I noticed yesterday that there was a purchasing managers’ report that seemed to say the cost of raw materials has increased of late. That’s not too surprising, considering energy prices have risen over the last year. And I would think that, as the rest of the world’s economies get back on their feet, increased competition for materials would bring upward pressure on prices.

Over the last year or so I’ve noticed I’m hearing about the core consumer price index as opposed to the good ol’ CPI; as I understand it (perhaps all too imperfectly), this new measure differs from the old in that it does not include energy costs. The only sense I can make of that approach is that it’s an attempt to mask the appearance of inflation. Did I miss the point? Is an inflationary period upon us?

Well if the price of raw materials went up due to higher energy prices then whatever the finished product was would also increase in price (or the company would have to cover the lower profit margin or loss). Thus it would seem that higher enrgy prices would show up as higher prices for goods in general and eventually in the inflation numbers even if they don’t include energy prices in general. Actually I think one of the main reasons not to include energy prices in inflation numbers is the seasonal fluctuation of the numbers would make it look like we had “seaasonal” inflation even though over the course of a year or two inflation and the yearly energy price average were stable. I do think that some energy price (maybe an average price of the last year) should be used in the figures. Frankly though I’m not exactly sure what the figures are including nowadays, it’s been almost a decade since my college Econ. days.

Energy and food prices are notoriously volatile when compared to the remaining components of the CPI. The “core” consumer price index is an attempt to identify inflation or the lack thereof in the other CPI components. I have always thought, as you mentioned, that it is a ploy to disguise any appearance of inflation. The people who prepare, distribute and comment on these figures, the Fed govt and Wall Street firms, have a vested interest in hiding any inflationary indications. And don’t even get me started on foreign Central Banks.

A couple of possible reasons for excluding energy from price indices:
(a) the seasonal factor outlined by funeefarmer
(b) the externally-controlled, and artificially-controlled, nature of oil prices. Of course, this criterion could be used to exclude almost anything produced by a trust or oligopoly, so I don’t know why they’d pick on oil prices in specific. The point is, a rise in oil prices doesn’t necessarily constitute inflation. Inflation is an increase in the money supply out of proportion to economic growth.
So, if energy becomes scarce, energy prices will rise, but that’s not because of the (controllable) money supply, it’s because of the (uncontrollable) shrinking of the economy.

Of course, regular old inflation will affect energy prices as well, but maybe the big brains think it messes up price indices more than it helps, since energy prices fluctuate for a lot of non-economic reasons, like how well the OPEC ministers are getting along that week.

This is all a big WAG on my part, since I don’t remember monetary policy very well.

Sorry, beatle. I’ve been hanging in GD for a little too long. Here you go.

Come on guys, there’s no ploy.

Core CPI is in fact CPI with food and energy prices removed. This is to wash out the high volatility of those prices in the short term. (CPI is already seasonally adjusted during each reporting period.) No one says things like “The CPI has been increasing at a rate of 10%/year for the past 6 quarters, but core CPI has only been 2%.” People do say “The Consumer Price Index increase last month or last quarter was .4%, but core CPI was only .2%.” It’s a short term phenomenon.

Why are food and energy particularly volatile? Well, for one thing they are hard to store for long periods, so stocks tend to be low. Something as simple as a refinery fire in New Jersey or a cold snap in the midwest can send prices for these commodities really gyrating over the short term. Another reason is that short-term production levels can swing around pretty drastically for small reasons.

It’s worth noting that when people talk about inflation, they mostly talk about the Consumer Price Index (CPI), but an equally important measure is the Producer Price Index (PPI). As the name implies, PPI measures the prices that producer of goods pay for their inputs. Cars are in the CPI, steel is in the PPI.

The Purchasing Managers Report is a survey from which economists try to divine future changes to PPI and then CPI. As important or more important than the input prices part of the Report is the cool stuff like how much the purchasing managers are ordering and how consistently they are receiving deliveries. This allows economists to make a guess at inventories at various places in the economy and from that determine the supply of goods in the near term. Combine that with other surveys of business and consumer demand, and you can get a pretty good look at where prices are heading in the near term.

That’s why you’ll see the market sometimes move in a direction contrary to that which might be suggested by the “number” reported on Bloomberg TV (you do watch Bloomberg TV in the mornings, don’t you?)

Jesus saves… Gretzky grabs the rebound… He Scores!