Rodney Johnson | Tuesday, April 29, 2014 >>
I don’t typically shop for groceries, so when I find myself at the store, I’m usually on a mission to buy last-minute items, like bread, milk, or eggs. However, from time to time, I’m sent on a special assignment to pick up steaks or ribs.
As the grilling season gets into full swing, this happens more often. But maybe not this year.
On my last trip to the grocery store, I glanced at the butcher’s window and thought I’d missed the placement of a decimal point.
“Surely those prices for beef can’t be right!”
I wasn’t sure if they were selling steak by the pound or posting the price for a family pack.
Given that the prices were 20% more than I remember from last year, this seemed out of whack. Besides, I’d just read the Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS), and was assured that inflation remains quite tame at 1.4% for the year.
Surely there was a problem somewhere. As usual, I soon found it… darnrn statistics!
There’s no question that beef prices have shot up dramatically in the past year, and in particular, over the past three months. In addition, pork prices also jumped in recent weeks. The drivers of these price moves are the three Ds: drought, disease, and demand.
As a result, Americans are paying double-digit price increases for meat that serves as the mainstay of many meals.
While this unwelcome fact is showing up in stores across the country, it’s not apparent in the monthly or even annual inflation numbers because, according to the U.S. governrnment, we don’t buy enough of it to matter.
In the BLS report on CPI for March 2014, the price of beef and veal increased by 7.4%.
This doesn’t match the eye-popping numbers at my local grocer, but I do recognize that the CPI figure represents all cuts, so this seems acceptable.
The problem for me is that the CPI calculation assumes that only 0.51% of the average American household budget is spent on this category… and that’s where the fight starts.
The BLS determines how our costs change every month across a broad category of spending. Unfortunately, so much data is crammed into a single number — the CPI — that all meaning is lost.
I want a measure of inflation to give me a sense of how my daily life is being affected, which means providing information on items like food and energy.
We all eat. Most of us either drive or take some form of transportation that uses fuel. Our homes use energy for heat, cooling, and cooking.
Taking stock of such items would seem a logical start to measuring inflation. But the BLS goes farther… much farther!
In addition to boring items like food and energy, the BLS also tracks — and includes in CPI — appliances, clocks and lamps, and TVs.
It adds price changes in all of these categories to the mix when trying to determine how my daily cost of living has changed. Lucky for me, each of these items have fallen in price over the last 12 months!
Apparently, appliances make up 0.289% of spending, and have fallen 3.3% in price over the last year. Clocks, lamps, and decor items comprise 0.26% of spending and have fallen 7%, while televisions, which make up 0.159% of spending, have dropped a whopping 12.7%!
That’s great news!
The problem is that each of these categories represent things I could choose to buy or could put off until another day, if I wanted them at all.
While I might not have to eat steak (which is debatable, I think of it as a necessity), food items clearly represent a different category than televisions… and yet they’re lumped together when calculating the cost of living.
Of course, none of this would matter if the CPI was just another set of boring numbers released by another faceless governrnment agency, but it’s not.
This magic statistic is used to determine cost-of-living adjustments, wage adjustments, and many other changes in income.
If the CPI understates the increasing cost of food because the statistic also includes the change in the price of televisions, well that’s just too bad.
Someone bought a TV this past year… and apparently they got a heck of a deal. Unfortunately, we can’t eat TVs.
We would be better served to have a series of inflation statistics that tracked different areas of life, perhaps discretionary items versus non-discretionary, monthly purchases versus those bought once a year, or contracted payments (cars and rent) as opposed to everything else.
This would give us much better information on how our costs are changing, which is probably why the governrnment doesn’t calculate such numbers.
In fact, the BLS went down this road many years ago, computing the CPI-E, which was meant to track the cost changes for items that retirees typically buy.
The series was ended after a short time, probably because showing that retirees were getting hammered would’ve led to calls for greater cost-of-living adjustments in Social Security payments.
That would’ve been awkward, but the right thing to do.
Instead, we’re left with a mash-up of categories and numbers that are all boiled down to one figure… and in the end, it tells us just about nothing.
P.S. As a final note on this, consider that the CPI estimates the average household spends only 0.76%, or less than 1% of its annual budget on health insurance. The reason is that a majority of workers get their insurance through their employer, who actually makes the premium payment, so it doesn’t technically come out of the consumer’s pocket. While this might be true, it does nothing to lower the cost of health insurance!
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