Friday , 29 September 2023

The Latest Inflation Data & How It Personally Affects You

…What does inflation mean at the micro level — specifically to your household?…Let’s do some analysis of the Consumer Price Index, the best-known measure of inflation.

Relative Size Of Each Of 8 Categories

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 we’ll refer to hereafter as the CPI.

(Click on image to enlarge)

The slices are listed in the order used by the BLS in their tables, not the relative size… For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link.

The 8 Categories By Cumulative Percent Change

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

  • Medical Care has been the fastest growing category…
  • Apparel [has been] deflated since 2000 and has nearly returned to those levels in recent years. Another unique feature of Apparel is the obvious seasonal volatility of the contour.
  • The BLS does not lump energy costs into an expenditure category…[but] does track Energy as a separate aggregate index… [which is] assigned a relative importance of 7.347 out of 100… We can immediately see the impact of energy costs on transportation [in the chart].

(Click on image to enlarge)

Add Energy

College Tuition & Fees

The next chart will come as no surprise to families footing the bill for college tuition. Here we’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.

Add College Tuition

The BLS weights College Tuition and Fees at 1.613% of the total expenditures but, for households with college-bound children, the relentless growth of tuition and fees can cripple budgets. Often those costs get bundled into loans that saddle degree recipients with exorbitant debt burdens. Of course, the Federal Reserve would point out that the right dose of Core Inflation (extended of course to wages) would enable debt-burdened college grads to pay down their loans with inflated dollars.

The tuition series in the chart above, however, is overly dramatic. The BLS calculates tuition based on the sticker price, which is higher than many, if not most, households pay. A New York Times piece, How the Government Exaggerates the Cost of College, explains that the government data ignores financial-aid grants which substantially lowers the real cost to consumers. For a more accurate view on college tuition, see the statistics at the College Board website.

Change & Annual Rate of Change of Core Inflation

Economists and policymakers (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 a major part of the Food and Beverage category. Note 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 chart below shows us the annualized rate of change (solid lines) and the cumulative change (dotted lines) in CPI and Core CPI since 2000.

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CPI and Core CPI

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.
  • The pain is even more extreme for low-income households whose grocery money shrinks when gas prices rise and, 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.

…Inflation has been tame in recent years…[but] inflation volatility has a painful effect on lower income households, those on fixed incomes, those with higher ratios of tuition, transportation, or medical costs and all households whose discretionary spending is more dream than reality.

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)