Consumer Price Index (CPI) – maybe the “Con” part should be emphasized

‘Ever find yourself filling up the tank with petrol or wheeling the cart out of the grocery story, wondering how deflation could be a problem?  I do.

In November, the Consumer Price Index grew by 1.1% over 12 months.  Net of food and energy costs, the so-called Core CPI grew by just 0.8%.  That’s not what our budget at home reflects.  The reason why is in the way the government manipulates calculates inflation.  The following chart shows what the current CPI basket of component indexes looks like.

Note that housing comprises about 42% of the index, while Food & Beverages, Transportation, and Medical Care comprise just 38%.  Now, I’m not arguing that housing isn’t important, but once you’ve got a roof over your head, you could argue that the other three categories become more important.

The Bureau of Labor Statistics, however, says that homeowners could rent out their homes, and, therefore there needs to be some allowance for that.  Thus, was born, Owners Equivalent Rent, and it is fully 25% of CPI, as the chart below shows.

Here is a look at the November CPI and the basket components.

Economists are notorious for stripping economic series down to their cores.  Whatever their ostensible reasoning for doing so, the real reason is because the headline figures are harder to forecast than the core versions.  Since they do that, so can we.  So here is a look at the components amongst the CPI baskets that you and I would say are the essentials; they’re what we need to spend money on to live.  For the chart below, I’ve factored out the housing and recreation components.  This version looks more like our household; it would look even more like it if we factored out the prices of vehicles. 

And here is the resulting CPI from the Mr. Obvious Insights’ household CPI.  If we factored out vehicle prices–we haven’t bought one in seven years–our inflation picture–and, I’m guessing, yours–would look even worse (i.e. higher.)

That’s still not what we’d call runaway inflation, is it?  It is, however, almost twice the official statistic and more than twice the so-called Core rate of inflation, and it certainly doesn’t look inflation.

Does it matter?

It absolutely matters because it is the basis of government policies–namely the Federal Reserve.   The entire premise of quantitative easing–stated or not–is that we must not slip into deflation, as we don’t want to repeat the mistakes of the ’30s. 

2.29% is a whole lot more ‘flation than is 1.13%.

So if deflation isn’t a problem, then what is the Fed doing by quantitative easing?  Inflating bubbles, and like all of them, this one will end badly.  Candidates for bubblicious asset classes are:

  1. Emerging markets
  2. Commodities
  3. Others?

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2 Responses to “Consumer Price Index (CPI) – maybe the “Con” part should be emphasized”

  1. Ed says:

    Good observation. Graig

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