Wednesday, March 23, 2011

Journamalism (Daily Mail edition)

I was forwarded this article from the UK's Daily Mail from a friend and thought I'd comment on it as it seems another case of journamalism run amok. In this case, however that could be due to one of two possibilities: either the journamalist doesn't understand what he is writing about or he's pushing a right-wing agenda... which, given that the Daily Mail usually supports the Conservative Party, is a distinct possibility. On to the evidence...

The headline claims that the cost of living in the United States is now at an all-time high (notice they don't say the Cost of Living Index, which is the same as the CPI). That in and of itself is deceiving as the cost of living is almost always going to be at an all-time high sans a deflationary economy (but I'll get to this later). 

The first evidence provided by the Mail of an increased cost of living is the statistics from the Chained Consumer Price Index. The Chained CPI (or C-CPI-U) doesn't factor out food and energy prices, which is the main reason economists don't often use the C-CPI-U as a reliable measure of inflation. 

Food and energy prices are very volatile in the short-term so they have to be factored out. A late frost in Florida will cause a huge spike in orange juice prices, but should that spike in orange juice prices be considered when the Fed is trying to measure inflation? If so, they would be trying to tame inflation at a time when inflation isn't a problem. And as for gas and other energy and commodity prices? Well gas prices, in particular, have become unhinged from the economy as a whole (thanks to Goldman Sachs) and all commodity prices are now more subject to the swings of speculators and the total amount of money in wealth funds the world over, and the growing use of commodities in the large emerging markets. Anyway, for all those reasons, commodity prices shouldn't be used to decide whether or not inflation is present in an economy.

Now, admittedly, commodity prices do play a part in inflation but they're not nearly as large as you'd think (even if it seems like an item would have a large commodity component to it). Here's an example via Paul Krugman:
In December, says the Bureau of Labor Statistics, a one-pound loaf cost an average of $1.386. How much of that was the cost of wheat? As best I can tell, a bushel of wheat produces about 63 pounds of bread; wheat has lately been selling at around $10 a bushel; so we're talking maybe 16 cents of that loaf of bread, or less than 12 percent of the price, reflecting the cost of wheat. 
What I get from this is that wholesale food prices have a surprisingly small impact on the price of food, let alone on overall consumer prices. Again, not zero. But it's not at all peculiar to see large commodity price rises while overall inflation stays low.
Anyway, long story short, economists prefer the Core CPI (which factors out food and energy prices). And if the Core CPI is used then what we see is that inflation rates are at their lowest levels (roughly 0.5% year-over-year) since the CPI was first adopted and measured by the BLS in 1957.

Now then, let me address the other major fallacies (or deceptions) from the article. The article says that the cost of living is now at an all-time high. As mentioned before, my answer to that would be, "Well, duh!" 

The U.S. economy hasn't actually experienced across-the-board deflation in any products except in house and car prices in certain pockets of the country. Deflation is a very dangerous and almost incurable economic problem, but just because we're veering dangerously close to it and economists are warning us about it, doesn't mean we've actually experienced it. Core inflation is running at an all time low (roughly 0.5% per year) but that still means things are getting more expensive on a 0.5% year-over-year basis. So of course the cost of living is higher today than it was yesterday, higher than the day before yesterday, higher than last week, last month and last year. The disingenuous Daily Mail article fails to mention this.

As if to further prove they're being disingenuous about inflation they include a chart from the BLS that is almost completely meaningless. The chart shows the relative price level of the Chained CPI and shows that it's going up and up and up. But that chart does not show inflation "rates", it only shows what an assembled basket of goods (priced at $100 in 1978) would cost today ($220). So again, without actual deflation, this chart is only going to show rising prices.

In short, the Daily Mail's article and the journamalist who wrote it are probably no different from all the other conservative hacks out there calling on the U.S. government to rein in spending and halt all efforts to get the economy back on track.

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