Recently, when grocery shopping, I was confronted by one of the great horrors of inflation. The price of one of my beloved delicacies, cheesecake, had risen once again from $10.99 to $11.99 per cake. Pre-pandemic this exact same brand was at $7.49. I’m very aware that when anyone goes to the store they have seen massive price increases occur over the past few years. My upset, annoyance, and dissonance is very much connected to that reality but also to the massive confusion of trying to correlate that information to the Consumer Price Index Report which is published monthly.
Since the pandemic and economic lockdown occurred, I was preparing for higher prices at the grocery store and was rarely surprised at checkout. But in the past year, my beloved cheesecake has gone exponential. It has increased in price by 60% and even though I can still afford it, I refuse to pay the current price. A 60% increase is far above anything that has ever been reported in the CPI which got me thinking about what is in a cheesecake and what exactly is the CPI measuring.
A cheesecake consists of butter, milk, cream cheese, eggs, flour and sugar. It’s hard to comprehend that those components combined have massively outperformed 95% of all investments over the past 36 months.
Answering the question of what the Consumer Price Index is and what does it measure is a little more difficult as it clearly is an index which bears very little resemblance to the reality of what is occurring in the economy.
The Consumer Price Index (CPI) is a price index used to measure and track the changes in the prices of goods and services at the consumer level. It’s a tool utilized by government agencies, economists, and business owners to assess the health of an economy. The CPI is supposed to measure a ‘market basket’ of goods and services that reflects how families spend their money, but it only considers the regional markets in which said items are bought, meaning that it may not accurately portray any given family’s budget. Despite these shortfalls, the United States Bureau of Labor Statistics currently has over 2,400 employees working on various aspects of collecting and organizing data for the Consumer Price Index program.
My major criticism of the CPI is that it is not a static and consistent basket of goods and services. Over the last 50 years, the basket of goods in the CPI has grown to a quantity of over 80,000 items. Instead, CPI is an artificial measure of inflation that is heavily influenced by politics. It fails to accurately reflect the cost of living for most people because it does not take into consideration factors such as the quality of goods and services and differences between geographical areas. It also ignores taxes that change prices due to additional financial burden on households and various other costs like housing insurance, medical care and energy which are significant costs for families. Critics argue that it fails miserably in its purpose. At the foundation, CPI is based on substitutions in the indexing process which use heuristics rather than sound market data to make assumptions about the prices of goods and services across different timeframes. This oversimplification does not allow for a true reflection of the cost associated with acquiring a good or service, resulting in a distorted picture of price inflation and the real-world costs people face when trying to make ends meet. Clearly, this highly politicized index falls short of providing a reliable representation of the cost of living.
Let’s get back to the cheesecake example so that this criticism makes sense. If cheesecake was in the basket of goods, statisticians and economists would be able to remove the cheesecake and replace it with a snack substitute. Should this occur, you can certainly understand how statisticians would replace a fast-rising item of cheesecake with an item that ideally was less expensive or decreasing in price, like “biscuits” claiming that it is a feasible and realistic substitution. This is also referred to as “heuristics.”
Since substitutions are permitted into a basket of goods which is constantly changing the CPI is always prone to price revisions based upon the whims of the political econometric class. While this sounds improbable it gets much worse because these revisions are always occurring changing the key components of the index for political expediency.
Revisions to former consumer price index reports are primarily driven by political interests. To show the nation a lower cost of living, politicians will often revise reports from the past in order to paint their economic policies in a positive light. For example, when new policies are enacted that inflate prices or lessen the value of the dollar, revisions might be implemented so that it appears as if there was no decrease in living standards. Likewise, to distance oneself from what could potentially be an unpopular policy decision, politicians may delay providing a certain revision until after the policy is put into action and its effect on the standard of living can become less obvious. Additionally, political rivals might also manipulate reports to discredit the current administration’s economic decisions in hopes of gaining favor during an election cycle. All of this occurs because the ruling class refuses to allow the citizenry how quickly the cost of living is increasing, and they do not want to be held accountable. These revisions also occur when a government wants to overstate its achievements in terms of economic growth and ignore negative data that could otherwise lead to criticism or assessment. Furthermore, during election cycles these revisions are often exploited to give the public the impression that an economy is stronger than it is due to decreased inflation. It’s important for the public to be aware that these political motivations can distort reality to suit certain interests and it is essential for citizens to stay informed and question any revision regardless of its source.
