PeakTrader.com

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BPP Chart:

http://1.bp.blogspot.com/-qreSr3l4w1E/T5WhUEUA-BI/AAAAAAAARSc/xsfliloDmGY/s1600/bpp.jpg

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PeakTrader said...

Paul Krugman on the BPP:

2011

"What you should know is that the BPP numbers don’t exactly measure the same things as the CPI — in particular, no services.

So you wouldn’t expect identical numbers. But they don’t look all that different, especially if you focus on longer stretches, not month by month.

Over the period covered by the BPP, the overall CPI has risen at an annual rate of 0.75 percent, while the BPP has risen at an annual rate of 1.22 percent.

Those who insist that the inflation numbers are all cooked, and that we’re really seeing very high inflation, must believe that the MIT guys are in on the plot.

2012

For some reason I seem to be seeing a resurgence of inflation scare stories, despite the fact that — gas prices aside — inflation remains quiescent. And along with the scare stories come assertions that the inflation numbers are faked, that the government is hiding the true rate.

So it’s time for another look at the Billion Prices Project, which uses internet price quotes to create an inflation measure completely independent of government agencies.

It’s not a perfect match for the CPI, nor should it be. But the BPP index is just as quiescent as the official number.

Of course, maybe they’re part of the conspiracy.

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Whether people believe the CPI or BPP is overstated or understated is meaningless, because there's no proof of any bias, one way or the other.

So, the rate of change, e.g. annually or monthly, is most important.

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It's likely, demand for the categories "Medical Care" and "Education and Communication" increased, although their prices increased more than other prices.

The actual price of medical care is reflected (mostly) by insurance & co-payments.

The actual price of education is offset by grants and scholarships (also, I knew a stranded foreign student who received a tuition waiver).

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Bart, if the price of tuition is raised 10% and students actually pay 5% more, tuition inflation is 5%, not 10%.

Also, you're confusing prices of goods & services with asset prices, debt, and wealth.

The price increase of tuition is reduced by increased debt (e.g. government debt that will never be paid-down) or reduced wealth (accumulated in the private sector), along with discounts (e.g. tuition waivers).

Moreover, your statement "medical share of CPI is 7.1%, medical share of GDP is 17.2%" represents two different categories.

GDP represents output or income, consumption is a subcomponent of GDP, and actual U.S. household or consumer spending on medical care is smaller than total spending in the U.S. health care industry.

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Bart, obviously, you don't understand what the CPI measures.

"The consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households."

Also, the CPI is a proxy for the general price level. Medical care is only part of the CPI.

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Also, the CPI is most likely overstated, based on many econometric studies, because appropriate adjustments have been too slow and too small:

Sources of Bias and Solutions to Bias in the CPI
National Bureau of Economic Research
Jerry A. Hausman, MIT

Four sources of bias in the Consumer Prices Index (CPI) have been identified.

The most discussed is substitution bias, which creates a second order bias in the CPI.

Three other changes besides price changes create first order effects on a correctly measured cost of living index (COLI).

Introduction of new goods creates a first order effect of new good bias.

Quality changes in existing goods will lead to quality bias, which has first order effects.

Shifts in shopping patterns to lower priced stores can create first order outlet bias.

I explain in this paper that a pure price based approach of surveying prices to estimate a COLI cannot succeed in solving the problems of first order bias.

Using data from 1972-1994 Costa finds that cumulate CPI bias during this period was 38.4% with an annual bias of 1.6% per year.

Hamilton (2001) also estimates CPI bias to be 1.6% per year during this period, using a similar econometric approach on a different data set.

This sizeable estimate of bias demonstrates how the BLS procedure overestimates the COLI.

The actual bias would be even greater if the effect of new goods bias and quality change bias were included.

A recent estimate of quality growth by Bils and Klenow (2001) finds a significant estimate of quality bias over the period 1980-1996.

They estimate that the BLS understated quality improvement and overstated inflation by 2.2% per year on products that constituted over 80% of US spending on consumer durables.

These more aggregate studies along with my (and other) micro studies on particular goods demonstrate that CPI bias is likely to be substantial.

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Moreover, I may add, you're using the entire U.S. health care industry as a percentage of U.S. GDP.

It should be noted, in the past 30 years or so, there are more industries in the U.S. and some industries became quite large, which suggest real GDP growth (or nominal GDP growth minus the inflation rate) has been strong.

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Bart says: "reverse hedonics and reverse substitution bias are nowhere to be found in ANY of those studies or in any commentary from the BLS."

Common Misconceptions about the Consumer Price Index
BLS

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI.

On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

Since 1998, hedonic models have been introduced in several other components, mostly consumer durables such as personal computers and televisions, but these newer areas have a combined weight of only about one percent in the CPI.

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Bart, you can find the methods and data. However, it unnecessary, because everything fits together.

For example, 8% inflation doesn't fit with other economic variables, but 2% inflation doesn't contradict them.

CPI conspiracy theories persist no matter what data are reported
April 22, 2012

The BLS provided details on its methodology because the “myths” about the CPI construction methods “continue to circulate,” BLS economists John Greenlees and Robert McClelland said in an August 2008 rebuttal.

