BBC warns of trouble in gold market

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By John Crudele
New York Post
(nypostonline.com)
March 3, 2000

Did Washington eliminate the rising price of oil from
the last Consumer Price Index?

If you have a car, you know that the price of gasoline
has beaten up the family budget in recent months.
Homeowners who heat with oil haven't missed that point
either. In fact, the fear is that every industry from
airlines to the makers of widgets will try to pass on
their energy-cost increases to consumers in the months
ahead.

Yet Washington is showing very little official
inflation. How can that be?

We may have found the answer.

In a tactic that's reminiscent of the old Soviet
Union's method of statistics keeping, officials in
Washington seem to have simply eliminated the nasty
effect of energy prices from their figures.

I say "seems to have" because it is virtually
impossible to understand what the ledger keepers in
Washington are doing, even after they've explained it.

But here's what I know.

The Bureau of Labor Statistics reported two weeks ago
that the nation's Consumer Price Index rose just 0.2
percent for January. That bit of good information for
the markets came shortly after we found out that
producer (wholesale) prices were unchanged for the
month.

Let's concentrate on the CPI in this column.

Buried deep in a footnote in the CPI report, under a
section about seasonal adjustments, is this statement:

"Effective with the calculation of the seasonal factors
for 1990, the Bureau of Labor Statistics has used an
enhanced seasonal adjustment procedure called
Intervention Analysis Seasonal Adjustment for the CPI
series.... For the fuel oil and the motor fuels
indexes, this procedure was used (in January) to offset
the effects that extreme price volatility would
otherwise have had on the estimates of seasonal
adjusted data for those series."

If this footnote really means what it seems to say,
this disclosure is astounding. Washington has been
assuring us that that inflation is under control, but
it has been reducing -- and maybe even eliminating --
the impact of the rising price of oil in its
calculations.

That's like leaving the rain out of a weather report.
Or the visitors' runs out of a box score.

If this is what BLS is doing, it would produce a
meaningless number.

The financial markets actually pay attention to these
CPI reports, even though -- as I've explained before --
the Federal Reserve has come to distrust them and now
relies on inflation information gathered from private
sources. Last week, in fact, Federal Reserve Chairman
Alan Greenspan publicly said that he'd no longer take
the CPI into consideration.

But as far as I know, Greenspan doesn't know about this
footnote.

John Williams, an economist who runs the Shadow Bureau
of Government Statistics in Hawthorne, N.J., was the
one who brought this matter to my attention. Williams
did his best to estimate what inflation would have been
had the government not used Intervention Analysis.

His guess? Instead of a 0.2 percent jump in the CPI,
the number would have jumped a full percentage point
for the month. And the producer price index would have
been up 2.5 percent instead of zero.

Williams is particularly amazed by the rest of the
footnote, which states that "extreme values and/or
sharp movements which might distort the seasonal
pattern are estimated and removed from the data prior
to calculation of seasonal factors."

"This is incredible. If only those people using heating
oil had their bills handled by the Bureau of Labor
Statistics, they'd have no trouble paying them."

It isn't that the statisticians are doing something
sneaky. They are, after all, explaining everything
right in the report. It's just that nobody knows this
statement is there.

What they are doing is wrong and dangerous.