Michael Santoli: Personal CPI and Price Inflation
When you're shouldering those big cost increases in tuition and business insurance, how much less disposable income (and personal inclination) do you have left to ramp your spending and thus help fuel more widespread price increases?
Having met you at Minyans in the Mountains and having seen both your financial and journalistic acumen first-hand, I still have misgivings about your Barron's article today, at least with respect to inflation's trendiness.
The peak birth rate in the U.S. occurred about 1960, meaning a lot of middle-aged parents are financing their childrens' college education, an important component of their overall household expenditures. Most pay for a variety of insurance costs which constantly rise, and despite the adverse health consequences, we're still fueling both our mitochondria and our vehicles. At least in my household, a pair of Dartmouth tuitions (rising 4.9%) costs more than half of my pretax net income, and my office expenses continue to rise upwards of 5% annually, between salaries and capital expenditures. Having already paid a pair of college tuitions with a steady rate of increase far above CPI, and received an annual compensation reduction for at least the past five years from business inflation, I guess that I resemble your remark, sans the hedge-fund appendage.
Meanwhile the dollar has fallen 8% in the past nine months, although most of my expenses are in dollars.
Obviously, the relevance of CPI to government COLA (cost-of-living allowance) could impact the hedonic calculations of CPI, and alternative measurements like those at Shadow Government Statistics.
Judge Judy wrote, "Don't pee on my leg and tell me it's raining." Somehow I feel that with inflation, we're still 'officially' living in a state of denial. Clearly, we need better measures of age-related inflation as well as more reliable measures of other government statistics. I'm not sure that monetary policy will stifle the root cause of commodity-based inflation, globalization with energy and other natural resource consumption growth.
Let me offer just a few observations.
My snide reference in the Barron's column to the hedge-fund managers calculating their "personal CPI" was meant in part as a put-down of anecdotal evidence deployed in the service of an ingrained market view. (If readers could stomach a story about my 75-year-old father-in-law who, every time he sees me, recounts how cheap his '64 Corvette was when he bought it new and "isn't it a shame the oil companies are gouging us," I might've used that example instead.)
Given the choice between believing the first-hand observations of individuals about their costs and the collective conclusions of, say, the TIPS market, I have a hard time wholly denigrating the wisdom of the markets. Yes, we all know the way certain inefficiencies and such skew the TIPS spread, but if the inflationary trends were galloping away the way many complain, I simply can't imagine the TIPS market would be quite so unmoved. I absolutely can agree that the government data is massaged and flawed without having to accept that the true trend is for runaway inflation.
One reason I see a problem with the anecdotal approach is that we naturally notice the stuff that's going up in price a lot more easily than we do the rest of what we buy. That's an empirically demonstrated fact.
I will also suggest that this economy is exceedingly adept at exerting pricing pressure on those who can afford it, gouging those with a certain level of price insensitivity. For the rest, huge companies squeeze the supply chain or outsource to deliver cheaper stuff and/or absorb the margin hit in the service of keeping/gaining market share. This, to me, is at the root of the hedge-fund manager first-person data critique. I believe my hedgie friends when they tell me their taxes in Scarsdale went up 15% last year. But do you know what happened to those who couldn't afford it? Neither do I, because those folks don't live there. And the cost of private health insurance, often rising at double or triple headline CPI? People with no employer coverage or ability to pay out of pocket, unfortunately, go uninsured.
There are some 3.4 mln students in private colleges in the U.S. right now. The hefty tuition increases obviously sting their parents, but the gross expenditure is hardly big enough to nudge the aggregate CPI much higher.
On the other side, do a study on the current price-per-calorie of a fast-food value meal versus a year ago, or look at Wal-Mart (WMT) comps running below the rate of wholesale inflation (despite reaping benefits of food inflation) or price a three-pack of Hanes T-shirts at Target (TGT) or watch the casual-dining chains slash guidance because they can't push food costs through to menu price increases, and you'll see how the bulk of the US population has offsets to the widely broadcast inflation in necessities. (Incidentally, WMT put out a press release today boasting that it's cutting prices on 16,000 items, most related to back-to-school.)
Then there's the flipside to the widely observed pattern of "inflation in what you need, deflation in what you merely want." When you're shouldering those big cost increases in tuition and business insurance, how much less disposable income (and personal inclination) do you have left to ramp your spending and thus help fuel more widespread price increases? This, to me, is the unspoken reason that it can make sense to look at core inflation "excluding eating and driving," without relying solely on it, because the latter two activities - eating and driving - have to be done no matter what price increases there are, a drag on consumption for most people and thus a drag on broader inflationary pressures. I think this is why Bernanke is so focused on inflation expectations. The danger is that these headline price uptrends will inflame inflation expectations and permit broader cost-push inflation to get rolling.
I'm obviously no economist, and I won't deny inflation is an enormous potential risk to markets. As I've written before, there's plenty to worry about, and folks are plenty worried. To an extent, this broad-scale worry helps innoculate the market from an acute negative response unless the numbers massively surprise.
All the best,
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