While my criticism sounds harsh if you study how the CPI is created and calculated you begin to appreciate the power of obfuscation. One of the greatest costs associated with living is the cost of housing. The cost of housing was removed from the Consumer Price Index and replaced with rent in 1983. It was argued that this change was necessary to reflect the actual cost of living more accurately for consumers. Could it be that the cost of rent moves more gradually than the price of a house?
My favorite history professor in college taught me understanding a subject often depends on where your starting point and ending point are. The problem I see with the Consumer Price Index is that revisions to the past reports and the refusal to use a fixed basket of goods, make the CPI of little value to a real-world consumer. Every year, the government releases consumer price index (CPI) reports to track the prices of goods and services. Unfortunately, these revisions can be used to manipulate political outcomes. By re-examining the data and making changes in the numbers, an agency can shift public perception of a particular issue and achieve desired results. For instance, if a CPI report showed inflation was rising faster than expected, new revisions could be deliberately made in order to lower overall estimates. This circumvents consumers’ access to reliable information that would otherwise serve as a decision-making aid for financial matters such as retirement planning or investments. In addition, modifications to CPI reports are intended to expand their accuracy, but this often results in either over- or underestimation of cost increases that affect entire markets and industries. Understanding why these reports get revised is important in achieving fair outcomes while curbing unethical practices. Revisions to consumer price index reports are a commonplace occurrence, yet this phenomenon should be met with scrutiny as it is a powerful tool for political opportunism. The revision of these indices is used by governments, or individuals within government, to adjust the outcome of economic reports, thereby manipulating public perception and creating a narrative that suits their own goals.
To understand the level of manipulation you have to be schooled in statistics and econometrics, which is outside my area of expertise. But these practices are commonplace and you can read all about the mathematical calculations within each and every report that is released by the Bureau of Labor Statistics.
This is important because the Bureau of Labor Statistics just announced a major change to the calculation of the CPI moving forward. You can read about the change here.
The BLS is changing to a 2-year measurement and integration of the CPI into a 1-year measurement.
Since it pertains to inflation let me hypothesize why I think this is occurring.
Look at the following chart of CPI.
If you want to show the smallest amount of inflation where would be the ideal place to measure from? (How about if we start the measurement from where inflation was raging at all-time highs?)
By changing the CPI to a 1-year composite Index the rate of growth in inflation will falsely appear to have fallen.
Call me jaded and suspicious. When stats from the past can be revised any economic magic or miracle you desire can be created!
Let me show you how this works. First thing to do is to stop thinking about the CPI as statistics and think of it as weight gain or weight loss. Now when you see or read a report you will recognize that the Bureau of Labor Statistics is literally like the Department of Weights and Measures. The problem is nothing is carved in stone, so all of the weights and measures are malleable and negotiable to accomplish whatever the political interests desire.
Weights and measures are a crucial part of our lives that ensure fairness, consistency, and accuracy. They help us understand and communicate the quantity of something in a consistent and meaningful way. An effective system of weights and measures allows us to ensure quality control in manufacturing, protect the safety of consumers, determine prices, facilitate fair trade between traders, enable uniform taxation, manage environmental protection efforts, and provide an objective means for resolving disputes. Furthermore, with scientific advances in deep learning and quantitative analysis over the years, precision measurements have become essential for understanding how various aspects of science interact with each other. Ultimately, weights and measures are a key part of our daily lives – their importance cannot be understated.
What are the consequences when you change how something is weighed and measured?
My answer to that question is that then what the weights and measures are supposed to reflect have become corrupted.
Instead of what the price change means, we become trapped in a world of bureaucrats determined that they have the power to control what the measurement is desired to show.
I know this sounds harsh but follow along with me.
Let’s say that in 2020 your weight was between 190 and 199.
In 2021 your weight was between 199 and 210.
In 2022 your weight was between 211 and 220.
You can see that weight is increasing every year. The weight is becoming heavier and heavier.
A child with basic arithmetic can calculate that weight is increasing every year. But if those weights are changeable the entire reason for measuring is a charade.
