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Wall Street History
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03/19/2004
The CPI
For years I have wanted to delve into the calculation of the consumer price index (CPI) but never did so because it is an extremely dry topic and not easily transferable in a forum such as this.
But as the controversy mounts over the official government statistics on inflation and the everyday experience of us little guys, I thought it was as good a time as any to tackle the issue.
The following information is gleaned from the U.S. Department of Labor / Bureau of Labor Statistics (BLS) www.bls.gov. It takes a little digging, but any one of you can pull up what I’m about to present.
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Let’s start out with the BLS definition of the consumer price index.
“The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
What goods and services does the CPI cover?
The BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:
--Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) --Housing (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture) --Apparel (men’s shirts and sweaters, women’s dresses, jewelry) --Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance) --Medical Care (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services) --Recreation (televisions, cable television, pets and pet products, sports equipment, admissions) --Education and Communication (college tuition, postage, telephone services, computer software and accessories) --Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses)
Knowing this, let’s see how they break up the index, all #s adding up to 100.
Food and Beverages ...15.384 Housing ..42.089 Apparel 3.975 Transportation 16.881 Medical Care 6.074 Recreation 5.872 Education and Communication ..5.948 Other Goods and Services 3.776
Now let’s really break it down.
Food and Beverages ..15.384 Food .14.383 Alcoholic beverages.....1.001
Housing ..42.089 Shelter ...32.878 Fuels and utilities ..4.741 Household furnishings and operations .4.470
Apparel 3.975 Men’s and boys’ ..1.024 Women’s and girls’ ..1.704 .Infants’ and toddlers’... .195 .Footwear . .778 .Jewelry and watches ... .274
Transportation ....16.881 Private 15.817 Public ...1.064
Medical Care 6.074 Medical care ..commodities ....1.499 Medical care ..services ...4.575
Recreation 5.872 [too numerous to list numerically here, including for video and audio, pets, pet products, sporting goods, photography, recreation serices (club memberships, admission to movies), recreational reading materials (newspapers, magazines)]
Education and comm. 5.948 Education 2.841 Communication ...3.107
Other goods and services 3.776 Tobacco / smoking .806 Personal care 2.970
Do you want to break it down further? Well, for this week, let’s just look at some of the bigger items that we all care about; health insurance, property taxes, college tuition and energy.
First off, there is no specific measurement for health insurance. Instead, it’s lumped into medical care commodities (prescription / nonprescription drugs) and medical care services (physicians’ services, dental, eyeglasses), both of which add up to the above figure of 6.074 of the index. From February 2003 to February 2004 this supposedly has risen at a 4.2% clip. You may now laugh.
Property taxes, according to the BLS, “should be reflected indirectly in the BLS method of measuring the cost of the flow of services provided by housing shelter, which we call ‘owners’ equivalent rent,’ to the extent that these taxes influence rental values.” [This is 23.383 of the index] Feb. ’03 – Feb. ’04 it rose 1.9%. I’m sure all of you are thinking, “Oh yeah, that’s about the rate of increase in my property taxes.” Stop laughing.
College tuition and fees is 1.305 of the index and has risen at a 10.1% clip from Feb. ’03 – Feb. ’04. The index margin is ridiculously low, but at least the overall rate of increase is roughly in line with what your own personal experience is.
With energy, let’s look at two items here. First, “gas and electric utilities,” 3.599 of the index and up 6.3%, Feb. ’03 – Feb. ’04. Second, gasoline, part of the transportation component, is 3.222 of the index and up 2.0% over the aforementioned period.
Now discuss amongst yourselves .time’s up.
So does the CPI represent the real everyday costs of Americans? While there are some areas in which the index is relatively in line with reality, there are countless instances where it is woefully short. But this is a critical barometer when the Federal Reserve sets interest rate policy. I reserve the right to revisit this issue in the near future.
Wall Street History returns March 26.
Brian Trumbore
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