The Bureau of Labor Statistics reported some inflation numbers Tuesday morning that spooked investors in early morning trading. At first glance, the numbers are confusing. The BLS says that wholesale prices for finished goods rose 0.2 percent. But if you subtract energy and food costs from that figure to get the so-called core inflation rate the number jumps up to 0.4 percent. The BLS also reported that the average wholesale price of "finished energy goods" fell by .2 percent in April.
How can that be? Everyone knows that the price of a barrel of oil and a tank of gas are breaking new records practically every week. How the World Works paid $4.21 a gallon on Sunday in San Jose, Calif., setting a new personal record.
The truth is, wholesale prices of finished energy goods actually rose by 2.9 percent in April, and the U.S. government will admit this if pressed.
How to explain this paradox?
The inflation figures released on Tuesday by the BLS are "seasonally adjusted." Usually, gas prices jump by a significant margin in April, in concert with the kickoff of the summer driving season. Since the BLS's goal is to figure out how much prices are rising or falling beyond what normally occurs in a typical year, every April it automatically factors in a big jump in gas prices, and then compares what is happening to what typically takes place.
But this year is no normal year. Gas prices rose so much earlier in the year that even though they continued to surge in April, they did not rise, in percentage terms, as much as they usually do, which means that when the BLS factored in its normal seasonal adjustments, gas prices "fell."
Up might be down, and down might be up, but on the New York Stock Exchange, investors aren't fooled -- one reason why the Dow Jones industrial average had sagged more than 200 points by noon, Eastern time. Another reason: bad quarterly numbers from Home Depot, Staples and Target -- all telling the same story: consumer distress.
For more fun with how the government calculates its economic numbers, Kevin Phillips' piece "Numbers Racket" in the May Harper's is instructive. Thanks also go to Barry Ritholtz's Big Picture for help deconstructing the new inflation numbers.