Facts & Interpretations

The garbage economics keeps on coming

This morning the US Bureau of Labor Statistics announced:

“In September, the Consumer Price Index for All Urban Consumers rose 0.2 percent, seasonally adjusted, and rose 2.4 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.3 percent in September (SA); up 3.3 percent over the year (NSA).”

Wall Street media reported variously that inflation rose 2.4% year over year, core inflation came in at a hotter than expected 3.3% etc. Did you catch what was added here? The word “inflation” does not appear in the BLS statement.

The difference is subtle but profound. BLS reported fact. Media reported interpretations. AKA spin.

Fact: The CPI did X.
Spin: Inflation did X.

This has been done for so long and become so ubiquitous it offends the sensibilities of few. But the tacit assumption is one to my knowledge for which no case has ever been presented … that CPI = inflation. According to who? And by what reasoning? Assumptions like these are the most pernicious in all of economics. Things that just sort of make their way into popular conception without any genuine examination.

It’s worse than that even, because the assumption that CPI = inflation is not one but two steps removed from fact. One step is that consumer price increases themselves are inflation; the other is that CPI accurately measures consumer price increases.

The second of these is at least occasionally challenged in the economics media. The first is far more dangerous because it is not. No discussion. No facts or logic, it’s just implied … over and over and over again … until the uncritically thinking just take it as a given.

Here at Financology we don’t accept such things. Assumption does not equal proof. Repetition does not cause truth. There is so much slop in it that the entire field of economics is broken and has to be rebuilt from first principles.

This post isn’t even going to bother trying to refute such assumptions. The burden of proof falls on those making them. And until somebody actually makes an attempt to justify them, there’s nothing to refute. They’re just empty, unsupported assertions. No, worse, because they’re not even explicitly stated, just breezed past. I will just call attention to the self evident fact that US domestic consumer prices are just one subset of prices around the world that have risen over the years and that the exclusion of the remainder from our reckoning of inflation has yet to be explained.

Why is it important? Is it just possible that one of the reasons we have a chronic inflation problem is because the field doesn’t even have a grip on what inflation is?

It can’t be helping. Media experts appear to be disappointed and caught off guard by the higher than expected CPI. Guess if you just assume such increases come out of nowhere with no warning that’s what would happen. Financology readers are not though, because we don’t blunder through the world of prices with blinders on. We’re aware that some of these other prices – ones the experts discard from consideration – move first. We do not hail from the Ostrich School of Economics.

We have warned repeatedly that there is no planet on which stock prices can roar ahead at double digit rates indefinitely without consumer prices eventually catching up. And what is the insight that leads us to this? The fact that we use the same unit to measure both. And that both rise due to the shrinkage of that unit. It just takes longer for that shrinkage to filter through the economy to final consumer prices (“long and variable lags”), while stocks, being traded in real time, tick by tick auction markets, respond instantly to changes in the value of the currency. Commodities like oil, copper, and wheat do too.

The first wave of consumer price inflation relief we saw in 2023 followed a retreat in asset prices in 2022. But that’s not enough because asset prices have since been off to the races again. If asset prices decline in the coming months, moderating consumer price inflation will follow.  But if they resume their skyward trek, consumer price inflation will reaccelerate.

We won’t be taken by surprise for the simple reason that we don’t accept the financial media’s garbage economics.

 

6 thoughts on “Facts & Interpretations

  1. Finster says:

    Spectators could also ask; “why is the Fed even lowering rates?”. Consumer prices are rising at well over the pace of the Fed’s target, and unemployment is well below 5%.

    Damn good question. The short answer is to mollify Wall Street. We don’t have inflation by accident. We have it because some people benefit from it, and those people happen to have a lot of wealth and power.

    I’m far from convinced Wall Street’s concern about unemployment is even genuine, as opposed to a pretext to lobby the Fed for easier money.

  2. jk says:

    i read somewhere that the taylor rule [fwiw] implied the fed should have RAISED the ffr 25bps instead of lowering it all.
    .
    the bottom line, for me, is that the growth of nominal gdp has to be higher than interest rates in order to inflate away the debt. we have soft ycc via janet’s structure of the fundings and buying of off the run paper. we have soft capital controls via onerous regs on foreign financial institutions which might deal with u.s. citizens. we have soft mandates via regulatory requirements for u.s. financial institutions to buy treasury paper.
    .
    in sum, we’ve got all the elements of financial repression. and “soft” rules can be hardened if necessary.
    ,
    inflation [declining purchasing power for our currency] is our destiny. one redeeming feature is that it benefits the young by e.g. devaluing their student debt, increasing their nominal income and so on. russell napier describes inflation as stealing from the old, slowly.

    1. Finster says:

      Somehow I doubt the it’s the average American that’s so keen to “inflate away the debt”. It’s the average American upon whom the burden of inflation falls most heavily. Which of course begs the question of just who the Fed is working for. Pondering that question would lead to more insight than all of lower Manhattan parsing interest rates.

      The argument is often raised the Fed needs to keep a lid on rates to keep the debt manageable. That makes sense if you have economic amnesia. Which came first? Easy money or supersized debt? Easy money. That’s how it works … easy money induces more borrowing. So using easy money to alleviate an excess borrowing problem is the financial equivalent of trying to cure an alcoholic with more booze. Economic malpractice.

      Crackpot generational redistribution theories aren’t any better. Making the old poorer would just leave the young less to inherit.

      I have been saying since the beginning of the decade that more inflation lies ahead. But if it meets no policy resistance, there won’t be any policy left to save. Inflation apologists and cheerleaders need to get out of their comfy gated communities and high rises and go spend some quality time in Venezuela or Zimbabwe, where they’ve had great success inflating away debt.

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