Wampum

How relevant is CPI anyway?

During my recent ponderings on stagnant worker bee hourly wages, I found myself knee-deep in the archives of a related economic indicator, CPI (Consumer Price Index.) Most Americans, myself included, probably think of CPI mostly as an "inflation" index used to adjust Social Security and other income. And no doubt this is an important use of CPI. However, a closer look at the details of CPI is very helpful when determining general "pain index" trends, something I've been thinking a great deal about as Bush's purported recovery remains jobless and otherwise troubled.

According to the BLS website, CPI program "produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services." And not all good and services are weighted equally; some, like food and shelter, rate higher than such categories as recreation and apparel. However, while useful as an overall gauge of price trends within the economy, the current weights used by the BLS struck me as not particularly useful when calculating an average American family's "pain index".

For example, while housing costs are weighted highest (40.8 out of 100), transportation (17.3) is weighted higher than food (14.6). Recreation (5.96) is weighted the same as medical care (5.94), with education and communication (5.8) not far behind both.

Now, perhaps I don't run a typical American household, but I certainly rate putting food on my kitchen table (8.3) significantly over buying new car (8.2). And if money was tight, I think that my video rentals (1.6) would suffer far more than my prescription drugs (1.4). In fact, for the past couple of years of less-than-infrequent unemployment, at least a third of the BLS's "market basket" was truly extraneous in our household.

So what does this all mean in compiling a useful "pain index"?

Well, the BLS asserts that it's market basket of goods and services increased only 1.8% in 12 months from November 2002 to November 2003. However, I decided to pull out a few of the "commodities" in the basket which I consider particularly important for more detailed scrutiny, particularly in light of the stagnation of wages for non-exempt workers over the past year.

Goods or Service	Relative Importance (December 2002)	% Change Nov 02 - Nov 03
All Food	14.554	3.2
Meat, Poultry, Fish	2.222	10.6
Veggies and Fruit	1.234	3.5
Food at home	8.338	3.9
Food out of home	6.216	2.2
Rent	6.467	2.7
Mortgage	22.243	2.1
Fuel Oil	0.205	10.7
Natural Gas & Electric	3.399	6.7
Gasoline	3.091	5.5
Medical Care	5.961	3.5
Telephone	2.273	-2.6
Apparel	4.220	-1.9

So in what categories did prices decrease, besides apparel and telephones services? Well, nonalcoholic beverages (-0.9%), household furnishings (-2.3%), new (-2.1%) and used (-11.3%) cars, ISP/DSL/Cable (-11.0%), PCs (-18.5%), tobacco (-0.3%), and personal care products (-0.6%). These categories were deemed important enough by the BLS to counter the price increases noted above of somewhat more "basic" needs.

I'm in the process of synthesizing this into some form of index which will also include other factors, such as unemployment insurance limits and regional differences, wage trends, property and sales tax increases, etc. Probably won't be ready until after December's CPI figures are released next week. But stay tuned and feel free to suggest other "pain index" factors in comments below.

Quick addendum: With the recent rapid devaluation of the US dollar, will we see some of those categories which have "deflated" in price, namely apparel, electronics/PCs and household goods, increase substantially, since most are now imported?

Posted by MB Williams at January 6, 2004 01:51 PM | TrackBack