NOTE TO MACROBLOG READERS: Dave is playing hooky today, allowing me another shot at his blog. The comments are mine, not his, and not those of the Federal Reserve Bank of Cleveland or the Reserve Board of Governors.
For a refreshing change, the December CPI report had a bit of good news this morning for both consumers and inflation worry-warts like me. For consumers, many of the items that posted price declines in November continued to do so in December, including energy, men’s apparel, footwear, and new and used vehicles. To these were added falling prices on women’s apparel, beverages, dairy products, and bakery goods. In fact, when you add them up (and I did), 35 percent of the consumer’s market basket showed either no change or a price decline last month, compared with about 25 percent a month earlier. Likewise, only a little more than 13 percent of the CPI basket posted price hikes in excess of 5 percent (annualized) in December, compared with about 24 percent in November. So whatever sleep I lost in the days immediately following the November CPI report, I hope to recoup starting this evening. Sure, the “core” measures of inflation, reported in the following table, weren’t great, but they certainly didn’t worsen, seeming content to remain in the neighborhood of 2 to 2½ percent. (More detail can be found in the Cleveland Fed’s median CPI press release.) Any whiff in the November data that prices were poised to break the upper 2½ percent threshold seems to have vanished in December. CPI 0.5 0.5 1.2 0.2 -0.6 -0.1 CPI Ex. Food/Energy 0.1 0.1 0.1 0.2 0.2 0.2 MEDIAN CPI 0.2 0.2 0.1 0.2 0.2 0.2Percent Change, Last 1 Month
Jul
Aug
Sept
Oct
Nov
Dec
Percent Change, Last 12 Months
|
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
CPI |
3.2 |
3.6 |
4.7 |
4.3 |
3.5 |
3.4 |
CPI Ex. Food/Energy |
2.1 |
2.1 |
2.0 |
2.1 |
2.1 |
2.2 |
MEDIAN CPI |
2.3 |
2.3 |
2.3 |
2.3 |
2.4 |
2.5 |
Now, if you’re like me, you might be more comfortable if the CPI trend was closer to the lower end of that 2- to 2 1/2-percent range. Well, we might be getting some help from the BLS beginning with next month’s CPI report.
Here’s a puzzle for you: If a good’s price goes up, and you don’t buy it, has your cost of living risen? [Actually, this is a question that most economics majors are asked on an examination at some point in their undergraduate studies.] The intent of the question is to get students to think about the theoretical difficulty of measuring changes to our cost of living. Here are two rules in measuring cost of living, and if they seem in conflict, well, that’s because they are. Rule one: When you gauge price changes, you must fix the market basket. One can’t make any conclusion about the cost of living by comparing the price of the oranges I bought yesterday to the price of apples I bought today. And rule two: Once you fix the market basket, it immediately becomes outdated!
It turns out that there is no right answer to the question above. You can either price the oranges you don’t buy today, or the apples you didn’t buy yesterday. Most economists have concluded that it’s most useful to value the items you bought in an earlier period using the prices of today—as long as that earlier period wasn’t too long ago. Next month, the Bureau of Labor Statistics will update the market basket on which they compute CPI changes. The basket will reflect consumer expenditure patterns over the 2003-2004 period, compared to the 2001-2002 basket of goods they use today. Can the market basket really change that much in just a few years and, moreover, is it likely that the new market basket give us a higher or lower reading? Well, yes, the market basket can change quite a lot. And I’m not just thinking about ipods, Xboxes, and high-definition TVs. Whenever prices move, people change their expenditure patterns—generally moving away from the goods going up in price in favor of goods where prices are relatively more favorable. So yes, we can anticipate that when the market basket is updated, changes in the cost of living will be more moderate than they would have otherwise been. How big a change is this likely to be? We’ll know next month. But to give you an idea, consider the figure here, which compares the “core” CPI to the “core” CPI on a chain-weighted basis.
The chain-weighted CPI is an experimental measure which updates the consumer market basket more frequently that the conventional CPI. Over time, the chained CPI has averaged about 4/10ths of a percentage point below the conventional measure, an indication that updating the basket could have a significant effect on our CPI reading. So, if you are like me, and would like to see the CPI trend closer to 2 percent than 2 ½ percent—the BLS might just have what you are looking for in next month’s report.