Consumer Price Index Flat
but Inflation Rate Rises!

December 2002

How can the CPI be flat and the inflation rate rise?

The rise we are seeing is exactly what we have been predicting for months! And next month is almost guaranteed to be another even sharper uptrend. The reason why is fairly interesting. This month the Consumer Price Index stayed exactly the same as last month (181.3) but the inflation rate rose from 2.03% to 2.20%. How can that happen?

The explanation is actually quite simple, the index fell for November 2001 so anything other than a decline in the index will cause the rate to increase as last years numbers fall out of the equation. This is why the "analysts" are so confused, one minute they are worried about deflation and the next they worry about inflation. They don't seem to understand that the inflation rate is a basket of 12 numbers and the old ones are constantly being removed and new numbers take their place. If you replace a negative number with a zero (as happened this month) the average for the year still goes up! But the rate for the month was still zero. So it appears that inflation is rising rapidly when in actuality it is zero!

Actually, what we are seeing is that the deflationary effects of 9/11 are falling out of the annual calculations.

• Last October (2001) the index was 177.7
• By November the index had fallen to 177.4
• In December the index fell further to 176.7
• The Index began rising again in January but did not even reach October's levels
• January 2002 came in at 177.1
  
• February was 177.8

So we had 4 months of zero inflation! As they fall out of the calculations the "Inflation Rate" will appear to skyrocket but may actually be flat or decline slightly. If it rises at all, the increase over last year will be spectacular.

It is a bit tricky to talk about negative increases. The decline for last December was 0.39% for the month (or an increase of -.39%). If that happened every month for a year we would have a massive deflation of 4.68%. That is an inflation rate of -4.68% or an almost 5% decline in prices over the year.

If inflation hits +5% we begin to panic, what does -5% indicate? Catastrophe on the scale of 9/11 every month!

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