Wall Street History
The CPI: Update
Time to revisit a column I did back in March 2004 on the CPI,
the consumer price index. Granted, it’s an extremely dry topic
and not easily transferable to a forum such as this, but whenever
the data is released there is controversy as the government’s
statisticians don’t necessarily agree with the everyday experience
of us little guys.
The following information is gleaned from the U.S. Department
of Labor/Bureau of Labor Statistics (BLS) www.bls.gov.
Let’s start out with the BLS definition of the consumer price
“The CPI is a measure of the average change in prices over time
of goods and services purchased by households.”
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. These 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
--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, 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 ...14.992
Medical Care 6.281
Education and Communication ..6.034
Other Goods and Services 3.476
Now let’s really break it down.
Food and Beverages .14.992
Fuels and utilities ..5.264
and operations ...4.651
Men’s and boys’ .0.885
Women’s and girls’ ....1.590
.Infants’ and toddlers’.....0.177
Jewelry and watches ......0.326
Medical Care .6.281
Medical care services 4.834
[too numerous to list numerically here, including for video and
audio, pets, pet products, sporting goods, photography, recreation
services (club memberships, admission to movies), recreational
reading materials (newspapers, magazines)]
Education and comm. ....6.034
Other goods and services ..3.476
Tobacco / smoking 0.712
Personal care ..2.764
Do you want to break it down further? 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 6.281 of the index. From October 2006 to October 2007
this supposedly has risen at a 4.8% clip.
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 23.830 of the index] Oct. ’06 – Oct. ‘07 it
rose 2.8%. I’m sure all of you are thinking, “Oh yeah, that’s
about the rate of increase in my property taxes.”
College tuition is now lumped with “other school fees and
childcare,” which collectively represent 2.872 of the index and
has risen at a 5.3% from Oct. ’06 – Oct. ’07.
Regarding energy, let’s look at two items. First, “gas and electric
utilities,” 4.029 of the index and up 5.1%, Oct. ’06 – Oct. ’07.
Second, gasoline, part of the transportation component, is 4.303
of the index and up 23.4% 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’m overseas next week. Wall Street History returns December