In an effort to gain a little better perspective on the historic, current and more importantly future direction of inflation, I’m adding coverage of the monthly CPI data to the lineup of regularly occurring posts.
I’ll continue to develop the analysis adding other housing and economic related data in future posts but for now, let’s just get a sense of how well inflation is measured and read.
I think it’s safe to say that the notion of inflation being moderate and contained is a widely held belief.
But is it entirely accurate?
Although there is a clear difference between today’s circumstances and that of the troubling inflationary eras of the 70s and early 80s, consumer households still appear to be facing some pretty significant rising price pressures.
We are all aware of the fact that gasoline is priced considerably higher now than just three years ago but what about other essential consumer goods and services?
The following chart (click for larger version) shows indices for Food and Beverage, Apparel, Gasoline, Medical, Education, Owners’ Equivalent Rent, Household Fuel, CPI Core and for sanity’s sake, the Case-Shiller Composite index since 1997 all normalized to a base of 100.
First, notice that the black “dotted” line is the CPI Core index, which is simply the CPI minus food and fuel.If you were to dwell mostly on CPI core, as the Fed does when evaluating future expectations, inflation does look moderate.
But, notice that, excluding the Case-Shiller index for a moment, Gasoline, Household Fuel, Education and Medical prices have increased (and are continuing to increase) fairly significantly.
This seems to fit well for our general knowledge of both the obvious increase in oil costs and the widely reported increasing prices for medical goods and services and of college room, board and tuition.
Next, notice that Owners’ Equivalent Rent, the price index that the government uses to represent housing in the CPI, looks unusually stable and seems to understate increases to housing prices when compared to the more realistic and accurate S&P/Case-Shiller home price index.
Lastly, notice that Food and Beverage prices recently appear to be tipping up a bit, likely as a result of the prolonged increase in fuel prices leaving only Apparel to be considered a truly moderate (and even falling) essential consumer cost.
