A Forex View From Afar

How the CPI and PPI is calculated…

Written by A Forex View From Afar on Tuesday, May 20, 2008

Back to www.thelfb.com


Germany, a country obsessed with inflation- PPI 1.1%
Switzerland, a country known for its price and financial stability- PPI 0.4%
UK PPI a month over month read - 2.4%
US PPI merely 0.2% (No typo, it is at 0.2%)

Doesn’t all that seems odd, most countries show inflation and a lot more are experiencing it, but US simply doesn’t want to show any at all? Even Japan has inflation, a country that has experienced deflation for years.

Well, it seems someone had finally come up with the reason why US does not experience inflation issues in their statistics, but does experience huge inflation in Consumer's pockets.

John Kemp at Sempra Metals had found out that BLS, the government agency that deals with Labor Statistics, likes to flatten-out prices as much as possible. The chart underneath speaks all by itself.



Gasoline prices have gone up by 10% since January 2008, while the BLS calculated prices had actually decreased by 3%, over the same period of time.This can be explained by the fact stat agencies release their data in adjusted format, to avoid sudden movements in prices and volatility. we then do not know how truthful the adjusted data the is, since they record a price we feel in our pockets 6 months later, or even further out

The adjusted data has also another major draw-back- over time this rather huge price increase will be absorbed into the CPI and PPI, so if inflation persists over the medium term, we are going to see some inflationary reads coming out of US.

Gasoline prices account for around 5.5% of the total CPI. If they increase around +15.5% by the end of the year (on an adjusted basis) that will add +0.85 percentage points to the headline inflation rate taking it from +3.9% in the twelve months to Apr to as much as +4.8% in the twelve months to Dec (other things being equal).
John Kemp, Sempra Metals

With Oil reaching $129 per barrel, it seems by the year-end that inflation will be higher than it reads now, unless of course someone doesn’t decide to change, again, the way that Inflation is calculated.

This study was the case for Oil, just think how much most commodities and services have increased their prices lately. Where will the CPI be at the end of the year, then? By all accounts way under what the US Consumer feels each day, and therefore way under the reads that are used in other regions to value their currency against the Usd.


Source:
FT: Real, on-the-road, US inflation