that U.S. consumers paid during the previous month. This is known as the consumer price index, or CPI.

Inflation holds more than a curiosity value for policy-makers, economists and traders looking to make a quick buck flipping bonds. The CPI is used to determine the annual cost-of-living adjustment for Social Security benefits and military and civil service retirees. It's used to adjust wages and salaries for union workers. It's the measure used to deflate other economic series to determine the real dollar value.

The CPI is used to adjust federal income tax rates to prevent "bracket creep." The index is also the means of gauging the Federal Reserve's success in achieving price stability, which has come to be recognized as the best means of ensuring maximum sustainable economic growth.<snip>

In 1983, the BLS switched from an asset-price approach to housing (home prices, mortgage interest rates, property taxes and insurance and maintenance costs) to a flow-of-services approach to capture actual consumption costs. A house was no longer a home (an asset) but something providing the user a service, calculated by its imputed rental value.

The methodology used to determine imputed rents hasn't been constant over time, either. Starting in 1983, a single survey of rental units was used to impute both residential rents and owner-occupied rents, with the results reweighted for owners' equivalent rent (OER). In 1987, the BLS added a survey of owner-occupied houses to the rental survey, dropping it again in 1999 (effect is a 0.6 percentage point annual understatement in the CPI since 1998).<snip>

Other changes to the CPI included quality adjustment. Many goods prices -- everything from apparel to cars to computers to televisions -- are adjusted for quality changes. Hedonics is one method that statisticians use to determine how much of the increase in new car prices is actual price change and how much of it is improved car. (Anyone wanting to buy a new car without the quality enhancements is out of luck.)

In 1999, the BLS adopted a geometric mean formula for computing most of the basic CPI components. Unlike an arithmetic mean, which uses fixed quantity weights, "a geometric mean implies that any increase in price will be offset by a quantity decline so that the expenditure share remains constant," BLS economist Pat Jackman says.

For CPI purposes, the geometric mean is only used to address substitution within item categories: substitution among the type of orange, the quantity of oranges bought (Costco packaging or normal amount) or the different outlets at which they are bought, but not substitution of apples for oranges.

The application of a geometric mean formula to 211 categories has had the effect of lowering the annual CPI increase by 0.2 percentage points per year since 1999, according to Jackman.<snip>

[durablend]

1. Supermarket (groceries) prices shot up in the past week alone

Ain't no way *co is gonna tell me there's no inflation. Can't even get out of the supermarket without feeling sick.

[papau]

2. You are supposed to "substitute" so that there is no change in cost -

you just eat dog food.

[mhr]

3. Dog Food Was Too Expensive - I Started Growing Worms

It's the only thing the long-term unemployed can do.

[papau]

4. I hope not - but I have lived for long periods on pasta!

:-(

[mhr]

6. I'm With You - The Only Difference Is That My Pasta Squirms A Little More

In the kettle!

Welcome to Bush's new Amerika.

[stevebreeze]

8. me I'm stocking up on Soylent Green

[Robert Oak]

5. saving tips

I've found buying bulk spices from the health food stores, bulk
grains, flour, and so forth to be a HUGE savings. I can walk out
with 5lbs of flour for about 2.50 and spices it's pennies per spice.

plus, I'm supporting organic growers who for the most part, aren't
doing some evil GMO or labor abuse thing.

[papau]

7. Excellent - but it has the feel of the 50's when Ike got generous and

gave the poor a block of cheese, powdered milk, and no name vegie oil in lieu of any money - and called it a win-win since it cut the government's cost of storage for these items that were piling up under the surplus food generating price supports for farm corporations that existed at that time.

It really paid to be poor in the 50's! :-)

[cthrumatrix]

9. the truth is our govt "lies" so they can keep the "sham alive"-- period.