Bad Analysis

I had some free time so I checked out my financial blogs. Anyway, I ran across a new (to me) one called Get Rich Slick. I was turned off by it immediately by the fact that it says up front that it is intended for those who earn over $100k per year (maybe someday!). Anyway, I checked out one of the top articles that took me back. It is called Wholesale Inflation at 13%, Food Inflation at 18%. In it he has the following quote from another article (emphasis his):

The 1.1 percent rise in wholesale inflation, which followed a 1.4 percent drop in August, was more than double what economists had been expecting.

The big increase was driven by a 4.1 percent surge in energy prices in September, including an 8.4 percent jump in gasoline costs, the biggest rise for gasoline prices since March. Food costs surged by 1.5 percent.

He then goes on to say:

Do the math. A 1.1% rise in wholesale inflation translates into 13.2% ANNUAL INFLATION! And a 1.5% rise in food costs translates into 18% ANNUALIZED INFLATION!

Immediately, I realized this was bad analysis and I wrote a comment in reply. After submitting it, it, it did not show up nor did I get a confirmation that it was submitted and awaiting moderation. As a result, I wanted to post it here as an example of what can happen if you spin information with bad analysis or look for trends without considering long term data. The worst part is that I am uncertain if he made an error or was intentionally trying to spin data to support his arguments. The reason I say this is because I looked over a few other posts and he keeps going on and on about how double-digit inflation is coming.

Anyway, here is my response:

I think you need to reconsider your highlighting:

The 1.1 percent rise in wholesale inflation, which followed a 1.4 percent drop in August, was more than double what economists had been expecting.

I think you need to look at trends at a whole rather than focusing on ONE MONTH. Using the chart on this article as reference we see that wholesale prices have risen approximately 3.4% through September rather than the 9.9% your analysis would predict.

Of course, my analysis is a little off because I simply added and subtracted the percentages when in fact each percentage is based upon the value of the prior month. I am not a statistics expert, but I think that if we account for that from the base price at the beginning of the year we will get an inflaction of 3.42%.

As we can see looking at late last year’s numbers that appear to the left of the graph, there is no necessary correlation between the way a month will go two consecutive years, but if for the sake of argument we assume the last three months will go as the first 9 have on average, this will lead to a yearly inflation of about 4.56% in wholesale prices… much better than your 13.2% number.