A Unique View of CPI from Doug Short

If you want to look at charts that help you understand what's going on in our economy, Doug Short's Updates is a great place to start.  His charts are crisp, clear, concise and easy to understand and he provides a wide multidimensional view of many potentially inter-related metrics all launching from his Update landing page.

Here is one of his charts that gives a unique view to the CPI data that I have not seen expressed elsewhere and is worthy of emulation and further extension..

http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?inflation-since-2000.gif

In the previous two posts, we showed year over year data which is a traditional and well respected method for smoothing out the month to month variability.  But as we all know, inflation is cumulative and so it makes sense to look at year over 2 years, year over 5 years, or year over 10 years changes and compare those to how our earning power has changed over that time period.  E.g. for those on fixed income in retirement, the longer view translates more directly to the degree to which inflation will impact their lives.  A 4 percent difference over the year will have a small effect.  A 35% change over 10 years will have a huge impact for anyone whose income is not keeping up.

Doug's breakdown of the component changes is also highly revealing. 

UPDATE 20 September 2011 at 3:00 PM

Of all the published charts I found online covering the latest release of CPI for August 2011, I found this chart from Doug Short to be by far the most valuable & useful by itself, while inspiring further questions encouraging the viewer to dig deeper.  The big advantages of this chart compared to the others are that

1. it shows the cumulative impact of inflation over an almost 12 year period
2. it breaks down the overall cpi effects into a series of selected and interesting sub-components which show a wide range of cumulative change during this time period.
3. it reveals Doug's thinking about which of the subcomponents he things might be the most important to pay closer attention to (Energy, Medical Care, and Tuition)
4.  And with a little thought it lets us get a hint about how the average headline cpi cumulative increase of 34.2% came about from a weighted average of the three (left most) componentss: a core cpi reading of 26.3% an energy reading of 124% and a food reading of 37.7%.  To me this showed up the weakness of focusing on either the headline cpi number or the core cpi number whether by themselves or even when combined becasue doing so leaves the cumulative impact of energy and food invisible to the viewer.

For me, this chart inspired me to dig deeper because it was crystal clear that headline cpi value cannot be understood unless you get a feel for its key components while looking at the cumulative change.  This letter eventually to the series of cumulative cpi charts we created in our subsequent posts: 

A 20 year cumulative view of headline cpi from FRED - showing cumulative readings of headline CPI by itself for 5, 10, 15, and 20 years periods

Drilling down into CPI 20 year trends - showing a set of interesting sub-components and their 5-20 year cumulative history

Dangerous to have too few metrics or the wrong metrics

In a previous post: Revisiting "See You In September" I noted:

There is a way forward that addresses Michael O'Hanlon's concerns

The relevant quotes from O'Hanlon were:

• "metrics are grist for a fact based debate but history shows it is dangerous to rely on too few of them"
• "metrics were used in Vietnam and we had the wrong ones"
• [the Vietnam metrics] "did net harm to the debate"
• "we can’t be exactly precise about which indicators are the conclusive ones”

Here are a few observations related to the above.

Dangerous to Rely on Too Few of Them. I agree entirely. For Iraq, we need to be able to look at at least 50-100 of the most important factors efficiently, all within a relatively small period of time. For expert use, a much higher number of metrics must be available for review in an efficient and effective manner. Michael O'Hanlon's weekly Iraq Index is one of the best examples out there that pays attention to the principle of not relying on too few metrics.

The Metrics were the Wrong Ones. This is a solvable challenge this time around. First, follow the principle above and make sure that we look at ALL of the important factors. How do we decide? We ask all the experts in all the different areas (security, economy, health, ...) to name what they consider to be the most important indicators. Then we capture and archive and report on all the factors that have been suggested, even if only once. Maybe there will be some "wrong ones" in the mix, but when we have the full set of data to work with, the chances of being led astray will be markedly reduced.

Can’t be exactly precise about which indicators are the conclusive ones. We don't have to be precise. Different people will have different opinions. If we capture all of them, record a history of each trend, and make this data available in Static Graphical format, AND as machine readable data suitable for input into a Trend Visualization application, then we can begin to have good and constructive discussions about what different trends mean and what we should do about them.

Many Eyes - A New Doorway for Graphical Collaboration

From our previous post we noted that:

We believe in many eyes, many hands, many voices working together on the path of mutual discovery (rather than the idea of a single expert figuring it all out and presenting it to us in final form).

To help foster exactly this kind of process, I am excited to note a new web site, Many Eyes that is now available for exactly this purpose. As they describe it on their home page: Many Eyes is a place to: view your data, ask questions, share your discoveries, and harness the collective intelligence of the net for insight and analysis.

Once you register, you can upload interesting data sets and create visualizations that you feel are meaningful. Others can view your visualization and comment. They can also create their own variant visualizations using the data you uploaded and publish these for others to view and comment. Many different visualization formats including time series graphs, bar charts, scatter charts as well as some very creative new chart types are available in an interactive fashion. Creating new charts is similar to the kinds of interactions you might experience with one of the many stock quote charting web sites such as the java charts on prophet.net

Even better, once a data set is uploaded by anyone, it is possible someone else to download that data set for further analysis on their system using their favorite tools. For example, you might want to take a set of raw time line data series and compute some additional columns of data as we did in one of our previous Iraq posts. You could then take your new data set with added columns and upload it to Many Eyes for others to work with directly.

To test out these capabilities, I uploaded the O'Hanlon indicators that we have recently posted about. You can find a visualization that shows a single indicator that I created at: Percent of Coalition Troops Appears to be Shrinking. Once you get to that page, you can select other indicators from the list box on the left side to view the other trends at work. You can also download the entire table to your computer or leave a comment or create at publish your own chart. [Unfortunately, at present the long indicator names cannot be fully seen during the selectino process. So if you want to know what they are, you can find out by clicking on the table like icon element to look at and scroll through the top row of the data set where the indicator names appear]

I see Many Eyes (what a great name) as a big step forward in thinking about, discussing, understanding, and collaborating about the most important factors in our lives. I expect I will be uploading additional data sets and creating new visualizations there in the future. I would love to hear what you think about his newly available capability.

Apprenticed Investor: Know Thyself

Apprenticed Investor: Know Thyself

Hat tip to Brad Delong for pointing out and reminding me of this excellent article by Barry Ritholtz in his Apprenticed Investor. While Barry is directing his comments at our all too human behaviors when we are investing in stocks, his discussion of pitfalls to watch out for is highly relevant to the analysis of any set of complex data (e.g. the 142 Iraq factors we have so far identified).

Take a look. It's a quick read and well worth the effort