I know food inflation is only a small part of the CPI but I’m using this as an example to make a bigger point, the current government data does not reflect reality.
We already know that the weights assigned to different components of CPI do not accurately reflect consumers’ share of wallet among those components. On another note, recurring seasonal patterns, which are present in numerous time series data presented by the government, obscure the underlying behavior given the current economic climate. If the 2010 data is seasonally adjusted using 2008 or 2009, you end up with one conclusion, and if seasonally adjusted using pre-2008 data – one likely has a different interpretation given the difference in volatility during these two respective periods. These distortions are very clear in the recently reported CPI data.
Yesterday's CPI came in below expectations, thanks partially to gasoline inflation that was reduced by seasonal adjustments.
The issue here is that in November 2009, gasoline inflation was boosted by seasonal adjustments, but it was reduced in November 2010. Specifically, a non seasonally-adjusted 4.1% monthly gain in November 2009 gasoline prices ended up as a seasonally-adjusted gain of 6.4%. In contrast, a not-seasonally-adjusted 2.0% monthly gain in November 2010 gasoline prices ended as a seasonally-adjusted gain of 0.7%.
If you are a consumer that drove to work in the month of November 2009 and again November 2010, you paid 8% more for gas at the pump in November 2010 on a year-over-year basis. The government CPI figure is clearly divergent from this figure. Considering how integral a line item gasoline is for the consumer in his/her P&L, it is ridiculous that the divergence between gas prices and CPI is so stark.
As a client of Hedgeye once said, “there is no inflation if you are an anorexic pedestrian”. Per Wikipedia, CPI is representative of changes through time in the price level of consumer goods and services purchased by households. Not so much.
Howard Penney
Managing Director
