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Think prices are high? Just wait ’til summer

May 20, 2011

Prepare yourself for a summertime inflation shock.

An expert who helps put together the government’s Consumer Price Index (CPI) says that the closely-watch inflation gauge could rise abnormally “after June.”

In a phone conversation I had soon after a 0.4 percent increase in consumer prices for April was announced last week, this expert — who I can’t name — confirmed that the CPI is again understating energy prices.

And, again, the computers at the Bureau of Labor Statistics, which collect this data, will correct that mistake in the next few months.

This pattern has been going on for four years now. I first broke this story back in 2008, when Pat Jackman, then the chief analyst for the CPI, confirmed to me that the inflation gauge was going haywire because of the unpredictable nature of this economic downturn.

Now, a different analyst (Jackman has retired) says real-life energy prices this spring rose more than the BLS computers expected, and this is causing the current error.

Here are the details:

That 0.4 percent overall increase in April included a seasonally adjusted 3.3 percent jump in the price of gasoline. But before that adjustment, the CPI really showed gasoline inflation more than twice as bad with an increase of 7.5 percent.

The same thing happened in March. The government seasonally adjusted the increase in gasoline down to 5.6 percent when, unadjusted, it was really 11.7 percent.

Now, don’t go getting all conspiratorial on me. This is just the government’s seasonal adjustment statistics going haywire because of the odd nature of this economic downturn. Nobody is making these numbers look better on purpose.

And the way seasonal adjustments are built, they will self-correct. Nobody can go into the computers and mess with the results.

Can a spike in the CPI this summer be avoided? Yes, if gasoline prices in the real world suddenly dip a lot the index might accidentally adjust itself and a super-hot CPI could be avoided.

But even if gas prices stay right where they now are, the computers still need to offset the underreported rise in energy prices this spring. As they say, payback will be a bitch.

The economy is obviously weakening right now and that could help moderate summertime gas prices. But Wall Street speculators — who were responsible for much of the recent price hike in commodities — will undoubtedly jump on the “peak driving season” theme in an effort to scare some life back into the fading energy market.

And any bit of good economic news would help speculators achieve their aims. As I’ve been saying, the next two employment reports should be unrealistically strong. And those reports might be all the speculators need.

If gasoline prices should rise, then the jump that’s already baked into the summer CPI numbers will be even more pronounced.

There is also a lot of other tricky financial stuff going on right now. If, for instance, Congress stumbles in trying to raise the nation’s debt limit — well, nobody really knows what will happen to the economy, inflation and interest rates. But it won’t be good.


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