Inflation in the 21st Century

Thursday, March 24th, 2011

March 18, 2011

by dshort.com

My monthly update Inside the Consumer Price Index identifies the components of the Consumer Price Index, documents their relative weights, and uses line charts to show the cumulative percentage change of each since 2000.

In this post I’m using a bar chart to illustrate the relative change over the same time frame. The table below documents the current weights assigned by the Bureau of Labor Statistics (BLS) to the eight components of CPI. I’ve also included the weights of the two aggregate categories — Food (ex alcoholic beverages) and Energy — that are excluded from CPI to determine the Core CPI. (Note: CPI is sometimes referred to as “Headline CPI” to distinguish it from the Core variety.)

The bar chart below shows the relative change for each component and the two special aggregates. I’ve also added College Tuition & Fees, a subcomponent of Education and Communication, because of its significant impact on households with college expenses. Incidentally, the BLS assigns a mere 1.5% weight to this subcomponent of CPI. But for households planning for college expenses, the impact of inflation is dramatic.

Click for a larger image
The Inflation Controversy

The table and chart above help to explain why inflation is such a controversial topic. If your household mirrors the expense ratios of the CPI weightings, then the monthly CPI reports may seem reasonably accurate. However, households on tight budgets will be highly sensitive to the more volatile components of CPI — food and especially energy expenses. Also, for households with greater exposures to energy costs (especially gasoline), medical expenses, or college bills than the BLS weightings, the CPI data will definitely understate your experience.

Copyright © dshort.com

Tags: Alcoholic Beverages, Bureau Of Labor Statistics, College Bills, College Expenses, Components Of The Consumer Price Index, Consumer Price Index, Core Cpi, Cpi Data, Cpi Reports, Cumulative Percentage Change, energy, Energy Expenses, Expense Ratios, Headline Cpi, Index Documents, Line Charts, Relative Change, Relative Weights, Subcomponent, Tight Budgets, Volatile Components
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The Economy and Bond Market Notebook (2010-05-10)

Monday, May 10th, 2010

The Economy and Bond Market Notebook (2010-05-10)

Treasury bond yields fell across the board this week as investors sought the relative safety of Treasuries as the Greek crisis refuses to go away. Just as in the stock market, bond market liquidity suffered this week, driving up volatility across most fixed income asset classes. An interesting exception were municipals which were very stable this week as they have very little exposure to the Greek crisis.

Last week we talked about consumer confidence hitting the highest levels since September 2008 but this week we took a step back and looked at it from a longer term perspective. The March personal income and spending report was issued this week showing spending rising 0.6 percent while income rose 0.3 percent. What struck us about these numbers was the seeming disconnect between income, spending and consumer confidence. It turns out the primary driver of the “robust” gains in income were driven by a 1.1% increase in “transfer payments”, i.e. government social benefits of one form or another. The unemployment insurance subcomponent payments rose 8.7 percent in March. The savings rate declined to 2.7 percent, the lowest since September 2008. This gets us back to the relationship to consumer confidence, excluding the lows suffered in the past 18 months or so, consumer confidence is at the lowest levels it’s been in more than 30 years and when it is government social programs driving gains in income we understand why the consumer may be wary.

Strengths

• Nonfarm payrolls rose a robust 290,000 in April, well ahead of expectations. March’s data was revised higher, showing a gain of 230,000 vs. the 162,000 originally reported.
• The ISM manufacturing index rose to the highest level in almost six years as activity levels continue to improve.
• JP Morgan’s global manufacturing index rose to the highest levels in six years confirming the trend we are witnessing in the U.S.

Weaknesses

• The crisis in Greece continues to smolder and for every two steps forward the markets take at least one step back. Concerns of a full blown credit crisis have surfaced and cannot be ruled out.
• The European Central Bank is apparently unwilling to offer any new assistance to Greece and this disappointed the market.
• Australia raised interest rates by 25 basis points this week in a sign that central banks will move to their own tune.

Opportunities

• The best outcome would be a coordinated, comprehensive solution to not only the Greek debt situation but a broader approach that includes all of Europe.

Threats

• Until the Greek situation is resolved with some degree of certainty the market will be at the whims of macro risk factors.

Tags: Asset Classes, Bond Market, Consumer Confidence, Fixed Income, Ism Manufacturing Index, Jp Morgan, Lows, Market Liquidity, Municipals, Nonfarm Payrolls, Personal Income, Relative Safety, Stock Market, Subcomponent, Term Perspective, Transfer Payments, Treasuries, Treasury Bond Yields, Unemployment Insurance, Volatility
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