This week, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) report for September 2024. It reported the aggregate CPI was up 0.2% last month, and has increased 2.4% over the previous 12 months. Excluding the volatile yet more crucial food and energy components, the results were 0.3% and 3.3% respectively.
Do you believe it? Are these numbers indicative of your situation?
Without pulling out a year’s worth of receipts, that 2.4% number seems a little low to me. However, since I would no more be able to produce a year’s worth of receipts than flying to the moon, “seems” is a good verb choice. After all, I can’t really prove anything. Perhaps “feels” might also work.
Therein lies the problem with trying to calculate an accurate inflation number for the entire economy. There is no way it would be 100% reflective of any one person’s situation. Why? Because I seriously doubt if there is a single person/household in the United States who spends their money precisely along the weightings the BLS uses in the CPI.
Do you spend 0.203% of your budget on bread and 0.254% on chicken? How about 0.060% on salad dressing or 0.042% on pork chops? Want some more? Well, I am going to give them to you regardless.
- Did you spend 3.684% on a new vehicle?
- 0.099% on ‘infants’ and toddler’ apparel?
- 0.648% on sporting goods, 0.28% on toys
- 0.206% for ‘residential’ telephone services (also known as a landline),
- or 0.158% on funeral expenses?
Let’s see. I haven’t bought pork chops in over a decade. The last car I bought was “coming off a lease.” No one has died in our immediate family over the last 12 months, and we got rid of our landline years ago. The kids are out of the house, so there hasn’t been any real outlay to either sporting goods or toys. Salad dressing and bread? Those are within the realm of reasonableness, but probably a smidgeon high. Conversely, chicken is also in the proverbial ballpark, but likely possibly a little low.
That is just me. If you have recently purchased a new car, had a baby or a loved one die, your expenditures would look a lot different than mine. Further, if you are, say, a professional photographer, you undoubtedly spend more than 0.024% on “photographic equipment and supplies.” People who keep kosher or halal aren’t spending 0.328% of their budget on pork, are they? And do teetotalers really fork over 0.854% of their budget on booze? What about folks in densely populated areas who use public transportation and don’t have a car? Does 2.794% of their monthly budget still go to motor vehicle insurance?
I think you get the picture. Just as no two snowflakes are alike, or so they say, no two consumers spend their money the exact same way. And, again, no one spends their money in the way the BLS calculates the CPI.
If so, is it truly a good reflection of inflation?
The simplest answer is it is the better than nothing. While that might sound somewhat cavalier, it isn’t. Could the BLS do a better job with the weightings? Perhaps. Maybe it could better reflect the changing consumer habits of the well-off? You know concert tickets for A-list acts which are well beyond the means of the masses? Or how about having to buy a license to get in the queue to buy season tickets for sporting events for many teams? What about the explosion in what it takes to send a kid to summer camp? A few days at an upscale resort?
You see, I would argue many items/services which were once a luxury are now necessities, or near necessities, for many. Things which should demonstrate significant “price elasticity of demand” which somehow don’t. People continue to buy the stuff, no matter how much it costs.
Consider this, and I freely admit it might be a poor example. The last year I went to summer camp, Camp Mac, was 1982. My mother has told me the 4-week session back then set them back around $475. While by no means cheap, and certainly a luxury, it wasn’t a complete backbreaker to get me out of the house and occupied for a month.
At the end of the 2nd Quarter of 1982, the value of the “US CPI Urban Consumers NSA” index was 97.00. At the end of June 2024, it was 314.18. As such, $475 for summer camp back then would “be equal” to roughly $1,539 today. Care to take a guess what it will be in 2025? How does $5,535 strike you? What’s more, Camp Mac is more affordable than a lot of its competition.
By comparison, Alpine Camp for Boys in Mentone, AL, will be $7,100 for its comparable session next year. Not too far away from Alpine in Mentone, four weeks at Riverview Camp for Girls will set your family back $10,315. It gets better. if you really want your teenager out of the house for the summer, there is an 8-week option at Riverview for, get this, $20,555.
Let’s just say, this sort of thing doesn’t really fit neatly into the CPI.
On the opposite end of the income spectrum, the index doesn’t adequately address financing costs. For instance, and I have covered this previously, assume you buy a car and need to finance $25,000 of the purchase price for 60 months. In Year 1, the interest rate was, say, 3%, and it was 6% the next year. Fortunately, the price of the car doesn’t change from one year to the next.
Thanks to the increase in the financing rate, the difference in the monthly payment is ‘only’ around $34. However, that works out to be $409 per year and a 7.5% increase. That is your reality. Paying for the car simply costs more. However, care to guess what the CPI would say about inflation in this scenario?
If you guessed 7.5%, you would be wrong, because 0.0% is the right answer. Why? Because the sticker price of the car didn’t change.
Now, what do you think has happened to the affordability of a lot of items for lower income households as financing costs have risen? That’s right. They have gone down. Further, folks who maintain any sort of balance on their credit cards have seen their minimum monthly payments soar. Guess what? That isn’t neatly reflected in the CPI either.
This is how and why people have been looking sideways at the Consumer Price Index and other inflation gauges. Yeah, they might do an okay job of tracking a basket of goods/services, but no one consumes the same stuff in the exact same quantities. Further, a lot of higher-end items don’t make it into the CPI basket either at all or in preposterously low weightings. Finally, all of these indices do a horrible job tracking the impact changes in interest rates have on true consumer prices.
Whew. But what does it all mean?
Well, for starters, it means I get to spend about 1,300 words railing against a completely imperfect science. One which I don’t have the power to either do myself or change. Seriously. Secondly, this week’s CPI likely means the next Fed rate cut will be 0.25%, as opposed to another 0.50% one like we had in September.
Why? Well, that imperfect basket of goods/services was just high enough to keep the Fed from being too, too aggressive. If that is indeed the case with the CPI, you can only imagine what the reality is for actual consumers.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.