a few words about inflation

18 Feb

The basket of goods and services consumed is different for everyone, so inflation is experienced uniquely by all. The person who lives in a lower-cost area and drives into a high-cost one for work might have above-average transportation expenses but below-average housing costs. The retiree might spend less on housing but much more on medical care. College students spend a lot on education.

Here is the “basket” used to compute the Consumer Price Index (CPI):

I see glaring differences between what I personally spend on many of these categories, and I suspect a lot of the population would, too. The CPI is used “adjust incomes, lease payments, retirement benefits, food stamp and school lunch benefits, alimony, and tax brackets.” But the government is keeping the books. So what’s the incentive here? It goes without saying that they stand to benefit most by keeping it as low as possible.

The current commodity environment is undoubtedly inflationary. The rising prices of base metals, food inputs, cotton prices, among others, don’t just affect electronics, food and apparel costs but ripple into other areas as well. The longer high prices persist the more they have the potential to permanently raise structural costs (including wages). It may be a while before these increases show up in the official statistics, though, as the most recent 1.6% year-over-year print indicates. Nonetheless, these increases can profoundly affect consumers without a commensurate increase in the Consumer Price Index (CPI).

Below are year-over-year prices changes (through yesterday) on several basic commodities. Not a pretty picture if these prices are sustained for a length of time. Even grease is up almost 80%. Grease!

To close I’ll mention one of my favorite statistics the BLS publishes, the Special Index called “Purchasing power of the consumer dollar (1967=$1.00)”. That number — $0.152. Purchasing power clearly erodes over time, even if it doesn’t show up in the statistics in real time.

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