CPI Essentially Flat in August 2010

The Consumer Price Index (CPI-U) increased 1.1% YoY and 0.3% MoM (seasonally adjusted) in August 2010.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. (Before seasonal adjustment, the all items index increased 0.1 percent for the month.) Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

The energy index rose in August and, as in July, was the primary factor in the seasonally adjusted all items increase. All major energy components posted increases, with the gasoline index being the main factor. The food index, which declined in July, rose in August. The food at home index was unchanged while the index for food away from home increased.

The index for all items less food and energy was unchanged in August after increasing in each of the previous three months. This pattern mirrors the shelter index, which also was unchanged in August after rising in recent months. Posting increases in August were the indexes for medical care, used cars, and new vehicles, while the indexes for recreation and apparel declined.

Over the last 12 months, the index for all items less food and energy rose 0.9 percent, though the shelter component posted a 0.7 percent decline. The food index increased at a similar rate, rising 1.0 percent, with grocery store food prices up 0.8 percent. The energy index posted a somewhat larger increase, rising 3.8 percent with gasoline up 4.4 percent.

I could dazzle with a micro-analysis of the unadjusted data telling you that the biggest increases in costs come from apparel (1.2%), used cars (1%) and education (1.6%) – or the biggest decrease was in lodging away from home (-2.3%). Or I could pile on telling you core inflation (inflation less food and energy) was 0% perpetuating an economic myth that consumers and the economy only react to core inflation.

But the real story is the very low CPI YoY – and that the seasonal adjustment factors are not working. The graphs below confirm that there is hardly any seasonality in the data, and that the governments seasonal adjustments are over adjusting the data:

My contention is that the smoother the data looks, the better the adjustments. When unadjusted data is smoother than adjusted data – warning bells should be going off.

Although the CPI represents the costs of some mythical person, and it is surrounded by controversy that it understates real inflation – it still acts as a metric to cost changes in the economy. Each of us need to provide a multiplier to the BLS numbers to make this index representative of our individual situations.

I find all seasonal adjustments suffering right now except for the DOL weekly initial unemployment claims. I suspect this is being caused by Great Recession data distorting the results, or that the New Normal has a different seasonality characteristic.

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