Posts Tagged ‘consumer price index’
“You get what you measure”*…
Matt Stoller takes the occasion of Trump’s selection of Kevin Warsh to head the Fed (“an orthodox Wall Street GOP pick, though he is married to the billionaire heiress of the Estee Lauder fortune and was named in the Epstein files. He’s perceived not as a Trump loyalist but as an avatar of capital”) to ponder why public satisfaction with the economy is so low (“if you judge solely by consumer sentiment, Trump’s first term was the third best economy Americans experienced since 1960. Trump’s second term is not only worse than his first, it is the worst economic management ever recorded by this indicator”).
Stoller argues that we’re mesuring the wrong things (or, in some cases, the right things in the wrong ways)…
… the models underpinning how policymakers think about the economy just don’t reflect the realities of modern commerce. The fundamental dynamic is that those models were constructed in an era where America was one discrete economy, with Wall Street and the public tied together by the housing finance system. But today, Americans increasingly live in tiered bubbles that have less and less to do with one another. Warsh will essentially be looking at the wrong indicators, pushing buttons that are mislabeled.
While corporate America is experiencing good times, much of the country is experiencing recessionary conditions. Let’s contrast consumer sentiment indicators with statistics showing an economic boom. Last week, the government came out with stats on real gross domestic product increasing at a scorching 4.4% in the third quarter of last year. There’s higher consumer spending, corporate investment, government spending, and a better trade balance. Inflation, according to the Consumer Price Index, is low at 2.6.% over the past year. And while official numbers aren’t out for the final three months of the year, the Atlanta Fed’s GDPNow forecast shows that it estimates growth at 4.2%. And there are other indicators showing prosperity, from low unemployment to high business formation, which was up about 8% last year, as well as record corporate profits…
… Behavioral economists and psychologists have all sorts of reasons to explain that people don’t really understand the economy particularly well. But in general, when the stats and the public mood conflict, I believe the public is usually correct. Often, there are some weird anomalies with the data used by policymakers. In 2023, I noticed that the consumer price index, the typical measure of inflation, didn’t account for borrowing costs, so the Fed hike cycle, which caused increases in credit card, mortgage, auto loan, payday loans, et al, just wasn’t incorporated. The public wasn’t mad at phantom inflation, they were mad at real inflation that the “experts” didn’t see.
I don’t think that’s the only miscalculation…
[Stoller goes on to explain the ways in which “consumer spending” doesn’t tell us much about consumers anymore, about the painful reality of “spending inequality,” and about the obscure(d) problem of monopoly-driven inflation. He concludes…]
… Finally, there’s a more philosophical point, which I don’t think explains the short-term frustrations people feel, but is directionally correct. Do people actually want what the economy is producing? For most of the 20th century, the answer was yes. When Simon Kuznets invented these measurement statistics in 1934, financial value and the value that Americans placed on products and services were similar. A bigger economy meant things like toilets and electricity spreading across rural America, and cars and food and washing machines.
Today? Well, that’s less clear. According to the Bureau of Labor Statistics, the second fastest growing sector of the economy in terms of GDP growth from 2019-2024 was gambling. Philip Pilkington wrote a good essay last summer on the moral assumptions behind our growth statistics. There is no agreed upon notion of what makes up an economically valuable object or activity, so our stats are inherently subtle moral judgments. Classic moral philosophers like Adam Smith believed in the “use value” of an item, meaning how it could be used, whereas neoclassical economists believed in the “exchange value” of an item, making no judgments about use and are just counting up its market price.
Normal people subscribe on a moral level to use value. Most of us see someone spending money on a gambling addiction as doing something worse than providing Christmas presents for kids, but not because of price. However, our GDP models use the market value basis. Kuznets, presumably, was not amoral, he just thought that our laws would ban immoral activities like gambling, and so use value and market value wouldn’t diverge. But they have.
It’s not just things like gambling or pornography or speculation. A lot of previously unmeasured activity has been turned into data and monetized, which isn’t actually increasing real growth but measuring what already existed. Take the change from meeting someone at a party to using a dating app. One is part of GDP, the other isn’t. Both are real, but only one would show a bigger economy.
Beyond that much of our economy is now based on intangibles – the fastest growing sector was software publishing. Is Microsoft moving to a subscription fee model for Office truly some sort of groundbreaking new product? It’s hard to say, while corporate assets used to be hard things like factories, today much of it is intangibles like intellectual property.
A boomcession, where the rich and corporate America experience a boom while working people feel a recession, is a very unhealthy dynamic. It’s certainly possible to create metrics to measure it, and to help policymakers understand real income growth among different subgroups. You could start looking at real income after non-discretionary consumer spending, or find ways of adjusting for price discrimination.
