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Digging Deeper Into The CPI

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If you do not eat, drink, or drive, or need medical care you are in great shape.

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Last Friday, Professor Depew was Looking Inside The CPI in point number 1 of Five Things:

The Consumer Price Index increased 0.8%, the most since September 2005, according to the Labor Department.

  • Consumer prices increased 4.3% year-over-year, the most since June 2006.
  • The core rate increased 2.3% year-over-year, up from 2.2%.
  • Although we've seen a number of news stories referring to the CPI data as "broad-based," a closer look inside the report shows this is not exactly the case.
  • The core increase was led by an increase in Apparel and Transportation.
  • The move in Apparel, up 0.8%, was outsized, the largest in eight years.
  • Transportation was also sharply higher, up 2.9% compared to .4% in October and .1% in September.
  • Meanwhile, furniture, electronics, appliances, household products, toys, jewelry and hotel rates were all flat or lower.


I read "Five Things" religiously every day. Sometimes I can add to the discussion and sometimes not. In this case Professor Depew had me digging still deeper into the Consumer Price Index November Report to see what else was hidden beneath the surface.


CPI for All Urban Consumers (CPI-U)


Click here to enlarge.


The numbers look pretty bad. But what else is lurking beneath the surface? For starters, what's that 2.9% jump in transportation all about?


Transportation Details

"The transportation index increased 2.9% in November. The index for motor fuel rose 9.3%, accounting for over 90% of the overall transportation increase. The index for new vehicles increased 0.1% in November. During the last 12 months, new vehicle prices have declined 0.4% and prices for used cars and trucks, 0.5%. The index for public transportation increased 1.8% in November, largely reflecting a 2.6% increase in the index for airline fares."

So what we see is the cost of buying a car or truck is actually dropping, even as the cost of driving a car or truck is soaring. Are the costs of making a truck dropping? If not, then where is the passthrough in prices? The transportation numbers would be negative if fuel and airline fares (also fuel related) were subtracted.


Home Ownership Details

"The index for housing increased 0.4% in November, following a 0.2% rise in October. Each of the three major housing groups contributed to the larger advance. The index for shelter, which rose 0.1% in October, increased 0.3% in November. Within shelter, the indexes for rent and for owners' equivalent rent increased 0.4 and 0.3%, respectively, while the index for lodging away from home decreased 0.2%. The index for fuels and utilities, which rose 1.2 percent in October, increased 1.5% in November. The index for fuel oil increased 14.2%, its largest monthly advance since a 14.7% increase in February 2003."

Notice how the index for shelter is rising even though home prices are falling nationally. This tells me the 0.3% rise for shelter simply is not happening. This component was seriously understated for many years but is now overstated for the last two years. What is rising, however, is the cost of "driving" a home, so to speak. Energy (heating and utilities) are soaring but with $400,000 homes (2005 prices) now going for $250,000 in many places, the overall cost of housing for a new buyer has plunged. Unfortunately the debt hasn't, and that debt is an enormous drag on bank and consumer balance sheets alike.


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Looking ahead, I suspect those who compute the CPI will soon realize that housing is overstated and switch to new methodology to reflect what's now happening. In addition, look for them to increase the weighting of housing in the CPI.

However, a focus on the CPI is a focus on the wrong thing. The proper focus is on money supply and credit, not the CPI. The Fed talks about--and has everyone looking at--things that cannot be properly measured. I believe this is on purpose because it is fertile grounds for both manipulation and excuses.


Apparel Details

In November, the apparel index increased 0.8%. Professor Depew noted this was the largest jump in 8 years.


Food And Beverage Details

"The food and beverages index rose 0.3% in November. The index for food at home increased 0.3% in November, the same as in October. Larger increases in the indexes for fruit and vegetables, for cereal and bakery products, and for dairy products were offset by downturns in the indexes for meats, poultry, fish, and eggs, for nonalcoholic beverages, and for other food at home. The index for fruits and vegetables increased 1.6% in November, following a 0.7% increase in October."

The Overall Picture

Prices of things we need (food and energy) continue to rise. Prices of most everything else are dropping. If you do not eat, drink, drive, or need medical care you are in great shape. Then again, perhaps that makes you a robot.

As for apparel, I confidently predict higher prices will not stick. Here is the reason: U.S. apparel chains see slow holiday growth:

U.S. specialty apparel retailers have experienced slow sales growth over the first 20 days of the holiday shopping season, according to data released on Sunday by SpendingPulse.

SpendingPulse said that over the first 20 days of the holiday shopping season, sales at U.S. specialty apparel chains, which include Gap Inc. (GPS), Aeropostale Inc. (ARO) and Urban Outfitters Inc. (URBN) rose a modest 0.5% this year, compared with a 5.1% increase last year.

Men's clothing sales rose 4.5%, while women's clothing sales fell 5.7%, SpendingPulse said. Consumer electronics sales rose 5.8%, SpendingPulse said
.

Is the strategy to lure shoppers to stores with deep discounts on electronics and toys, in hopes they will buy other stuff failing? Consumers are buying bargains. That we know. Are they buying anything else? Are stores making any money? The numbers coming out in January will be interesting, for sure.


Food's a Bargain if You Have a Freezer

In regards to food, there is a veritable bargain on beef right now at Dominick's (Safeway).

  • Standing rib roast $4.88
  • London Broil $1.59
  • Ground Beef $0.99


Typically they have one of those items on sale, not all of them at once. I cannot recall the last time I got ground beef under a dollar.

Those deals are for anyone with a "Fresh Values Card." The card is free and the discounts ring up as coupons. I blew the "coupon bucket" wide open by hitting $168 in coupons (and I only shop for 2). It took a supervisor override to approve my purchase.

When stuff is on sale like this I buy it and freeze it. Freezer wrapped roasts will last six months or more if properly wrapped. By the way, processing is free. Those who want ground round can buy London Broil at $1.59 and have the butcher grind it. That way you have extremely lean hamburger and you also know exactly what went into it.


The Last Hurrah For Higher CPI?

It's hard to say if this is the last hurrah for higher CPIs or not (I think it might be), but it does not take much digging to see the headline numbers are primarily energy-based. Fed interest rate policy cannot do a darn thing if the problem is peak oil.

With everyone watching the CPI, however, it's a worthwhile exercise to dig into the facts instead of screaming "hyperinflation" like most seem to be doing. With a huge tip of the hat to Mr. Practical: Hyperinflation Is a Rear View Mirror Phenomenon. A focus on the CPI is simply another misguided rear view mirror focus.

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