Saturday, June 16, 2007

A Different Take on the CPI Released Yesterday

The following is summarized from the US Dept. of Labor CPI Summary released on June 15, 2007. The most reported form of the CPI, Consumer Price Index for All Urban Consumers (CPI-U), increased 0.6% in May, prior to the seasonal adjustment. The May level of 207.949 (1982-84=100) was 2.7% higher than in May 2006.

On a seasonally adjusted basis, the CPI-U advanced 0.7% inMay, following a 0.4% increase in April. The index for energy increased sharply for the third consecutive month--up 5.4% in May. The food index rose 0.3% in May, slightly less than in April. The index for all items less food and energy (core inflation rate) increased 0.1 % in May, following a 0.2 % rise in April.

This discrepancy between the core inflation rate (0.1%) and total inflation rate (0.6%) speaks to the lack of value of the core inflation rate when energy prices are increasing. Admittedly, many will tell you that the FED looks at the core inflation rate to make policy decisions. But let us face facts, Ben Bernanke and friends weren’t born yesterday. They must have their eyes on the total inflation rate.

During the first five months of 2007, the CPI-U rose at a 5.5%seasonally adjusted annual rate (SAAR) compared with an increase of2.5% for all of 2006. The acceleration this year was due to larger increases in the energy and food components. The index for energy advanced at a 36.0% SAAR in the first five months of 2007 compared with 2.9% in 2006. The food index has increased at a 6.2%. SAAR thus far this year, following a 2.1% rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.1% SAAR in the first five months, following a 2.6% rise for all of 2006.

The annualized growth rate for the March, April and May for selected items:

All items 7%
Food and beverages 4.2%
Housing 2.5%
Apparel -6.6%
Transportation 30.6%

The same items for the past 12 months:

All items 2.7%
Food and beverages 3.9%
Housing 3.3%
Apparel -0.8%
Transportation 1.3%

This data indicates that life in the US is just recently becoming more expensive. The prices of food and energy are up significantly. Apparel is down because retailers can’t move it and are now dumping their inventory. Housing is down slightly because of the condition of the housing and rental markets.

From a national perspective the data indicates that the growth rate in Q1 and Q2 personal consumption expenditure (PCE, largest portion of the GDP) can be largely attributed to more money being shelled out for energy and food and not real growth in PCE across a wide variety of items.

In addition by using the CPI-U the concerns of the American public are more understandable. The person on the street knows life is costing them more, now we know why.

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