But I think a better approach is to try to knit us into one society again. The kinds of policymakers who could try to create metrics to understand the different experiences of classes, and ameliorate them, don’t have power. Instead, the people in charge still use models which presume one economy and one relatively uniform set of prices, where “consumer spending” means stuff consumers want.
I once noted a speech in 2016 by then-Fed Chair Janet Yellen in which she expressed surprise that powerful rich firms and small weak ones had different borrowing rates, which affected the “monetary transmission channel” the Fed relied on. Sure it was obvious in the real world, but she preferred theory.
Or they don’t use models at all; Kevin Warsh is not an economist, he’s a lawyer and political operative, and is uninterested in academic theory. He cares about corporate profits and capital formation. That probably won’t work out well either.
At any rate, we have to start measuring what matters again. If we don’t, then we’ll continue to be baffled that normal people hate the economy that looks fine on our charts…
The models used by policymakers to understand wages, economic growth, and consumer spending are misleading. That’s why corporate America is having a party, and everyone else is mad. Eminently worth reading in full: “The Boomcession: Why Americans Hate What Looks Like an Economic Boom,” from @matthewstoller.bsky.social (or @mattstoller.skystack.xyz).
* Richard Hamming (and also to the article above, see “Goodhart’s law“)
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As we ponder the pecuniary, we might recall that it was on this date in 1958 that Benelux Economic Union was founded, creating the seed from the European Economic Community, then the European Union grew.
On that same day, Philadelphia doo wop group The Silhouettes started five weeks at the top of the Billboard R&B chart with their first single, “Get A Job.”
“Inflation hasn’t ruined everything. A dime can still be used as a screwdriver.”*…
As the recent election reminds us, inflation is a central issue to millions. How we calculate inflation has always been a subject of debate. And, as Carola Conches Binder explains, small changes that might seem trivial can lead to enormous changes in how well-off we think we are…
Every month, the US Bureau of Labor Statistics releases its newest data on the consumer price index (CPI). The CPI report is eagerly awaited by economists and policy wonks and investors. It garners heavy news coverage as a key piece of information in macroeconomic policymaking and analysis. The CPI and related measures affect monetary and fiscal policymaking and are often used to adjust Social Security payments, income tax brackets, and wages for millions of workers. Because of these far-reaching impacts, even relatively small changes in the measurement of the CPI can have major implications for households, firms, and the government’s budget. Thus, the technocratic task of measuring the price level is often at the center of political controversies. The evolution of inflation measurement in the United States has reflected both technical progress and these political forces.
The government’s role in the collection and publication of price indexes has been politically controversial from its origins, which were surprisingly late. Wesley Clair Mitchell, the former president of the American Economic Association, in 1921 called it:
a curious fact that men did not attempt to measure changes in the level of prices until after they had learned to measure such subtle things as the weight of the atmosphere, the velocity of sound, fluctuations of temperature, and the precession of the equinoxes . . . Perhaps disinclination on the part of ‘natural philosophers’ to soil their hands with such vulgar subjects as the prices of provisions was partly responsible for the delay…
[Binder recounts the history of price measurement, starting in Italy in the 18th century, explaining that economic and political pressures first resisted having indices at all, then struggled to shape them. She then compares the current approaches in use and unpacks the recent [and current] debate over whether we have inflation and if so, how much…]
… At the time of writing in 2024, inflation is falling by nearly any measure. But as Krugman’s super core episode [see here, here, and here] illustrates, the past few years have intensified public scrutiny of official price indexes and led to debates about their interpretations. In light of this scrutiny, it is important for national statistics agencies to maintain their credibility by adopting methodological improvements, learning from both the private sector and academic researchers, and communicating clearly with the public.
Just as the Bureau of Labor Statistics responded to the Stigler and Boskin Commissions by revising its methods, it has also responded to the Covid-19 pandemic and post-pandemic inflation. For example, the pandemic demonstrated that biennial (every other year) updates to the CPI expenditure weights are too infrequent in times of rapid economic changes. The pandemic very quickly shifted the types of goods and services that people were buying, so expenditure weights based on survey data from 2018 became out of date. People were spending more on food and other items facing large price increases, and less in categories experiencing falling prices, like transportation, implying that the official CPI measure was underestimating inflation.
