US CPI Inflation’s Smoke and Mirror Statistics

Cato’s Mark Calabria asks Is Housing Holding Back Inflation?

He writes,

Also of interest in the April numbers is that if you subtract housing, which makes up over 40% of the weight of the CPI, then prices increased 4.2 percent — twice Bernanke’s measure of stability. What has always been problematic of the housing component is that its largest piece is an estimate of what owners would pay themselves if they rented their own residence. This estimate makes up about a fourth of the CPI. As the chart below demonstrates, for much of 2010, the direction in this number was actually negative, which held down CPI over the last year. The current annualized figure for owner’s rent is 0.9 from April 2010 to April 2011. Oddly enough, this is below the actual increase in rents, which was 1.3. For most homeowners, the real cost of housing — their mortgage payment — has likely been flat, not decreasing. So whatever benefit there has been to declining housing costs, most consumers are unlikely to feel any benefit from those declines, if they are actually real.

Mr. Calabria is right. Housing data has been foundering. US housing starts dropped 10.6% in April says the Financial Times.

US Federal Reserve researchers and their apologists (academic and institutional representatives) have staunchly been defending (denying) Fed policies, by dissociating rising commodity prices with CPI inflation.

Yet, ironically, the US government has waged war on inflation by trying to influence the prices of commodities.

Importantly, putting into context Mr. Calabria’s concern, the construct of the US CPI seems mostly a statistical smoke and mirror.

Some great charts from Dshort.com can elaborate on this.

The above is the CPI breakdown

The above is the % change of each component of the CPI.

Except for housing, apparel and recreation all other categories have been moving sharply higher!

Dshort has more charts of CPI relative to Energy, Tuition and CPI versus core CPI here-where you can see the difference.

So unless you don’t eat or travel or have children in school, inflation seems nonexistent only for ivory tower based experts.

Also, it would be a wonder why Chairman Bernanke has refrained from mentioning ‘core inflation’, as Forbes Brian Domitrovic observes,

Heard a lot about “core inflation” from Federal Reserve chairman Ben Bernanke lately? You haven’t, because two months ago his handlers had him stop using the term. Now he uses substitutes, such as “headline” versus “underlying” inflation

What’s with the jargon? Everyone knows that prices are going up. Corn on the cob that used to sell a dollar a bushel is now a dollar each. Talk about core inflation: These days even cobs (which feed pigs, after all) at the center of the fruit of the stalk are worth a pretty penny.

Suppressed CPI gives the Fed the leeway to inflate more.

I am reminded of Mark Twain who once said, lies, damned lies and statistics.