From the rapid growth of crypto to the dramatic volatility of the asset class, governments around the world are responding through regulatory and legislative actions. Some jurisdictions have announced clear and accommodating frameworks in the hope to create the crypto hubs […]
The US Bureau of Labor Statistics began collecting data on prices and the cost of living in the 1880s, primarily in a (failed) attempt to settle political disputes over tariffs.
In the 1940s, the Roosevelt administration introduced a cost-of-living index intended to account for new technologies such as toasters and washing machines.
And in the 1980s, “hedonic adjustments” were introduced.
The BLS uses hedonic adjustments to adjust “prices whenever the characteristics of the products included in the CPI change due to innovation.”
The result is that the Consumer Price Index is somewhat misnamed: It’s not so much a measure of price as it is a measure of value.
The BLS confirms as much on its website: The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. We use a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI.
This is not an exact science.
According to CPI data, for example, the cost of a car has barely changed since the 1980s.
Yes, the price of a Kia Soul in 2022 is about 5x the price of a Yugo in 1988.
But a Kia is at least 5x better than a Yugo. So, as far as CPI is concerned, the price hasn’t changed.
And if you buy a new iPhone 13, it may cost the same as the iPhone 11 that coincidentally died just after you received the upgrade offer.
But the 13 is 40% faster and better than the 11. So, for CPI purposes, the price has fallen by 40%.
It does have some logic: A Kia really is better than a Yugo and the iPhone 13 is, at least statistically, better than an iPhone 11.
But do these things make you happier?
Does driving your Kia to Whole Foods make you 5x happier than driving your Yugo to Blockbuster?
Can you even tell the difference between the 11th and 13th versions of the iPhone?
Maybe you do appreciate these things — for about a minute. And then, if you’re anything like me, you start complaining your Kia is not a Mercedes and your iPhone takes forever to load webpages: 40 or 50 nanoseconds, at least.
This, I think, is why everyone seems to believe, against all historical evidence, the world used to be a better, nicer, safer place than it is today.
Admittedly, some things have gotten worse: If you've been on an airplane lately, there's a better than even chance your flight was delayed or your luggage was lost. And there's a 100% chance your seat was smaller than it used to be and your legroom is at least a half inch less than it was. (I’m unnecessarily tall, I notice these things.)
That stingy legroom, however, is not reflected in CPI: hedonistic adjustments are only used as a deflator.
Your air travel experience may be 40% worse, but, for CPI purposes, it does not offset the benefit of your 40% faster iPhone.
So, is CPI completely worthless, then?
According to today’s data, being happy in July of this year cost 8.5% more than it did in July of last year.
Honestly? That sounds about right to me.
It's not great: 8.5% is a lot to pay just to be only as happy as you were a year ago.
But the 0% month-on-month print suggests it’s no more expensive to be happy this month than it was last month.
And that, evidently, is good enough for risk assets: Stocks, bonds and crypto were sharply higher today.
Processed Jobs Data
Does the market reaction make sense?
Yes and no.
With all of the statistical shenanigans in mind, it seems kind of silly that 20 bips of CPI one way or another should have any effect on risk assets.
Until you remember, in markets, perception is reality.
The Fed targets statistics, and the statistics are looking better, irrespective of the underlying reality they misrepresent.
Let’s not overdo it, though: Crypto prices are acting like Powell will now be deliberately pumping our bags — he will not.
His No. 1 priority is to maintain the Fed's inflation-fighting credibility, dearly earned in Paul Volcker’s Yugo times and nearly lost in Powell’s pandemic times.
Today’s data is evidence Powell will retain the Fed’s inflation fighting credentials, but he's not going to risk snatching defeat from the jaws of victory with a premature pivot.
Ultimately, however, interest rates are set by the market, and the market has now officially pivoted to recession.
Risk assets have rallied on the idea that inflation has peaked and the economy is still growing.
That optimistic assessment is based mostly on the latest payrolls report, which showed the US added 528,000 jobs in July.
But that statistic, too, is about as processed as the Beyond Burger you had for lunch.
Payroll data is based on surveys, which are always suspect. And in July, surveyed employers said they added a modest 152,000 jobs.
It was only the seasonal adjustments that let the Labor Department report the eye-popping 528,000 number: 386,000 of those jobs are a statistical guesstimate.
We don’t actually know how many jobs there are or if the economy is growing or shrinking.
And more statistics won’t help much: We won’t really know until listed companies tell us how things have gone over the next few quarters.
I expect they will go well.
But they might not: So, you may want to squeeze a few more miles out of that vintage Yugo you still drive.
Canadian Watchdog Eyes Celsius, Spurred by Pension Fund Deal: Report — Blockworks
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