Monday, August 22, 2011

How come?

Graph #1
Graph #1 shows the Consumer Price Index (blue) and the GDP Deflator (red). You'd think they would be the same. Or similar. That's what I thought. But looking at this graph, I wouldn't call them similar.

Note: The two trend-lines are indexed to different base years. For the CPI, the base year is... the average of values for the years 1982 through 1984. Something like that. For the Deflator, the base year is 2005.

(So if you find 2005 on the horizontal axis, look straight up to the red line, then look to the left to a point on the blue line, and then look straight down from there to the years, you should be looking at 1982 or 1983 or 1984, in there somewhere.)

But FRED lets me pick my own index point, and it re-figures the numbers. So I picked 1980-01-01 for both lines and regenerated the graph:

Graph #2

Now you can see that the two trend-lines run very close together until the mid-1980s maybe. After that they veer apart. The question is: Why?

I suspect that there was a change in the way the numbers are figured, some time in the mid-1980s.

Wikipedia says:

In practice, the difference between the deflator and a price index like the Consumer price index (CPI) is often relatively small.

You'd think. But that's not what the graphs show. But Wikipedia has more to say:

On the other hand, with governments in developed countries increasingly utilizing price indexes for everything from fiscal and monetary planning to payments to social program recipients, the even small differences between inflation measures can shift budget revenues and expenses by millions or billions of dollars.

Yeah. That's why I said there was likely a change in the way the numbers are figured.

But I'm not finding anything on revisions to the Deflator calculation. However, consumer and producer price indexes saw revisions in the late 1970s and again in the late 1980s. Still, the CPI is higher than the Deflator. You might expect that revisions would have reduced CPI growth, bringing it closer to the Deflator. I can't say.

Heh. Maybe it is a result of supply-side economics: making consumer prices higher than prices in general? Can't say.

I'll just leave this hanging, for now.


Good eyes, Jazz. It helps to have more than two eyes looking.

Held steady from the mid-1950s to that 1978 revision. Then there was for a while a steady separation. I still don't know what it means. But I like to look at stuff like this.

1 comment:

Jazzbumpa said...

Actually, the divergence seems to start in the very early 80's. This looks like a very minor percentage difference, compounding over 3 decades.

If your compass is off by one degree, by the time you cross the ocean, you miss your destination by hundreds of miles.