CPI
The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real averge hourly earnings fell, real weekly earnings were unchanged.
The core CPI actually fell for the first time since 1982, bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two.
The most severe source of higher prices was medical care where medical commodities increased 0.7% and medical services jumped 0.5%. Meanwhile we have our political system voting to ignore the severe problem of soaring health care cost.
Interestingly, one of the largest increases was used car prices that rose 1.5% in January and is now 11.5% above their year ago level. But real used car prices are one of the most reliable leading -concurrent indicators of auto sales. This is logical since the supply of used cars is trade ins for new cars and if new car sales are too low this creates a shortage of used cars.
If memory serves, a year ago at this time, or maybe two years, you wrote about the implication of y/y core CPI in January/Q1 for y/y core CPI for the rest of the year. The point, I think, was that a lower comparison than a year ago tends to mean a lower comparison for the full year – a good start means a good finish – for reasons related to math as much as to fundamentals.
Do I have the story straight, and if so, is the story still the right one?
(Psst. Core CPI up 1.6% y/y, methinks, rather than 1.8%.)
KHarris — what you remember is that on a not seasonally adjusted basis some 55% of the annual increase in the core CPI occurs in the first quarter and if this years’ first quarter increase in the not seasonally adjusted core cpi is less than last years increase, than the dec to dec increase should be less this year than last year.
You are right it is 1.6%. Actually, my calculator says it is 1.479% — 220.463 vs 217.249
spencer,
I’m not quite sure why I should believe that a low inflation rate is encouraging news. The only good that I can see coming out of a low inflation rate is the prospect that it will keep Charles Plosser at the Philly Fed in his box for a few more months.
Sounds interesting.
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Yippee. I beat Paul Krugman to the punch by 34 minutes!
http://krugman.blogs.nytimes.com/2010/02/19/disinflation/
I find this a scary picture. For one thing, it suggests that deflation may not be too far in the future. But beyond that, there’s a growing belief among sensible economists that we need higher, not lower inflation.
Do you want demand pull inflation or funny money inflation? Be careful, circumstances are pulling you guys to abandon sound economic policy.
Not an academic study but my wallet tells me (for some time now) that CPI a cooked BS number with no relation to life on my planet.
***but my wallet tells me (for some time now) that CPI a cooked BS number with no relation to life on my planet.***
Not NO relationship. But your complaint is a common one, and IMO, it is a justified complaint. Economists treat this CPI metric as if it were reality, but it doesn’t seem to be. To name just one problem, the largest component of CPI (25%) is Owner Equivalent Rent and OER continued to climb while metropolitan housing prices were crashing and rents were following them. It finally turned negative four months ago.
Oh yes, and “core CPI” excludes energy and food because they are “volatile”. So, CPI either excludes or mismeasures food, energy and housing. Is it any surprise that it doesn’t match reality any too well?
That said, it’s the best measure we have of inflation. And inflation is important.
Not to be contrarian, but the current measure of inflation can not be the best we have when it does not relate to the major expenditure experience of living in a social order that requires money to sustain one’s life.
It is the intentional ignoring of data in the indicators used to assess policy and determine policy that has gotten our policy geared for making money at the expense reducing risk of living for the masses. Thus we get the Fed adjusting for inflation in a way that does little to help those who are starving. Thus, we get meme’s that lower prices at Walmart means people are living better because life is costing less.
It is cheating by not acknowledging just how much it now costs to be middle class, American Dream living.
If only I could eat an ever cheaper TV.
VtCodger,
The CPI-U, which is the one that is typically reported in the press, represents inflation for a “typical” urban consumer. So if your urban community is atypical, then CPI may not mean much. If you don’t live in an urban area, then the CPI may not mean much. If you are not a typical consumer (e.g., retired, extremely wealthy, extremely poor, chronically ill, etc.), then the CPI may not reflect your personal experience. Of course, there are other CPI indices. For example, there is a CPI for retirees. As to OER, keep in mind that OER is not directly related to housing prices. The concept of OER refers to the use benefit that an owner or renter consumes from the capital investment (i.e., the home). OER does not include capital gains or losses. OER represents the flow of housing benefits that are extracted (or consumed) from the housing stock.
The “best” measure depends upon your intended purpose. If you’re Ben Bernanke, then the best measure is the PCE. And as Paul Krugman notes (see my link above), if you’re the Cleveland Fed, the “best” measures are the median and 16% trimmed CPI.
***As to OER, keep in mind that OER is not directly related to housing prices. The concept of OER refers to the use benefit that an owner or renter consumes from the capital investment (i.e., the home). OER does not include capital gains or losses.***
A com’n slugs, I know all that. My point is that OER is a lousy metric (short term anyway) and because it’s such a large part of CPI, it makes short term values of CPI iffy at best.
Inflation on a personal basis is misleading as an indicator. For example, the first new car I bought in the early 80s was about 15% of my income. A comparable car today is about 12.5% of my income. My first house (late 80s) was twice my income. My current house is worth about twice my income. The houses are similar brick ranchers but the one I own now is larger and has a full basement. Of course people expect wages to rise better than this and they haven’t in my case.