Wall Street History

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Wall Street History

03/19/2004

The CPI

For years I have wanted to delve into the calculation of the
consumer price index (CPI) but never did so because it is an
extremely dry topic and not easily transferable in a forum such as
this.

But as the controversy mounts over the official government
statistics on inflation and the everyday experience of us little
guys, I thought it was as good a time as any to tackle the issue.

The following information is gleaned from the U.S. Department
of Labor / Bureau of Labor Statistics (BLS) www.bls.gov. It
takes a little digging, but any one of you can pull up what I’m
about to present.

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Let’s start out with the BLS definition of the consumer price
index.

“The CPI is a measure of the average change over time in the
prices paid by urban consumers for a market basket of consumer
goods and services.”

What goods and services does the CPI cover?

The BLS has classified all expenditure items into more than 200
categories, arranged into eight major groups. Major groups and
examples of categories in each are as follows:

--Food and Beverages (breakfast cereal, milk, coffee, chicken,
wine, full service meals and snacks)
--Housing (rent of primary residence, owners’ equivalent rent,
fuel oil, bedroom furniture)
--Apparel (men’s shirts and sweaters, women’s dresses, jewelry)
--Transportation (new vehicles, airline fares, gasoline, motor
vehicle insurance)
--Medical Care (prescription drugs and medical supplies,
physicians’ services, eyeglasses and eye care, hospital services)
--Recreation (televisions, cable television, pets and pet products,
sports equipment, admissions)
--Education and Communication (college tuition, postage,
telephone services, computer software and accessories)
--Other Goods and Services (tobacco and smoking products,
haircuts and other personal services, funeral expenses)

Knowing this, let’s see how they break up the index, all #s
adding up to 100.

Food and Beverages ...15.384
Housing ..42.089
Apparel 3.975
Transportation 16.881
Medical Care 6.074
Recreation 5.872
Education and Communication ..5.948
Other Goods and Services 3.776

Now let’s really break it down.

Food and Beverages ..15.384
Food .14.383
Alcoholic beverages.....1.001

Housing ..42.089
Shelter ...32.878
Fuels and utilities ..4.741
Household furnishings
and operations .4.470

Apparel 3.975
Men’s and boys’ ..1.024
Women’s and girls’ ..1.704
.Infants’ and toddlers’... .195
.Footwear . .778
.Jewelry and watches ... .274

Transportation ....16.881
Private 15.817
Public ...1.064

Medical Care 6.074
Medical care
..commodities ....1.499
Medical care
..services ...4.575

Recreation 5.872
[too numerous to list numerically here, including for video and
audio, pets, pet products, sporting goods, photography, recreation
serices (club memberships, admission to movies), recreational
reading materials (newspapers, magazines)]

Education and comm. 5.948
Education 2.841
Communication ...3.107

Other goods and services 3.776
Tobacco / smoking .806
Personal care 2.970

Do you want to break it down further? Well, for this week, let’s
just look at some of the bigger items that we all care about;
health insurance, property taxes, college tuition and energy.

First off, there is no specific measurement for health insurance.
Instead, it’s lumped into medical care commodities (prescription
/ nonprescription drugs) and medical care services (physicians’
services, dental, eyeglasses), both of which add up to the above
figure of 6.074 of the index. From February 2003 to February
2004 this supposedly has risen at a 4.2% clip. You may now
laugh.

Property taxes, according to the BLS, “should be reflected
indirectly in the BLS method of measuring the cost of the flow of
services provided by housing shelter, which we call ‘owners’
equivalent rent,’ to the extent that these taxes influence rental
values.” [This is 23.383 of the index] Feb. ’03 – Feb. ’04 it
rose 1.9%. I’m sure all of you are thinking, “Oh yeah, that’s
about the rate of increase in my property taxes.” Stop laughing.

College tuition and fees is 1.305 of the index and has risen at a
10.1% clip from Feb. ’03 – Feb. ’04. The index margin is
ridiculously low, but at least the overall rate of increase is
roughly in line with what your own personal experience is.

With energy, let’s look at two items here. First, “gas and electric
utilities,” 3.599 of the index and up 6.3%, Feb. ’03 – Feb. ’04.
Second, gasoline, part of the transportation component, is 3.222
of the index and up 2.0% over the aforementioned period.

Now discuss amongst yourselves .time’s up.

So does the CPI represent the real everyday costs of Americans?
While there are some areas in which the index is relatively in line
with reality, there are countless instances where it is woefully
short. But this is a critical barometer when the Federal Reserve
sets interest rate policy. I reserve the right to revisit this issue in
the near future.

Wall Street History returns March 26.

Brian Trumbore

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