CPI - SMOKE AND MIRRORS

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

 

CPI - SMOKE AND MIRRORS - hedgeye inflation index1


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more