Measuring Inflation Has Always Been Controversial

Economists, investors, and pundits have complained about inflation measures ever since the national CPI was introduced in 1921. 

Mark Twain captured America’s spirit of skepticism when he listed the three kinds of lies— “lies, damn lies, and statistics”—though he might have added government statistics. That skepticism is playing itself out in the current inflation debate.

Since peaking at 9.1% in June 2022, inflation fell sharply toward the Federal Reserve’s goal of 2% before plateauing above 3%, according to the consumer price index, or CPI, compiled by the U.S. Bureau of Labor Statistics. Other government price measures, including the Fed’s favored personal consumption expenditures price index, or PCE, from the Bureau of Economic Analysis, largely agree with the CPI. Presidential candidate Donald Trump, among others, doesn’t.

“They had inflation of—the real number, if you really get into the real number, it’s probably 40% or 50% when you add things up, when you don’t just put in the numbers that they want to hear,” the former president said at a June campaign event.

Casting doubt on government data finds receptive listeners, as Americans name high prices as the biggest threat to household finances.

It doesn’t help that inflation measures involve complex calculations with names like “hedonic adjustments,” and that even academics use four-letter expletives in arguing their cases.

Where economists see Adam Smith’s invisible hand at work, others see something more sinister. Recent reports of an $18 BigMac have fueled talk of pricing conspiracies.

The Fed is distrusted on the political left and right, with some calling it an “economic manipulator” that should be abolished. “America has a strong populist tradition,” former Fed Chairman Ben S. Bernanke writes in 21st Century Monetary Policy.

“Populists—from Andrew Jackson to, more recently, members of the Tea Party and Occupy Wall Street—have always been hostile to perceived concentrations of power in finance and government.”

That hostility has been present since the Bureau of Labor Statistics released the first national CPI, which included data going back to 1913, in February 1921. In a Page One editorial headlined “Deceptive Index Numbers,” The Wall Street Journal accused the BLS of using “Bolshevist calculations” to assume “an impossible minimum living wage of the lordly figure of $2,600 [around $45,000 today] a year.”

Further, it wrote, “a series of radical readjustments” in the index made it “look fishier than ever.” Updates in the CPI mix, in fact, keep it relevant. Cars and radios, for instance, weren’t common enough to be included in the earliest years. Straw hats were prominently represented in 1919 before falling from fashion.

Some items have remained. Back in 1913, round steak cost 22.3 cents a pound, which converts to about $7 today—a bargain, compared with the actual U.S. average of $8.25 in May. Butter, though, cost 38.3 cents a pound then—the equivalent of around $12 today—versus the $4.59May average.

Despite its “Bolshevist calculations,” the CPI became indispensable to business.

In 1922, Barron’s used it to show how prices had fallen from inflationary postwar highs, concluding that further business recovery “is fairly assured.” American’s changing spending is seen in comparing today’s expenditures with the Great Depression.

From 1935-39, food represented 33.9% of an average household’s expenses; it accounts for just 13% today. Apparel ate up 11% of a Depression era paycheck; it’s 2.6% today. Shelter costs, however, have risen from 33.7% to 36.1%; and medical care is up from 4% to 7.9%.

The bureau compiles the CPI from surveys of metro-area businesses and households, collecting about 94,000 prices and 8,000 rental-housing-unit quotes a month. Indexes are compiled by category, region, and in variations such as the “sticky price,” or core measure used by both the CPI and PCE that excludes food and energy prices.

Excluding food and energy seems counterintuitive, since they make up a large chunk of expenditures. But commodities are susceptible to price disturbances outside of normal supply and demand. Think of the oil embargo of 1973, which tripled prices in months, or the spike in grain prices caused by Russia’s 2022 invasion of Ukraine. Central banks lack tools to address such shocks.

The CPI shelter-costs calculation, too, draws scrutiny. It uses rent for renter-occupied housing, and implicit rent for owner-occupied units.

Why not consider ownership costs? Owned housing units, along with mortgage interest, property taxes, and improvements are considered capital goods— rather than consumption items.

Perhaps the most controversial practice is known as hedonic adjustment. If the quality of a good goes up—say, a PC gets a better processor and more memory—its price can go up, too, without adding to inflation as measured by the CPI. “It’s a con,” wrote Bill Gross in 2004, claiming hedonic adjustments lowered annual inflation by as much as 1%.

The Fed prefers the PCE mainly because it responds to changes in spending habits more quickly than the CPI. The PCE tends to track the CPI, with a slightly lower rate of inflation.

The core PCE rose 2.6% in May—in line with expectations, and the lowest increase since 2021. Yields fell as some investors saw this as a sign the Fed may be ready to cut interest rates. Fed Chair Jerome Powell shot that down, saying he first needed to be sure he’s getting “a true reading on what is actually happening with underlying inflation.”

