Consumer Price Inflation (CPI) Soars …

…Over The Past Ten+ Years!

It’s interesting how words can change a person’s impression of something, isn’t it? Read the next paragraph and I’ll show you what I mean.

WASHINGTON (MarketWatch) – U.S. consumer prices rose a seasonally adjusted 0.1% in May, mainly because of higher costs of housing, electricity and natural gas, the Labor Department said Tuesday. Energy prices rose 0.4% even though the cost of gasoline was flat in adjusted terms. Food prices dipped 0.1%. The core CPI, which excludes volatile food and energy costs, rose 0.2%. Economists surveyed by MarketWatch had forecast a 0.2% increase in the broad CPI and a 0.1% uptick in the core rate. Consumer prices have risen an unadjusted 1.4% in the past 12 months, and by 1.7% on a core basis. Real or inflation-adjusted hourly wages, meanwhile, fell by 0.2% in May. Real wages have risen a scant 0.5% over the past 12 months.


Okay, the MarketWatch bulletin is from today’s reading on inflation and it does not sound too, too bad — right? Well, take a look at the next graphic and tell me if your opinion of inflation changes.

Inflation Data From 2000 To 2011

Because prices of different goods and services change at different rates, each household has its own price index—its own cost of living. Households that purchased relatively more of the items near the top of the table suffered a larger increase in their cost of living than implied by the increase in the aggregate CPI. Those that spent more on the items shown near the bottom of the list experienced a relatively smaller increase.

Source: AIER

See a difference? I realize the information is a bit dated, but I seriously doubt inflation has dropped an appreciable amount since the data was published in 2011. This is a pretty good list of the things we, as consumers, use most often, and it goes to show that inflation is much worse than we are led to believe. So, when you hear statements like: “Inflation is tame.” or “Inflation is subdued.” don’t believe it.

Chronic price inflation—even at moderate rates—leads to significant losses of buying power over time, a fact often obscured by the general focus on comparatively small monthly or annual price changes. During the past decade, the average rate of price inflation measured by the Consumer Price Index was 2.4 percent. Most people accept a 2.4 percent inflation rate as fairly tame. Yet it implies a loss of more than one-fifth of the purchasing power of the dollar over the decade.

Source: AIER

Unfortunately, what this graphic does not reveal are the ways manufactures are tricking us into believing that they are working hard to keep the costs of their products down. Have you seen what has happened to packaging lately — they’ve shrunk, considerably! Essentially, we get less for the prices we pay, and it is just another form of inflation. Two years ago, I could purchase a container of laundry detergent from BJ’s and I would have to turn it sideways in my laundry room cabinet in order to close the cabinet doors. Now, I can place it in the cabinet straight, back to front, and close the doors with room to spare; but I’m still paying as much, if not more, as I did two years ago.

Recently, my wife and I had two new tires installed on the front of her car (a Honda Accord). We also had the battery replaced, the transmission serviced and the engine oil and filter changed. In the end, the work set us back a cool $1,200.00. It is the type of work that ten years ago would have cost ~$600.00; I know that for fact because I used to be in the business. It is a phenomenon that should cause all of us a great deal of concern.

So, how do we fight it? The first suggestion most people would make would be to buy gold, but I’m not a gold bug so I’ll leave it up to the investor’s good judgment to decided whether or not she or he wishes to own gold. Personally, I own some of the precious metal but I do not see it as a store of wealth or as a viable alternative currency. That said, however, there are plenty of people who do believe in owning gold; thus, the reason why it so expensive.

To me, the best investment to protect against inflation is real estate. Since most people, however, are unable to buy vast amounts of land or real estate investment property, the next best option is to invest in real estate investment trusts or REITs. And then there’s the old fashioned way to beat inflation, shop wisely, hone your negotiation skills and learn to do more with less. They are the type of strategies that have led to the success of companies such as BJ’s Wholesale Club, Costco (COST), Sam’s Club and Walmart (WMT).

When it comes to shopping wisely, consumers will need to become more flexible. Several years ago my wife and I walked out of a LensCrafters store with a ,500.00 charge applied to our credit card. I looked at my wife and said: There has to be a better way. Two years later, when we were ready for a new pair of glasses, I place an order with Zenni Optical. The downside to our purchase was that I had to learn to make the adjustments to our glasses on my own (a minor inconvenience for me), but for ~$50.00 I had a new pair of glasses that worked quite well. They’re not designer glasses but they work, and they look pretty nice. So, in the end, for a minimal investment of ~$150.00, I was able to purchase two pairs of glasses and a pair of sunglasses; certainly less painful than the $1,500.00 I paid two years earlier.

Price Indices: Different Measures for Different Purposes

Price indices attempt to summarize the prices paid by millions of individuals for a vast array of goods and services. Each index is constructed to address specific issues or policy-making needs. Accordingly, each differs by the goods and services it includes, and the importance attributed to them.

The Bureau of Labor Statistics publishes several consumer price indices each month in addition to the overall CPI. Below is a sampling of them, along with the 2011 inflation rate computed from each. For reference, the annual average inflation rate according to the Everyday Price Index was 8.3 percent.

The CPI for All Urban Consumers (CPI-U) is the most commonly used price index. It is based on the prices of goods and services purchased by the 87 percent of the U.S. population that are urban consumers. For 2011, the CPI-U was 3.1 percent.

The CPI for Urban Wage Earners and Clerical Workers (CPI-W) reflects buying habits of the 32 percent of the population that qualify as urban wage earners. The annual percentage change in this index determines the cost-of-living adjustment to Social Security benefits, in an attempt to have Social Security COLAs mimic those of wages. For 2011, the CPI-W was 3.6 percent.

The CPI Less Food and Energy excludes the highly volatile food and energy prices from the CPI-U. The percentage change in this index is often called the core inflation rate. The core rate reflects government policy more than it reflects supply and demand. Over time, the CPI-U and the CPI Less Food and Energy exhibit similar growth rates. For this reason, core CPI is thought to be a good predictor of future inflation. For 2011, it was 1.7 percent.

The Chained CPI-U continuously adjusts for substitutions that consumers make in response to price changes. When the price of beef increases relative to the price of chicken, for example, consumers tend to buy less beef and more chicken. A price index that ignores this substitution will overestimate the impact of higher prices on the cost of living. For 2011, the Chained CPI-U was 3 percent.

Unlike other indices, the Personal Consumption Expenditure (PCE) deflator is not based on a fixed basket of consumer goods that is determined by surveying consumer buying habits. Rather, the PCE deflator looks at price changes for all consumer goods and services sold in United States. The Federal Reserve prefers to use the change in the PCE deflator as the measure of inflation. The PCE deflator has exhibited a lower inflation rate than the CPI-U. For 2011, it was 2.2 percent.

Source: AIER

Bottom Line: We will get through this; it won’t be easy but we will get through it. Be smart, be patient and, most importantly, be vigilant.

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