Sunday , 20 August 2017

Slicing & Dicing Consumer Price Index Data of the Past 11 Years

The Fed justified the previous round of quantitative easing “to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate”. In effect, the Fed has been trying to increase inflation at the macro level, but what does an increase in inflation mean at the micro level — specifically to your household? [Let’s take a look and see.] Words: 957

So says Doug Short ( in edited excerpts from his original article* which Lorimer Wilson, editor of (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note below. (This paragraph must be included in any article re-posting to avoid copyright infringement.)

Short goes on to say, in part:

The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I’ll refer to hereafter as the CPI.



The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses…

The chart below shows the cumulative percent change in price for each of the eight categories since 2000.



Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. The latest Apparel number is the first fractional nudge above zero in about nine years. Another unique feature of Apparel is the obvious seasonal volatility of the contour.

Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For example, the spike in gasoline above $4-a-gallon in 2008 is readily apparent in the chart.

The Ominous Shadow Category of Energy

The BLS does not lump energy costs into an expenditure category, but it does include energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.

The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 8.553 out of 100. In other words, Uncle Sam calculates inflation on the assumption that energy in one form or another constitutes about 8.55% of total expenditures, about half of which (4.53%) goes to transportation fuels — mostly gasoline. The next chart overlays the highly volatile Energy aggregate on top of the eight expenditure categories. We can immediately see the impact of energy costs on transportation.



The next chart will come as no surprise to families footing the bill for college tuition. Here I’ve separately plotted the College Tuition and Fees subcategory of the Education and Communication expenditure category. Note that the steady staircase in this cost matches the annual cost increases in late summer for each academic year.



Core Inflation

Economists and policy makers (e.g., the Federal Reserve) pay close attention to Core Inflation, which is the overall inflation rate excluding Food and Energy. Now this is a somewhat peculiar metric in that one of the exclusions, Energy, is an aggregate that combines specific pieces of two consumption categories: 1) Transportation fuels and 2) Housing fuels, gas, and electricity. The other, Food, is the major part of the Food and Beverage category. I should explain that “beverage” for the BLS means alcoholic beverages. So coffee and Coca Colas are excluded from Core Inflation, but Budweiser and Jack Daniels aren’t.

The next chart shows us the annualized rate of change (solid lines) and the cumulative change (dotted lines) in CPI and Core CPI since 2000.



Consumers, especially those who’ve managed expenses over several years, are most closely attuned to the top line.

Inflation and Your Household

The universal response is to moan over price increases and take delight when prices are cheaper but, in reality, households vary dramatically in the impact that inflation has upon them:

  • When gasoline prices skyrocket, a two-earner suburban family with long car commutes suffers far more than the metro family with short subway commutes or retirees with no commute.
  • Also, the pain is even more extreme for low income households whose grocery money shinks with gas prices rise. Remember, Uncle Sam excludes energy costs from Core Inflation.
  • Households with high medical costs are significantly more vulnerable than comparable households with low expenses in this category.
  • The BLS weights College Tuition and Fees at 1.493% of the total expenditures but for households with college-bound children, the relentless growth of tuition and fees can cripple budgets. Of course, Mr. Bernanke would point out that, with a healthy dose of Core Inflation (extended, of course, to wages), those debt-burdened college grads will pay down the loans with inflated dollars…

Which brings us back to the Fed’s efforts to manage the level of Core Inflation. At the macro level, Mr. Bernanke and his Federal Reserve team can doubtless make a theoretical argument for playing puppet master with inflation, but will their efforts — ZIRP and Quantitative Easing — achieve the desired goal?…


Editor’s Note: The above article has been has edited ([ ]), abridged (…) and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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1. A Look at Inflation Specifics Over the Past 5 Months


Core CPI [continues to rise, remaining] above the Fed’s inflation target of 2%. [That being said,] how inflation is impacting our personal expenses depends on our relative exposure to the individual components. [Let’s take a look at the specifics.] Words: 291