Don’t we all.

Source: Barron's

Consumption may further weaken if inflation not addressed

The Philippine government should focus on managing persistent inflation in the coming months to support household spending growth, analysts said.

University of Asia and the Pacific Senior Economist Cid L. Terosa said elevated inflation was the “culprit” for muted consumption seen in the second quarter.

“Consumption will start to pick up towards the last quarter of the year, but it might remain muted if inflationary pressures persist and potential risks manifest,” he said.

The Philippine economy grew by 6.3% in the second quarter as higher construction and investment growth helped offset slower consumption.

Household final consumption expenditure grew by 4.6% in the second quarter, slowing from 5.5% a year ago.

Headline inflation accelerated to 4.4% year on year in July, mainly driven by a spike in electricity rates and food costs. This was the fastest inflation print in nine months.

In the first seven months of the year, headline inflation averaged 3.7%, above the central bank’s 3.3% full-year forecast.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said the slowdown in consumer spending could largely be attributed to high inflation.

Increased borrowing costs reduce the purchasing power of consumers, “forcing some of the poorest of the poor and some people from the middle class to save and prioritize basic necessities such as food, shelter, utilities, transport fares, among others,” he said.

The Bangko Sentral ng Pilipinas (BSP) has kept policy rates at a 17-year high of 6.5% since October 2023. From May 2022 to October 2023, the BSP hiked borrowing costs by a total of 450 basis points to tame inflation.

Diwa C. Guinigundo, GlobalSource Partners’ Philippines analyst and former central bank deputy governor, said well-anchored inflation expectations could help provide additional incentives for higher consumption.

In an e-mail, he cited the need to improve households’ access to credit by easing lending standards without compromising standards.

“[Household spending] can be encouraged by ensuring better access by households through a better, more efficient system of the banks in being able to know their customers,” he said.

Emy Ruth Gianan, who teaches economics at the Polytechnic University of the Philippines, said targeted subsidies for various sectors may be needed in the short term to address anemic household spending.

“Note that households are most likely tight on spending because they do not see prices going down any sooner,” she said. “If we give them a signal that they can spend even at a fraction of the cost, then maybe we could boost consumption.”

FOOD INFLATION

Filomeno S. Sta Ana III, coordinator at Action for Economic Reforms, called on the government to come up with a strategic plan to boost agricultural productivity and address rising prices of food, which constitute around 43% of total household expenditures.

“Government’s reduction of food import tariff, particularly rice tariff, provides some alleviation, but is a temporary solution,” he said.

President Ferdinand R. Marcos, Jr. in June signed an executive order which slashed tariffs on rice imports to 15% from 35% previously, until 2028.

Security Bank Corp. Chief Economist Robert Dan J. Roces said the government should focus on addressing the challenges facing the agriculture sector.

“While the economy is on a solid footing, challenges such as the agriculture sector’s continued weakness and potential global economic headwinds require careful management,” he said in a Viber message. “This could indicate challenges in food production or rural economic activities.”

In the second quarter, agriculture and fisheries output contracted by 3.3%, worsening from the 1.2% decline a year earlier, reflecting the impact of El Niño.

Farm damage caused by El Niño reached P15.3 billion, according to the final estimate issued by the Department of Agriculture.

HEALTHCARE COSTS

Meanwhile, Mr. Sta Ana said inadequate social services, especially for healthcare, “make the situation all the more distressing for the population” amid high food prices.

He noted that out-of-pocket expenses for health are equivalent to 46% of total current health expenditures.

“A World Bank figure shows that a previous trend of decreasing out-of-pocket expenses as a percentage of current health expenditure has recently been reversed,” he said.

Aside from healthcare, education is also one of the most expensive items among household expenses.

“To the extent that more public money is made available to expand such public services, the way this is done in other jurisdictions, that would be most helpful to households,” Mr. Guinigundo said.

Ms. Gianan said concerns over the affordability of healthcare and the lack of access to it force households to plan well ahead for future expenses.

“Young people tend to spend more than their elderly counterparts, and spending smooths out throughout the life cycle as people save more for their retirement and other life needs,” she said in an e-mail.

“This is compounded by the fact that we have underdeveloped social services which compels people to really look out for themselves,” she added.

Source: Business World

July inflation accelerates to 4.4%

Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported.

Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year.

This is within the 4 to 4.8 percent forecast of the Bangko Sentral ng Pilipinas (BSP) for the month, however, it was higher than the 4 percent average inflation forecast in an Inquirer poll of 11 economists conducted last week.

Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.

This marked the first time that the inflation breached the central bank’s 2 to 4 percent target range for the year.

For the first seven months, inflation averaged 3.7percent, still lower from the 6.8 percent in July 2023.

Source: Inquirer