US Inflation Statistics: 'Nonsense'

HOW YOU MAY HAVE KINDA SAVED $392.10

November 16, 2006 -- YOU will be happy to know that your household costs actually went down in October because of that light truck you didn't buy.

I don't mean to mess with your head this early in the day. But the declining costs of light trucks was a major reason the government earlier this week was able to announce a surprise 1.6 percent drop in producer prices for October.

If you believe the U.S. Department of Labor - whose statistics rarely make much sense - we are on the verge of another deflationary episode like the last one that never happened.

I'll explain about deflation scares in a minute.

But first, let me talk about light trucks.

I didn't buy a light truck last month, and I'm guessing that you didn't either.

Yet as insignificant as the price of these vehicles is to the average American's budget, a $392.10 drop in light-truck prices did help the government conclude that the producer price index (PPI) declined.

Wow! It almost makes me wish I needed a truck.

And I'm almost tempted to buy one - except that the price didn't really drop $392.10. (Remember that lies are always best when told with precision - hence the 10 cents.)

In fact, the new light trucks that reached showrooms this fall didn't really go down 9.7 percent in price as the government implies.

Washington simply concluded that the new models are so much better than last year's class that buyers got more for their money - and a price break.

How did the Labor Department come up with the $392.10 figure?

It said that you got an extra $160.09 (notice again the precise number) in extra value from new federally mandated and non-mandated safety improvements "such as tire pressure monitor systems, stability control and airbag system improvements."

And you got another $58.01 in powertrain improvements, plus another $174.00 in value for "other quality changes." These include "changes in levels of standard and optional equipment."

Voila, the price went down even if it really went up.

Hedonics (a word that I've been barred from using ever again) and an assortment of other such razzmatazz allows Washington to report lower inflation, which automatically makes economic growth look stronger than it is, which in turn allow politicians to proclaim that an economy is great when it isn't, which ultimately gets them thrown out of office.

But on a more pernicious note, these inflation tricks can also fool economic planners like the folks at the Federal Reserve.

Recently the head of the Dallas Fed, Richard Fisher, complained that Alan Greenspan's Central Bank kept interest rates too low because it had been tricked into thinking the nation was on the verge of deflation.

He said the Fed was incorrectly worrying about deflation.

"In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets," Fisher added.

In other words, if you bought a house at a price that turns out to be too high, you can blame bad data caused by hedonic adjustments to light trucks that makes the PPI looked tamer than it really is.

Today, the government will announce its October Consumer Price Index.

It too will be nonsense.

john.crudele@nypost.com

http://www.nypost.com/seven/11162006/business/how_you_may_have_kinda_saved_392_10_business_john_crudele.htm