Archive for April, 2010

The Bureau of Labor Statistics maintains two major inflation indices, the Consumer Price Index (CPI) and the Producer Price Index (PPI). Since it is more widely used, the CPI is often criticized. I can recall several anecdotes stating that during the administration of

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hamburger replaced steaks in the CPI, reflecting a lower standard of living for Americans. (Note: unlike many polls, the poll above is entirely unscientific and placed here solely for your own amusement; it serves no other useful purpose.) Without descending too far into sarcasm, I will say that although I haven’t seen the exact details of that particular change to the CPI, it does seem reasonable that changes in the price of hamburger would more accurately reflect changes in the cost of living than would changes in the cost of steak. Note that at the time the decision was made (whenever it may have been), the re-weighting would have had 0 impact on the index reading; future changes in the price of hamburger would be reflected in changes to the index. I don’t necessarily agree with all BLS decisions, and they do update the CPI to reflect changes in lifestyle, but as a tool to measure aggregate inflation, the CPI is actually pretty solid.

On the other hand, the BLS really does make some bizarre decisions in maintaining the PPI. For example, they decided that in late 2009, consumer-grade potatoes nearly halved in their production importance:

Relative importance of component series in the Producer Price Index 
by stage of processing, December 2009 1/                                        02/16/10
________________________________________________________________________________________
      |         |                                                 | Relative importance |
      |  Com-   |                                                 |_____________________|
 SOP  | modity  |             Index                               | December | December |
 code |  code   |                                                 |  (2008)  |  (2009)  |
______|_________|_________________________________________________|__________|__________|

3111             Finished consumer foods, crude                        1.751     1.993 
        011101   Citrus fruits                                         0.080     0.088 
        011102   Other fruits and berries                              0.398     0.486 
        011103   Melons                                                0.047     0.037 
        011301   Dry vegetables                                        0.035     0.033 
        011302   Fresh vegetables, except potatoes                     0.579     0.771 
        011303   Sweet potatoes                                        0.005     0.005 
        011304   Irish potatoes for consumer use                       0.096     0.053 
        011901   Tree nuts                                             0.095     0.084 
        012101   Wheat                                                 0.010     0.009 

It’s hard to say exactly what the logic was behind this particular BLS PPI re-weighting decision. Maybe they thought that Americans were switching to a low-carb lifestyle… Perhaps they felt that changes in the price of consumer-grade potatoes had less impact on manufacturing costs than previously anticipated. That seems reasonable. But then again… why would potatoes have been weighted so much higher just a year previously? Furthermore, should tree nuts really be weighted so high relative to the other commodities? I don’t think there are satisfactory answers to these questions, but if you happen to come up with one, feel free to leave a comment.

For aggregate measures of inflation, the CPI is far superior to the PPI. I don’t generally suggest using the PPI aggregates for any purpose, although when the BLS updates the individual commodity series in a timely manner, it’s not hard to create custom price indices.