The Bureau of Labor Statistics could not move quickly enough to change its estimates of expenditure weights, but private researchers could. The economist Alberto Cavallo used data collected from credit and debit card transactions to build his own set of weights that he used to construct a new Covid CPI measure, which indeed rose more quickly than the official CPI in the first months of the pandemic…
Cavallo’s experience constructing alternatives to official inflation statistics began when his home country, Argentina, began doctoring its inflation statistics in 2007 to hide inflation that rose above 12 percent in 2006 and likely averaged above 20 percent from 2007 to 2011. Cavallo and a group called the Billion Prices Project at MIT used web-scraping techniques to collect the prices of goods sold online in Argentina and four other Latin American countries. For all but Argentina, the price indexes based on online prices closely tracked official price indexes, but for Argentina, Cavallo’s estimates of inflation were three times higher than official estimates, and Cavallo’s estimates soon became more trusted than the official statistics.
Cavallo and the other researchers behind the Billion Prices Project have since extended their methodology to other countries, including the United States. In 2011, they started a private company called PriceStats that produces daily-frequency inflation measures for central banks and financial-sector customers in 25 countries, including the United States, using data on millions of product prices from hundreds of retailers.
In the United States, private inflation estimates may supplement the official estimates, but are unlikely to replace them. In part, this reflects the statistical agencies’ willingness to refine their methods, learn from private researchers, and maintain methodological transparency. For example, having learned that biennial expenditure weight updates are too infrequent, the BLS will update its expenditure weights every year beginning in 2023. The BLS also recently sponsored a study, Modernizing the Consumer Price Index for the 21st Century, to investigate additional improvements to the CPI that could be adopted in years to come. The study’s panelists considered a variety of innovations by Cavallo and other researchers, and recommended that the BLS experiment with using a wider variety of data sources, including online transactional data, to improve the timeliness and accuracy of its estimates.
The development of price and inflation measures has often been driven by political controversies, especially during times of war or during labor disputes. The development of the consumer price index arose from a need to ensure that wages and benefits would keep up with the cost of living. The recommendations of several different commissions have led to changes in how the index is computed – changes that have major impacts on the federal budget and on the distribution of resources. Especially in recent years, alternative inflation measures have proliferated. Overall, the official price indexes represent a tremendous intellectual and public achievement, despite the debates that continue to surround their use and interpretation…
Measuring price changes: “Where inflation comes from,” by @cconces in @WorksInProgMag.
(Image above: source)
* H. Jackson Brown Jr.
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As we muse on measurement, we might note that today marks the anniversary of another measurement regime that supplanted what had been a largely an informal (and often intuitive) understanding of a basic fact of life: on this date in 1883, precisely at noon, North American railroads switched to a new standard time system for rail operations, which they called Standard Railway Time (SRT). Almost immediately after being implemented, many American cities enacted ordinances adopting the standard, thus resulting in the creation of time “zones” in the U.S.– Eastern, Central, Mountain, and Pacific. Though tailored to the railroad companies’ train schedules, the new system was quickly adopted nationwide, forestalling federal intervention in civil time for more than thirty years, until 1918, when daylight saving time was introduced.
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”*…
… or inflation is when you get less for the old price. Mark Dent on America’s most egregious case of shrinkflation– an investigation he began with a purchase from eBay…
… It’s everything I hoped for: a factory-sealed four-pack of regular Charmin Ultra toilet paper produced in 1992.
I look at the fine print and gasp…170 sheets per roll!
These days, a regular Charmin Ultra Soft roll, if you can find one, has 56 sheets. Even the roll they market as “Double” doesn’t have 170 sheets — it has 154. And the 1992 rolls are hardly the largest — the back of the package includes a note from parent company Procter & Gamble explaining these rolls have fewer sheets than a previous version.
Toilet paper is shrinkflation at its absolute worst. Imagine if Chipotle spent decades reducing the size of its burritos until they looked like tacos.
How far does the downsizing go? And why has the industry managed to make its products so small with barely any scrutiny?… I called Edgar Dworsky to help unroll the mystery of toilet paper shrinkage.
Dworsky, a Massachusetts-based consumer advocate who runs the consumer education websites Mouse Print* and Consumer World, is perhaps the only person in the US who reads the fine print, and he’s certainly the only one who’s consistently tracked changes to the sizes of products like cereal, snack chips, frozen pizza, and coffee mix, becoming the go-to shrinkflation source. As companies sought to avoid price hikes during the last couple of years and opted for shrinkflation, Dworsky’s decades-long work was profiled by the New York Times and praised by John Oliver.
