In March the CPI increased 0.5% bringing the year over year change to 2.7%.
I will leave the analysis of the CPI to other and just discuss some of the implications.
First, this caused my Fed policy index to turn positive for the first time since 2008. This index is a form of a Taylor Rule but it gives inflation and the unemployment rate an equal weight as compared to most versions of the Taylor Rule that give inflation roughly double the weight of unemployment or growth. But this implies hat the Fed should allow QE 2 to expire this spring. Moreover, it raises a real possibility that the Fed may raise feds funds in the second half of the year.
Second, I will look at the not seasonally adjusted (NSA) core CPI. In a low inflation environment firms tend to raise prices once a year, typically at the start of the year. As a consequence in the NSA core CPI over half the annual increase occurs in the first quarter of the year. The third quarter pop stems largely from tuition, home owners equivalent rent and new car prices.
In the first quarter of 2011 the NSA core CPI rose 0.852% as compared to 0.469% in 2010. This is the first time since 2004 that the NSA core CPI was higher than in the prior year. If the average that some 55% of the annual increase occurs in the first quarter holds this year it implies that in 2011 the December to December increase in the core CPI will be about 1.55% or about doulbe the 2010 gain.
A 1.5% annual increase in the core CPI would be well within the Fed’s implied target of 2% core inflation. To but this in perspective, from 1965 to 2008 the core CPI never fell below 2%.
In the short run, however rising inflation is creating problems for the consumer. In March the year over year change in real average hourly earnings fell to -1.0% and real weekly wage growth turned negative. This weakness in real wages is showing up in the economic data. For example, in March nominal retail sales rose 0.4%. But most of this was gasoline and excluding service station sales, nominal retail sales only rose 0.1%. This CPI report strongly implies that real retail sales actually fell in March. This means that in the first quarter real consumer spending is ending on a very weak note — one reason forecasters were optimistic about first quarter growth three months age was that the fourth quarter ended on a strong note. Moreover, the second quarter will be when the biggest impact of the disruptions to the supply chain from the Japanese disaster will occur. So the standard thinking that growth will rebound in the second quarter is questionable.
As a rule, the Shiller Index uses the CPI as reported for All Urban Consumers (CPIAUCNS on Fred(r)).
But the Index is only updated Quarterly, so monthly data is estimated. Which produces a very interesting difference over August, not to mention September expectations:
The annualised inflation rate between June and August is 0.39%, which just shows that the trend is volatile. But if there really is another round or two of 2.5% annual inflation, the projected 3% growth for Q3 is either going to look a lot more anemic than we think, or there is going to be a major producvtivity increase.
The odds of being paid the Marginal Product of Labor just dropped a bit more.
It seems to go without saying, that if there is reform, there will be some type of assistance for those who need it. Some numbers are bandied about as to the cutoff points. The Mass Connector has it’s formula up that you can play with by punching in your own numbers and picking a Mass zip code.
However, I have noted in my very early posts here at AB, that we seem to have slowly understated over time the amount of money actually required to be middle class in the US. I looked at this further here. It’s not just the amount of money, it is the standard of living that has been down graded as we argue over implementing social policy. The clearest standard is that it takes two earners to accomplish what one earner use to. Now, with 47 million and rising, bankruptcy due to medical bills hitting 73% of all filings, having health care seems to no longer be a marker of having achieved middle class and thus the American Dream.
Such thinking could be a problem if we truly want to solve our issue of access to health care services. Mass knew that those at 350% to 450% of poverty would have difficulty buying insurance in their system. They may not view it as such, but this is an admission that our numbers regarding what income level is middle class (other than simple mean and median) are bogus. We are lying to ourselves and when we lie to ourselves, we prevent ourselves from actually resolving the issue in question. We’re faking ourselves out! In doing so, we are further moving away from what was the accepted standard of living as representative of the American Dream. In fact, it has occurred to me that the political approach of redefining what will be considered a successful campaign and thus problem solved regarding any social oriented piece of legislation by reducing the expectations or size of the problem to be resolved has only lead our standard of living and thus the American Dream being defined down. It’s one step removed from just plain ignoring the problem as if it does not exist. Though ignoring a problem is at least not patronizing to those with the problem as is defining it down and declaring it solved.
This brings me to the defined poverty level. A couple weeks ago I received an email as part of an ongoing health care debate that claimed to prove via a referenced article that there are not 47 million uninsured because 48% of those are earning 250% of poverty which is about $65K and thus choose not to purchase health insurance. I suspected there was something wrong and thus went looking.
Well, it turns out that 250% of poverty at $65K per year is for a family of 5! A gross income of $65K for a family of 5 leaves nothing for purchasing health insurance. It is also an income level that in Mass would have subsidies to help pay for health insurance.
I then thought: I wonder what the poverty level was in the old days. You can find the data I used here. You can find the converting here. Then click on “Relative Values – US” in the left hand column.
The following chart looks at 5 decades (though I could not find exactly 1960 and 1970) and then compare them using CPI, Unskilled Labor, GDP per Capita and Share of GDP. Certainly based on the CPI conversion, the numbers coming forward to today seem to be as they should. But then, poverty levels are based on CPI. However, looking at Unskilled labor, that family of 5 is getting under paid compared to the old days of 1962. The family has been on a over all downward trend. In the 70’s it was a real roller coaster being down by ’73, up by ’75, heading down by ’76, bottoming in 1978. Even their poverty level based on GDP/cap and share of GDP bottomed. Funky times indeed. From the 1978 bottom this family had a steady gain but, it peaked in 1996. This is the same year the income share to the 99% fell below personal consumption.
What I find most interesting is just how dramatic the change at 250% of poverty level for a family of 5 is based on the GDP share and per capita. My interpretation is that a person at this level of income has continually become poorer even though the income that is considered 250% of poverty level has remained constant comparatively over the decades based on CPI. I guess this bodes well for those who have finagled the CPI? Most interesting, is 2007. It is the only year where this family’s income was valued more than the share of GDP and GDP per capita values. Frankly, I don’t know what to say about it. It is no wonder people don’t know if they are coming or going regarding their financial condition. Though a tendency toward the “going” feeling certainly can be understood. Even the anger expressed at the town halls can be more readily appreciated in that the mind can only handle so many cycles of ups and downs before it finally starts to crack.
It is this clash between the CPI and the GDP converters that is the fake out. If we continue to have such a dichotomy, then our efforts to assure “affordable health care” will be never ending because we are simply not being honest about how much it costs to be middle class and have the American Dream. Nor should we expect the apparent lunacy to subside as longs one’s mind has to deal with the clash between what it is living verse what it is being told it is are living.
Since I’m trying to cut a 24-page paper down closer to 15 today, I’ll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:
Brad DeLong appears (to me) to confuse perceiving a move from Democratic Republic to Empire—and therefore away from any Competitive Advantage for the past 100-ish years—with conspiracy theory. But I may just be reacting to his headline.