Since our book, The Great Recession Conspiracy, was released in June, 2009, we have advanced the idea that since the Congress and the Cowardly Lion were unwilling to face the huge national debt, their only solution would be to inflate the debt away. Nothing I have seen so far changes any of that.
Now the rate of inflation is measured by changes in the Consumer Price Index (CPI), and that is a somewhat complicated process. The explanation below is one of the clearest I have seen.
Here are some very important points for you to pay attention to in this material.
1) The CPI % Change Graph. Look at the medical expense line. That is a perfect picture of the idea we have been seriously trying to raise, Medical Costs are on track to bankrupt the entire country. Since Congress won't let that happen, inflation is their only way out.
And remember that there is NOT one single thing in Obamacare to change the direction or rate of change to that line.
2) Spend some time with the college tuition graph. It illustrates two of my concerns. First, is the fact that our well being into the future depends on having a better educated work force than any other country. This graph says we "are eating our seed corn", and that is inexcusably stupid.
The second concern is that this graph illustrates how we are rapidly becoming a two tier country, the really rich and the rest of us. Very quickly, the richy richest will be the only people who can afford college for their children. Remember that in the last ten years, the top 10% income households have increase the size of the GNP that they get by FOUR times while the median income of the average American family has DECREASED in real terms. They get richer, we get poorer. I think that is what is the basic reason for what is happening in Egypt, Tunis, et al.
3) Look at the CPI & Core Inflation Chart. If your income has not increased 30% in the last ten years, your share of the American GNP (the pie we all share) has been falling.
Read on:
What Inflation Means to You: Inside the Consumer Price IndexFebruary 20, 2011 new update
Note from dshort: The charts below have been updated to include the latest Consumer Price Index news release for the January data.
The Fed justified the current round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed is trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household?
Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI.
The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, see table 3 in the BLS's monthly Consumer Price Index Detailed Report.
The chart below shows the cumulative percent change in price for each of the eight categories since 2000.
Not surprisingly, Medical Care has been the fastest growing category. At the opposite end, Apparel has actually been deflating since 2000. Another unique feature of Apparel is the obvious seasonal volatility of the contour.
Transportation is the other category with high volatility — much more dramatic and irregular than the seasonality of Apparel. Transportation includes a wide range of subcategories. The volatility is largely driven by the Motor Fuel subcategory. For example, the spike in gasoline above $4-a-gallon in 2008 is readily apparent in the chart.
The Ominous Shadow Category of Energy
The BLS does not lump energy costs into an expenditure category, but it does include energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.
The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 8.553 out of 100. In other words, Uncle Sam calculates inflation on the assumption that energy in one form or another constitutes about 8.55% of total expenditures. The next chart overlays the highly volatile Energy aggregate on top of the eight expenditure categories. We can immediately see the impact of energy costs in the Transportation category.
The next chart will come as no surprise to families footing the bill for college tuition. Here I've separately plotted the College Tuition and Fees subcategory of the Education and Communication expenditure category. Note that the steady staircase in this cost matches the annual cost increases in late summer for each academic year.
Core Inflation
Economists and policy makers (e.g., the Federal Reserve) pay close attention to Core Inflation, which is the overall inflation rate excluding Food and Energy. Now this is a somewhat peculiar metric in that one of the exclusions, Energy, is an aggregate that combines specific pieces of two consumption categories: 1) Transportation fuels and 2) Housing fuels, gas, and electricity. The other, Food, is the major part of the Food and Beverage category. I should explain that "beverage" for the BLS means alcoholic beverages. So coffee and Coca Colas are excluded from Core Inflation, but Budweiser and Jack Daniels aren't.
The next chart shows us the annualized rate of change (solid lines) and the cumulative change (dotted lines) in CPI and Core CPI since 2000.
Consumers, especially those who've managed expenses over several years, are most closely attuned to the top line.
Inflation and Your Household
The universal response is to moan over price increases and take delight when prices are cheaper. But in reality, households vary dramatically in the impact that inflation has upon them. When gasoline prices skyrocket, a two-earner suburban family with long car commutes suffers far more than the metro family with short subway commutes. And remember, Uncle Sam excludes energy costs from Core Inflation.
Households with high medical costs are significantly more vulnerable than comparable households with low expenses in this category.
The BLS weights College Tuition and Fees at 1.493% of the total expenditures. But for households with college-bound children, the relentless growth of tuition and fees can cripple budgets. Often those costs get bundled into loans that saddle degree recipients with exorbitant debt burdens. Consider the following numbers from the CollegeBoard.com website:
- Public four-year colleges charge, on average, $7,605 per year in tuition and fees for in-state students. The average surcharge for full-time out-of-state students at these institutions is $11,990.
- Private nonprofit four-year colleges charge, on average, $27,293 per year in tuition and fees.
Which brings us back to the Fed's efforts to increase the level of Core Inflation. At the macro level, Mr. Bernanke and his Federal Reserve team can doubtless make a theoretical argument for playing puppet master with inflation. But will their efforts — ZIRP and Quantitative Easing — achieve the desired goal?
The one thing we can be certain about is this: An increase in inflation will have a painful effect on lower income households, those on fixed incomes, those with higher ratios of transportation costs, and any household whose discretionary spending is more dream than reality.
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