This is a quick post to explain how and why NFP and CPI are broken. I will be referring to this post rather than explaining these concepts everytime I am covering CPI or NFP in any given week.
The BLS is the Bureau of Labor and Statistics. It is a US governmental entity whose sole role is to to catalog and release statistics in relation to the US economy on a regular and predictable basis.
NFP
NFP stands for Non-Farm Payrolls. It is essentially a measure of how many net new jobs are being created in a given month. It is, of course an intentionally broken measure because the government has to put their finger on every single scale by which they measure themselves. Instead of waiting for new businesses to add job listings, the BLS makes a guess about how many new businesses were started and then makes a guess at how many seasonal jobs were create based on the guess of how many new businesses were started, and they add this number to the amount of job listings they find in their surveys. Yes seriously, they make up a number and add it to the job totals.
With this in mind, this statistic is mostly useless except in comparing it to the previous months to get a rough idea of if things were better or worse. The numbers provided are mostly meaningless. But the market trades them as if they are not, why? The markets believe that the Fed has dual mandates; stable prices, and full employment. So the markets are exclusively trading their beliefs about what will impact the Feds decisions on monetary policy. Stable pricing, means the markets trade CPI and inflation as if it affects the Feds decision making. Full employment means the markets trade NFP as if it affects the Feds decision making. We know that this is not what actually affects the Feds decision making. But what we know does not matter, all that matters is what the market will do.
NFP excludes farm workers as well as some government workers, private households, proprietors, and non-profit employees. NFP is typically released on the first friday of every month unless that friday falls on a federal holiday like new years day.
Two days before NFP is released, ADP attempts to make an estimate of what the NFP release will be. Many other entities also attempt to make estimates, but for whatever reason, ADP is the one the markets tend to follow the closest for front running any potential trade of NFP.
CPI
CPI (Consumer Price Index) is the governments measure of inflation, it is probably significantly wrong, and I will make a post at a later date explaining why, but its safe to presume that it is an underestimate of inflation, and if I had to guess based on my gut, I would say that the relationship between CPI and inflation is probably closer to a square function.
CPI measures a basket of consumer good prices in comparison to a comparable basket from the same month last year for a year over year number which is the main print. The secondary print is the month over month number which compares the same basket to the goods in the prior month. This number excludes any good that is considered an investment good, so obviously, inflation of the S&P, crypto markets, and the price to buy a home are excluded. Measuring at the consumer level in this way means a few things, but the main thing that it implies is that any meddling in the financial markets takes half a year or an entire year before those affects can filter down to the consumer level. Meaning that once inflation has been induced at the consumer level, it is very difficult to reverse when the only tools in use are at the financial level.
I will do a deeper dive at a later date where I actually attempt to identify the real shape of inflation and will use some examples from the basket of goods that the government is attempting to measure with the CPI, and we will see if we can identify the actual shape of inflation. I will also explain hedonic quality adjustments, and other formulaic changes that the US government uses to tamp the CPI print down. But that is for another post.
For the time being, here is a good video from Peter Schiff about how CPI is broken. In general, I view Peter Schiff as the number 1 analyst for matters of government statistics and federal reserve behavior. In this, he has no peer.
Slightly off topic but would you mind explaining GDP price index vs CPI? I was informed my “cost of living” raise will be 4.2% this year, which is better than any other year I’ve seen - but certainly not keeping up with actual cost of living, and when I asked where that number comes from I was shown in our contract that it’s essentially the gdp deflator. A cursory google result explained some differences between gdp price index and cpi but your explanations are always better.