Tag Archives: CPI

Retail Sales, Inflation Add Fuel to Fed’s Rate-Hike Trajectory, Treasuries Dive as Yields Surge, by Wolf Richter

The world was short Treasuries and the world was rewarded with stronger than expected stats on inflation and retail sales that sent bond prices down and yields up. 

But something funny happened on the way to the headlines.

In describing the retail-sales data released today, words like “slumps” and “declines” kept cropping up in the headlines. This referred to the seasonally adjusted month-over-month data, so the percentage change from December retail sales (peak holiday selling season) to January retail sales (peak merchandise-return season). This comparison is only possible with gigantic seasonal adjustments that try to smooth away the holiday selling peak and the post-holiday hangover in a way that, hopefully, the index ticks up a bit from December to January.

In today’s reading, this change in seasonally adjusted total retail sales – includes food services and drinking places such as restaurants and bars – ticked down 0.3% from December to January, triggering the “slumps” and “declines” in the headlines. But this figure is only as good as the seasonal adjustments. Here is what the month-over-month percentage change of total retail sales looks like not seasonally adjusted:

Not seasonally adjusted, total retail sales plunged 21% from December to January, but they plunged between 19% and 23% in prior Januaries. Hence the gigantic seasonal adjustments needed to smoothen out this wildly gyrating seasonal data.

But on a not-seasonally-adjusted basis, the year-over-year growth in total retail sales was a healthy 5.1% in January, compared to January 2017, in the same range of the year-over-year changes in prior months and at the higher end of the spectrum since 2012:

There was only tepid growth in the bar-and-restaurant business, with sales of food services up only 1.8% year-over-year. Excluding food services, retail sales jumped 5.6% year-over-year not seasonally adjusted:

To continue reading: Retail Sales, Inflation Add Fuel to Fed’s Rate-Hike Trajectory, Treasuries Dive as Yields Surge

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About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service, by Charles Hugh Smith

The Bureau of Labor Statistics adjusts the CPI hedonically, for improvements in quality. How about those goods and services that have deteriorated? From Charles Hugh Smith at oftwominds.com:

The quality, durability, utility and enjoyment-of-use of our products and services has been plummeting for years.

One of the more mysterious aspects of the official inflation rate is the hedonic quality adjustments that the Bureau of Labor Statistics makes to the components of the Consumer Price Index (CPI).
The basic idea is that when innovations improve the utility (and pleasure derived from) a product, the price is adjusted to reflect this improvement.
So if television screens become larger, while the price per TV remains the same, the hedonic quality adjustment adjusts the price down when calculating the CPI.
In other words, since we’re getting more for our money–more quality, more features, more goodies, more pleasure–the price is adjusted down to reflect this. If a TV that cost $250 had a 19-inch screen in the old days, and now a $250 TV has a 27-inch screen, the price of TVs in the CPI is adjusted down to reflect this increase in what the consumer is getting for her $250.
So while a TV still costs $250 to the consumer, in terms of measuring inflation the TV is reckoned to cost (for example) $225, as the consumer is getting a larger screen for her $250.
In other words, the price of TVs declines when measuring for inflation, even if the retail price remains unchanged. This is how the official rate of inflation can be so low even as real-world costs keep rising.
If you read the above link, you’ll find the mathematical model used to reduce the price of products when calculating the CPI, i.e. the rate of inflation.
While the BLS website makes mention of the possibility that hedonic quality adjustments occasionally go the other way, i.e. quality has declined, it’s clear this almost never happens. “Innovations” are always improvements.
I propose we start tracking anhedonic quality adjustments, i.e. significant declines in quality, durability, utility and the pleasure derived from the product or service. (Anhedonia: inability to experience pleasure from activities usually found enjoyable.)