Do they want to demonstrate slower weight gain? All that is needed is to gradually revise upwards the pounds from the beginning of 2022.
Do they want to demonstrate gradual weight loss? All they need to do is revise upwards the pounds from the end of 2022.
Nobody pays attention to the revisions they just think the CPI value as being gospel truth.
Regardless of the charade that the Consumer Price Index has become it is still one of the most critical reports that the government releases. Why? Because of the narrative that accompanies it.
It appears that with the new CPI, we are on the verge of a new narrative for the economy and the stock market as well.
What do I mean? In the early 1990’s the way the CPI was calculated was changed to reduce government spending. Instead, Chained CPI was adopted and saved the government many billions of dollars from cost-of-living adjustments for pensioners if this measurement had not occurred.
Wall Street has been begging the Fed for a pause in the rate increases.
The Fed has been telling us that they have a job to do.
Wall Street really wants the FED to PIVOT and start easing interest rates.
I can easily envision a scenario where based on the new CPI, the FED will claim that their objective of 2% year over year inflation growth has been accomplished.
But has it really? Or have the economists simply pulled the wool over our eyes? You will see that it all depends on where you start your measurement from.
The last CPI report showed inflation at 6.5% year over year. My inflation experience is significantly greater than that. There is very little that I buy today that has risen by only 6.5%on a year over year basis! For me, the number and the entirety of the report demonstrate an exercise in obfuscation.
I know I sound like a grumpy old man. But that is not my purpose.
What has your experience with inflation been?
Has your rent/housing only increased by 6.5% over the past year?
How about groceries?
Clothing?
Medical Care?
Insurance?
Gasoline?
Entertainment?
The Bureau of Labor Statistics will never be held accountable for the reality that CPI bears very little value to what occurs in the real world. Since CPI is already down 2.6% from its all-time highs, watch closely these new CPI reports moving forward. I think there is good reason to believe that should they accelerate the disinflationary perception; they will give the FED cover to pause and pivot sooner than you think.
If I am correct this would also help explain why precious metals and Crypto has exploded over the last 7 weeks.
How do you go about making sense of it all?
Reports like GDP, employment numbers, inflation rate, consumer confidence, and PMI are tracked closely by many as they can offer insight into how public sentiment is shifting along with providing an overview of certain aspects of the economy. Each report offers a different perspective, but it can be somewhat difficult to interpret without some knowledge of economics or market trends.
The bottom line really is how these economic reports affect your decision-making and your portfolio.
I’ve been extremely bearish in the stock market lately based upon numerous fundamental reasons. However, to my benefit, I don’t let those fundamental reasons interfere with my decision-making.
I learned long ago that markets can remain irrational far longer than I can remain solvent.
This is the primary reason why I trade with artificial intelligence. When the a.i. turns I pay attention. When it aligns with my fundamental reasoning I pay extra close attention and look to exploit the short side of the market.
Below is the chart of the SPY ETF Index.
I don’t need to worry about what to do in the future, the artificial intelligence will inform me.
For the last few days the A.I. has been spot on in focusing my behavior of the short side of the market.
The economists that I respect are reporting inflation year over year at roughly 15%. The government is telling me 6.5% What is your experience? How do you plan for your future effectively?
Great trading is never about how much you make when you are right, but rather by how little you lose when you are wrong.
Everybody has had horrible trades. The difference between the winners and losers in life is that the winners learned immensely powerful lessons from their losses.
Artificial intelligence is so powerful because it learns what doesn’t work, remembers it, and then focuses on other paths to find a solution. This is the Feedback Loop that is responsible for building the fortunes of every successful trader I know.
Artificial Intelligence applies mistake prevention as a continual process 24 hours a day, 365 days a year towards whatever problem it is looking to solve.
That should get you pretty excited because it is a game-changer.
Find the trend.
Scrutinize the 1–3-day forecast.
Lather. Rinse. Repeat.
The answer A.I. offers may surprise you.
This is how small traders grow their accounts by taking small bites out of the market consistently.
Today Artificial Intelligence, Machine Learning and Neural Networks are an absolute necessity in protecting your portfolio.
I, like everybody else, have my opinions about what will happen next. But I never let my opinion get in the way of what the artificial intelligence is forecasting.
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