CovOps
 Location : Ether-Sphere
Job/hobbies : Irrationality Exterminator
Humor : Über Serious
 |  Subject: The Government's Statistical Whopper of the Year  Thu May 29, 2008 5:18 am | |
| Consumers shell-shocked by ever higher records for oil and gasoline prices may have been surprised by the mild Producer Price Index (PPI) update recently issued.
The Labor Department reported that from March to April, wholesale prices rose only 0.2 percent, half of what the markets had been expecting. The primary cause for this tame reading was that energy prices fell 0.2 percent, and in particular gasoline prices fell by 4.6 percent.
What, you think I misunderstood the news?
I'll reproduce the exact quote from the CNBC article linked above, just so you believe me:
The slower than expected overall inflation was due to falling energy prices and flat food prices, categories that boosted inflation in the previous month.
Energy fell 0.2 pct, the largest drop since December, while food was unchanged in the month. Within the energy sector, gasoline fell 4.6 pct, the largest drop since December.
This struck me as odd. It reminds of a line from Chico Marx: "Who are you going to believe, me or your own eyes?"
I do a lot of work in energy economics, and so I follow oil and gas prices fairly closely. Despite the official figures, I was pretty sure gasoline prices went up from March to April; they certainly didn't fall 4.6 percent! I had to get to the bottom of this mystery.
First Stop, EIA
The first thing I did was check the price history at the Energy Information Administration. Yes, this is a government entity, but I've met some of their current analysts, and they are just the sort of retentive geeks you want crunching boring but important numbers. (If any are reading, I hope they realize that is a compliment.) Lo and behold, the EIA table shows that the lowest average weekly gasoline price in April was higher than all of the weekly averages in March. Clearly gasoline was more expensive in April than in March, just as I (and every motorist in the country) would have guessed. Hmm.
To Every Price, There Is a Season
After asking some colleagues and nosing around, I hit upon the answer. No, we weren't living in 1984, you see, it was that the Bureau of Labor Statistics (which calculates CPI and PPI) had made a seasonal adjustment to the raw gasoline prices that people actually paid and that the EIA recorded. As a different CNBC article explains:
Typically, gasoline prices rise sharply in April as the arrival of warmer weather encourages people to drive more. The government data is adjusted to reflect that pattern so that it can highlight variations from the trend. Because gas prices did not rise as much last month as they typically do in April, the seasonal adjustment showed that prices fell.
Now before we see whether this can explain the anomaly, a brief digression: The paragraph quoted above is a bit too simplistic. To correctly make a seasonal adjustment, one doesn't simply look at how much prices typically rise from the prior month to the month in question. This rule might make sense if annual prices were constant, but with a backdrop of ever higher prices year after year, the rule isn't quite right.
For example, suppose that, each and every month, the price of a widget always rises by 0.3 percent, year in and year out. According to the explanation given in the CNBC article, one might think then that if we look at widget prices last month and see that (as usual) they rose exactly 0.3 percent, then we would conclude, "Ah, that's normal; they always do that from March to April. So really widget prices were flat."
But to reason in this fashion would be wrong, of course, because we would reach the same conclusion for every month, and end up thinking widgets had stayed the same price throughout the year. (In other words, every month we would say, "Oh, that 0.3 percent rise is just due to the change in month; it did that this time last year, as well.") Yet in reality, widget prices would be about 3.7 percent higher after a twelve-month cycle, so clearly we wouldn't want to seasonally adjust all the price hikes away.
The correct way to do seasonal adjustments is actually rather complicated, and different econometricians could use different approaches. (For example, how far back do you go? Do you look at the change in gasoline prices from March to April 1924 to help interpret the monthly rise in 2008?) I'm not faulting the CNBC writer for the explanation given above — notice that I'm not trying to give a better description — but I still thought it worth mentioning that the analysis wasn't quite right.
So Is the Mystery Solved?
Now at this point, I put down my Guy Fawkes mask and bulletproof vest. My government hadn't lied to me after all. Phew!
But still something bothered me. That original article said gasoline prices had fallen by 4.6 percent, when in reality they went up by a decent amount. And we know that crude prices are surging up at record-breaking levels. Could seasonal adjustments really explain all that away?
To shed light on this question, I went back to the EIA data sets. Rather than weekly averages, this time I pulled up monthly averages, going back as far as they had them (August 1990).[1] I constructed a new table (shown below), which lists April-over-March gas price increases from 1991 through 2008. I then added a column showing the average April-over-March increase for the entire time span from a given year up through 2007. Finally, I added a back-of-the-envelope "seasonally adjusted" column, which took the 2008 value for April over March — 6.6 percent — and then subtracted the relevant monthly average for the periods of different lengths.
(See table and the rest in the original article...)
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