When it comes to downsizing products, Dworsky tells me that toilet paper, along with paper towels, “probably come in first place.” And my 1992 toilet paper is just the tip of the iceberg…
[Dworsky helps Dent (and us) understand just how far shrinkflation has gone (e.g., a regular Charmin roll, 56 sheets today, had 650 sheets in 1974), why (the full range of) manufacturers are acting so aggressively (spoiler alert: it’s garden-variety greed, but also other forms of self-interest), and how they market less-for-more…]
… While it may seem deceptive to shrink toilet paper with little notice aside from the fine print — and to compare “Mega” and “Double” rolls to basically nonexistent products — it’s not against the law. Companies can shrink their product and charge the same amount, or more, while doing nothing to warn consumers aside from updating the fine print.
The new publicity around shrinkflation has at least caught the attention of legislators. Two new shrinkflation bills have been introduced this year. One would give the FTC power to punish shrinkflation and another would force companies to notify consumers when they shrink products while keeping the price the same. France enacted a similar law a few months ago.
Absent new protections, though, toilet paper will keep getting smaller and rebranded with deceptively larger names that actually contain less product. “There is no end,” Dworsky says.
He’s already spotted Charmin’s latest stunt: The company has swapped out “Super Mega” rolls for “Mega XL,” a rebrand with the same number of sheets. Dworsky suspects Charmin fears running out of descriptors and wants to save the mother of all superlatives, “Super Mega,” for the next time its shrinkage has gone too far.
“I mean, seriously, what can you do to Super Mega? Become Super Super Mega? Super Mega Plus?” he says.
The toilet paper companies will find a way. They always do…
“Why toilet paper keeps getting smaller and smaller,” from @mdent05 in @TheHustle.
* Sam Ewing
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As we compare, we might send carefully-calculated birthday greetings to two important economists, both born on this date in 1954:
Katharine G. Abraham, a professor at the University of Maryland, served as the commissioner of the Bureau of Labor Statistics from 1993–2001 and a member of the Council of Economic Advisers from 2011–2013. She laid the groundwork for the American Time Use Survey, and (germanely to the piece above) testified repeatedly before Congress on the shortcomings of existing methodology of the Consumer Price Index in the 1990s (and the necessity of making revisions based on objective research) and expanded coverage of the prices of services in the Producer Price Index.
Sanjiv M. Ravi Kanbur, T.H. Lee Professor of World Affairs, International Professor of Applied Economics, and Professor of Economics at Cornell University. worked for the World Bank for almost two decades and was the director of the World Development Report. In May 2000, Kanbur resigned as director and lead author of the World Development Report, following the publication of the initial draft of the 2000/2001 report on the internet. Kanbur’s resignation came a year after the resignation of the World Bank’s senior vice-president and chief economist, Joseph Stiglitz…
Kanbur’s initial draft argued that, “anti-poverty strategies must emphasise ’empowerment’ (increasing poor people’s capacity to influence state institutions and social norms) and security (minimising the consequences of economic shocks for the poorest) as well as opportunity (access to assets).” The final version of the report still contained the three central pillars of: (a) empowerment, (b) security and (c) opportunity, however the order was changed to (a) opportunity (with emphasis given to market-driven economic growth and liberalisation as ways of reducing poverty), (b) empowerment and, (c) security. The World Bank denied that US treasury secretary Larry Summers or anyone else had influenced the report to make it less radical…. (source)
“What is it that happens in an inflation? The unit of money suddenly loses its identity.”*…
Today the Bureau of Labor Statistics releases its Consumer Price Index for the month of March. Here is some important context to help understand the figures…
When inflation numbers come out on April 13, they will likely look very high. And measured annually, inflation will probably rise further over the next few months. These headline numbers will be used to argue against the American Jobs Plan and future infrastructure investments, and even to advocate austerity.
But this response will be wrong, for three reasons:
1) The high year-over-year inflation of the coming months will reflect the falling prices of a year ago, whether or not prices are rising more rapidly today.
2) Achieving the Federal Reserve’s price-stability goals requires a period of above-trend inflation; if inflation, correctly measured, rises modestly in the coming months, that’s a good thing.
3) Even if inflation is a genuine problem, scaling back infrastructure investment is not the solution. It might even make the problem worse…
The full explanation at “The Illusion of Inflation: Why This Spring’s Numbers Will Look Artificially High.”
(Image above: source)
* Elias Canetti, Crowds and Power
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As we steel ourselves, we might spare a thought for James Buchanan “Diamond Jim” Brady; he died on this date in 1917. A businessman and celebrity in the Gilded Age, he made his fortune semi-scrupulously in the rail industry and less scrupulously in stock trading and fixed bets.
His appetites for indulgences of all sorts were legendarily huge; but his nickname was a nod to the main among them– to his obsession with jewels, especially diamonds. He amassed stones worth $2 million (equivalent to approximately $61,464,000 in 2019 dollars).
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