Friday, December 12, 2008

Consumer Price Index and some interesting observations

The U.S. Bureau of Labor Statistics monitors almost every aspect of American life. One of the more commonly cited is the Consumer Price Index. Almost everyone hears about it going up and very infrequently, going down. But the changes in the CPI never seem to match my impression of reality. For example, this last month gasoline prices dropped over a $1.00 a gallon, about a 33% decrease, however, the CPI on went down about 1%. I began to wonder why.

The base years for the CPI is 1982 to 1984. These years are arbitrarily set at 100. For all of the years before 1984, the CPI is less than 100. It was an average of 9.9 in 1913. If I read this right, from 1913 to 1984, prices went up 1000%. Click on this to see the chart. You math guys out there can correct me if I am wrong. In October of 2008, the CPI stood at 216.573. The highest its been is 219.964 in July of 2008. Other than observing that none of the possible savings accounts I know about will pay interest any where near the increase of 4.1% in 2007, I began to wonder what these figures really said.

There is a chart of all of the components of the CPI and the relative weight given to each component. Click on this to see the chart. I note that gasoline, a relatively large component of my personal expenditures is only 5.215 % of the CPI.

These are the larger percentage categories:

Food and Beverages 14.914%
Housing 42.427 %
Apparel 3.731 %
Transportation 17.688 %
Medical care 6.231 %
Recreation 5.647 %
Education and Communication 6.086 %
Other goods and services (primarily personal care and tobacco) 3.277 %

In examining my own budget these figures are no where near what I personally spend in those categories as a percentage of my gross income. In my case, the number one expenditure is taxes, which are not even mentioned. Another significantly missing item is donations to charities. Now, I understand that the CPI is supposed to measure the overall price of goods and services but in every individual case, it is unlikely that anyone actually spends money in the percentages listed. For example I don't smoke so my expenditures for tobacco are 0 % of my income.

The effect of personal spending habits is that your own personal CPI might be a lot higher or a lot lower than the national averages, depending on your spending habits. For example, if you don't own a car and don't drive, an increase in gasoline only indirectly affects your budget. Since food away from home is 6.173 % of the CPI, you can change the way the CPI affects you personally by merely eating out either more or less often. You can take out 1.811 % of the CPI by not smoking or drinking alcoholic beverages. The CPI is supposed to be designed to exclude investment items, so you can really change the way it affects your personal budget by investing in a home or whatever. Also, the CPI is not designed to reflect changes in purchasing habits due to changes in price. So if you buy hamburger instead of steak, you just get hamburger, you don't change the CPI.

Although the BLS denies that the CPI changes due to politics, it is interesting the rates of inflation are often recalculated after elections, just as the unemployment figures rose for the months before the recent national election when they were recalculated after the election. Politics may not affect the numbers but politics certainly influence the percentage components and the method and timing of the calculations.

No comments:

Post a Comment