Yellen and the Fed want 2% Inflation but the question 2% of what is the unknown answer. Inflation in CPI terms is defined by the BLS as either higher prices or falling dollar values. CPI is measured as average prices and reported month to month on a seasonally adjusted basis. CPI as an index was 241.43 in December’s release and rose in January 1.41 index points to 242.83. The base period is 100 from 1982.

In USD terms, a $100 item in 1982 now cost $242.83, a $10,000 automobile now cost $24,200. 83. Prices, USD values and Inflation are rising. Wages must meet or exceed Inflation or workers lose. Since 1982 or 35 years, the CPI index increased 24.59% or 0.24 per year. January was reported 0.6%, actual was 0.58%. Must take index point difference 1.41 and divide by last index 241.43 = 0.0058, then multiply by 100 to equal 0.58%. Gasoline increases were partially responsible for the 0.6 increase. Gasoline/ Oil in USD, AUD and NZD CPI Indices account for just about 0.2. Good estimation is CAD, EUR, JPY and the remainder of the world factor the same Gas/ Oil accounting at 0.2.

CPI increased 2.5% over the past 12 months. The index increased 2.5%. At 0.6%, the percentage is bumping against the 90% Confidence Interval. Is Yellen interested in this most widely reported All City CPI or the new chained C-CPI -U with a 100 base period from 1999. Possibly CPI W to account for Wage Earners and Clerical workers, or maybe CPI Transportation. Literally 100’s of CPI indices exist because CPI is tied to Wages, Social Security, Government benefits and in markets TIPS and Inflation Swaps.

Is Yellen working from the 1982 base period CPI, 1999 Chained or maybe the last 5 years. A full adjustment is done every 5 years because Seasonal V Non Seasonal is then fully calculated. March CPI is vital because it completes the full 5 year mark from 2012 to 2017. Seasonal is best for short term trend because it eliminates weather, sales, cycles, holidays. Non Seasonal is best viewed for longer trends because it takes all factors into consideration.

If 2.5% is the headline and 0.6 the Core then both figures reveal little about the overall index or the index target to meet this 2% goal. Point 2.5% is a 12 month read on the index and a small small move overall. From 0.6, point at 2% is miles away. The reporting of the information as Headline V Core is a misnomer and far to short term to assess overall CPI.

January 2012, CPI as an index was 226.65, today 242.83 and a difference of 16.1 index points. The monthly deviations in 5 years ranged from a one time report at 0.8% to minus 0.5% and seen a total of 3 times or 3 months in a 60 month period. January 2012 CPI increased 0.2% and +2.9% from 2011 to 2012. January 2017 rose 0.6% and 2.5% yearly. The monthly rose while the yearly dropped to compare one release to previous 5 years.

Yellen and the Fed state reliance on PCE. Since 2008, yearly CPI Inflation was 1.7 V 1.4 PCE. From 2000, CPI 2.4 V PCE 1.9. Core Inflation runs higher than PCE Core, 3.9% V 3.4% since 2000 and 1.7& V 1.5% since 2008 based on Cleveland Fed figures. The difference is in the weights calculated for 2 separate basket measures as CPI measures household purchases and PCE measures what businesses are selling. My question for Yellen and the Fed is where is CPI and / or PCE most comfortable in relation to Fed Funds and what are actual targets for both. Overall, I see Inflation and Fed Funds far to high.

Brian Twomey