Williams holds a bachelor’s in economics and a master’s in business administration from Dartmouth College. His website says he worked as a consulting economist.

Williams’s alternate measure of inflation was 10.3 percent for the 12 months through March, compared with 2.7 percent for the Consumer Price Index.

His assessment of gross domestic product has clocked negative economic performance in every quarter since 2005.

Williams sells subscriptions to his website for $175 a year. He declined to give the number of subscribers. “My business has been picking up over the years,” he said.

Independently of Williams, two economists at the Massachusetts Institute of Technology developed their own methodology.

Roberto Rigobon and Alberto Cavallo launched the Billion Prices Project in 2010.

“In a three-to-four month window, the inflation rate we report is almost identical to the CPI,” Rigobon said. That suggests that the CPI measure is accurate, he said.

“At BLS, we’re just dealing with the data, not the policies behind the data,” said Gary Steinberg, a press officer and more than 20-year veteran of the bureau. “We don’t have an opinion one way or the other on how the data are used.”

On average, the hedonic quality adjustment has increased, not decreased, the reported rate of inflation, the BLS says.

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According to Bart and VangelV, U.S. workers must be the dumbest people in the world, because they demand only 3% wage increases each year when inflation is 10% per year.

Maybe, U.S. workers feel guilty, because they're the most destructive workers in the world, shrinking real GDP 7% each year.

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http://www.blogger.com/comment.g?blogID=28997633&postID=6850934726539027411

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PeakTrader said...

Ken, and no matter how much proof is shown the government's inflation rate is unbiased, some people will, nonetheless, continue to believe in an inflation rate that makes absolutely no economic sense.

And your John Williams StaticStats site was created either by a charlatan or by someone who knows only enough about economics to be all wrong.

If you want to bet on something, bet there are plenty of fools.

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Methinks, the U.S. economy isn't static. It's actually the most dynamic economy in the world.

His static method doesn't fit with other economic variables. It contradicts them.

For example, StaticStats stated inflation has been high and real GDP growth has been negative.

However, I stated before:

In the past 30 years or so, there are more industries in the U.S. and some industries became quite large, which suggest real GDP growth (or nominal GDP growth minus the inflation rate) has been strong.

Moreover, I stated before:

U.S. workers must be the dumbest people in the world, because they demand only 3% wage increases each year when inflation is 10% per year.

Maybe, U.S. workers feel guilty, because they're the most destructive workers in the world, shrinking real GDP 7% each year.

******

Ken, all the other economic variables prove it's unbiased, along with other sound inflation methods.

Here's Paul Krugman on the BPP:

2011

"What you should know is that the BPP numbers don’t exactly measure the same things as the CPI — in particular, no services.

So you wouldn’t expect identical numbers. But they don’t look all that different, especially if you focus on longer stretches, not month by month.

Over the period covered by the BPP, the overall CPI has risen at an annual rate of 0.75 percent, while the BPP has risen at an annual rate of 1.22 percent.

Those who insist that the inflation numbers are all cooked, and that we’re really seeing very high inflation, must believe that the MIT guys are in on the plot.

2012

For some reason I seem to be seeing a resurgence of inflation scare stories, despite the fact that — gas prices aside — inflation remains quiescent. And along with the scare stories come assertions that the inflation numbers are faked, that the government is hiding the true rate.

So it’s time for another look at the Billion Prices Project, which uses internet price quotes to create an inflation measure completely independent of government agencies.

It’s not a perfect match for the CPI, nor should it be. But the BPP index is just as quiescent as the official number.

Of course, maybe they’re part of the conspiracy.

******

Inflation was overstated before appropriate adjustments were made, although they've been too slow and too small. So, inflation is less overstated.

Of course, some people pound square pegs into round holes. I guess, they believe they're round pegs.

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http://www.blogger.com/comment.g?blogID=28997633&postID=1766248223039343887

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Small business optimism remains low:

NFIB - National Federation of Independent Business
APRIL 10, 2012

After six months of gains, the Small-Business Optimism Index fell by almost 2 points in March, settling at 92.5. After a promising start to the year, nine of ten index components dropped last month, most notably hiring plans and expected real sales growth each taking a significant dive, in spite of owners reporting the largest increase in new jobs per firm in a year.

What could have been a trend in job growth is more likely a blip,” said NFIB Chief Economist Bill Dunkelberg. “And what looked like the start of a recovery in profits fizzled out. The mood of owners is subdued—they just can’t seem to shake off the uncertainties out there...What we saw in March is painfully familiar – this was the same pattern of growth followed by months of decline from 2011. History appears to be repeating itself—and not in a good way.”

http://www.nfib.com/press-media/press-media-item?cmsid=59825

Chart:

http://www.nfib.com/research-foundation/surveys/small-business-economic-trends

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Small Business Drives U.S. Economy
2007

Small business -- firms with fewer than 500 employees -- are job creators...represent 99.7 percent of all firms, create more than half of the private non-farm gross domestic product, and create 60 to 80 percent of the net new jobs.

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