With Christmas season upon us and a great deal of attention being focused on the retailers reports of same store sales I thought it would be a good time to report on one of my pet peeves.
I see people time and time again taking the retailers same store sales data and deflating it with the overall CPI to estimate “real” same store sales. But this
significantly overstates the inflation rate and understates the growth in same store sales. I even see members of the Federal Reserve Board doing this and they really should know better.
The relevant deflator to use is the deflator for GAFO sales, or department store type merchandise. GAFO represents stores that specialize in department store types of merchandise (furniture & home furnishings, electronics and appliances, clothing & accessories, sporting goods, hobby, book, music, general merchandise, office supplies, stationery, and gift stores.
Currently, the year over year change in the CPI is -0.2% and the core CPI is up 1.7%. But the year over year change in the deflator for GAFO sales is -2.1% and it has been falling at -3 % to -5% rates over the past few months.. Moreover, this roughly two to four percentage point difference between the two measures is fairly normal. The GAFO deflator has been negative — usually at -1% to -2% rates — every year since 1995. This difference consistently causes economists and others to significantly understate the strength of consumer spending.