Lies, Damned Lies, and Statistics

By Cato the Elder


So “Helicopter” Ben Bernanke was doing his usual bit in front of Congress this week, once again testifying that he’s going to maintain “exceptionally low levels of the federal funds rate for an extended period.” According to him, he can afford to do this because:

“Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers’ unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable. The range that most FOMC participants judge to be consistent with the Federal Reserve’s dual mandate of price stability and maximum employment.”

Hmm.  Oil prices rising by roughly 43 bucks a barrel in less than a year doesn’t sound very “subdued” to me.  Maybe I should have titled this post “how to hide inflationary numbers in one easy step.”  See, when lying with statistics it’s always best to lump different ones together into an index, then manipulate the relative weighting and report the aggregate, like they do with the Consumer Price Index or CPI.  The CPI works like this:

Housing 42.7%
Transportation 17%
Food 15%
Medical Care 6%
Clothing 3.7%
Other 14.6%

Say you own your own home and you pay a fixed rate mortgage.  Then the cost of transportation goes up 20% (3.4 out of 100), food goes up 20% (3), medical care goes up 30% (1.8) and clothing goes up 10% (.4).  This would increase the CPI to 8.6 but you lost 20% of your home value (like most of us did) which knocks 8.5 back off the CPI and SHAZAM.  We get a reading of 0.1%, which on the surface looks “subdued.”

Know what else isn’t included in the CPI?  Taxes.  Isn’t that wonderful?  They can raise your property taxes, sales tax, school taxes, income tax, etc. and none of this will affect the index one bit.  Property taxes are especially insidious, as it increases the effective cost of the home and reduces the monthly amount a buyer can afford to pay for it, which then lowers the price you’ll be able to sell your home for.

Yay for more free money, I guess….

H/T Phil Davis


  • AFF says:

    “Oil prices rising by roughly 43 bucks a barrel in less than a year doesn’t sound very “subdued” to me. ”

    Unless it fell by more than double that the previous year.

  • kelley in virginia says:

    cato, help me here. if vacancy rates are rising, why would the cost of shelter be rising, too, if vacancy was the only variable (as B seems to say)?

  • Cato the Elder says:

    And they would have stayed down there, except that you let the GS and JPM’s of the world borrow at zero and then go speculate on oil contracts with the cash. The market conditions that pushed the prices that low haven’t materially changed.

  • Cato the Elder says:

    Kelly, that’s the point – the cost of shelter is dropping rapidly when compared with the other components – the table is the relative weightings.

  • Let's Be Free says:

    Also, 2.6 percent year over year inflation through January of this year while in the deepest post WW II recession and unemployment is hovering near 10 percent is not subdued. We should be experiencing deflation now as part of the healing process. Instead, at this point, the only thing that’s stopping US dollar inflation from a dramatic additional surge is the weakness of the Euro — let’s hear it for the Greeks.

  • kelley in virginia says:

    so Let’s Be Free, you’re saying that but for the weak Euro, we would be experiencing inflation now? is the Yen & China dollar strong? if so, wouldn’t that make us experience inflation?

    *this is so complicated. all I want to do is beat Perriello in Nov.

  • Amit says:

    the Chinese basically fix their currency to the dollar to ensure cheap prices in the US which is why they have to keep buying our debt. but even they are realizing cheap credit doesn’t last forever and they are looking to diversify. if other countries don’t buy our debt the dollar is in for a real hurting. the timing of the situation in Greece helps the dollar in the short term but the Fed is continuing to debase our dollar by printing more of it without anything to back it.

    personally I don’t think the Fed should even exist but that’s for another day

  • Let's Be Free says:


    Based on the Fed’s published currency trade weights, the Euro Zone is the largest currency, followed closely by China and then by Canada. The unusualy sharp and counter to the long-term trend decline in the Euro during the last two months has bolstered the US dollar. Amit has it right, he’s giving a better explanation than I. If it were not for the Greek crisis (which will pass) US dollar inflation would be worse.

    In the long run as China diversifies (thus removing its support for the US dollar) then the dollar will devalue even more. There are very few good long run scenarios for the US dollar that don’t involve meltdowns elsewhere in the world.

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