There’s an old joke about a hot air balloonist who gets lost.
He brings the balloon near to the ground and yells out to the first person he sees: “Excuse me! Can you tell me where I am?”
The man on the ground says: “Sure! You are approximately 30 feet above ground at 39.04 degrees North by 98.15 degrees West!”
The balloonist replies: “You must be an engineer. You gave me the exact information I asked for, and yet I still have no idea where I am.”
The man on the ground responds: “You must be a lawyer. You’re lost and asked me for help, which I’ve provided, and yet somehow you now blame me for your predicament.”
This joke comes to mind whenever the U.S. government releases statistics.
I’d like to know how the economy is doing but I don’t find their information useful at all.
While I didn’t get lost in a hot air balloon, I’m still baffled long after the reports have been made public. Clearly, government statistics need better reporting, so that’s exactly what we’ve done, and we’ve started with inflation.
When calculating its Consumer Price Index (CPI), the Bureau of Labor Statistics (BLS) compiles prices on thousands of items every month and then compares them with the prices of those same goods and services for the previous month.
On the face of it, this sounds pretty good. Unfortunately, digging into the details reveals problems.
The BLS includes housing in its calculation of inflation. That seems right. After all, we all live somewhere. But does the price of housing actually change for most people, month to month? Of course it doesn’t, because almost two-thirds of people own their homes. Unless they have an adjustable rate mortgage, their cost of housing doesn’t change at all.
Among the remaining people, many have long-term leases on apartments or condos. That means the percentage of people who experience a change in the price of housing during the year is quite small. Yet this component represents more than 30% of the CPI, simply because it’s a big piece of most family budgets.
Then there’s the idea that one measure of CPI applies to everyone.
Do you buy the same goods and services as your kids or parents? Or more to the point, do you spend the same amount of your monthly budget on the same items as other age groups?
Of course you don’t.
Young people tend to spend a lot more money on education expenses, while older Americans spend significantly more on pharmaceuticals. So a dramatic rise in the cost of education would affect younger Americans much more than it would affect everyone else, especially older Americans.
Yet we treat the change in the cost of these goods and services — along with everything else — as if they affect all people the same way.
It doesn’t make sense.
To address this, we’ve developed our own Dent Age-Targeted Inflation Indices to capture how different age groups spend money, and therefore, how inflation in different segments of the economy affects each group.
We start by stripping out housing, so that consumers can see how they’re actually being affected by things that fluctuate in price, like food, gasoline, heating oil, household goods, etc.
The official inflation numbers for January showed the 12-month rate at 1.56%.
Our calculation of inflation for 18 to 24 year olds was a little less than that, at 1.17%, while young families got a bigger break, with inflation running at 1.06%. The 65 and over group had the biggest jump in prices, at 1.32%.
While we’re in a period of deflation — as we are now — the changes in each group, or even the difference between the official rate and the inflation different age-groups experience, can be small.
However, when inflation does come back, it won’t be evenly spread across all categories. Just look back at the 2000s…
In the CPI basket, from 2000 through January 2014, energy surged higher by 114%, while education costs moved up by 106%. Medical costs increased by “only” 67%.
Meanwhile, the overall inflation number plodded higher by only 39%, which is really close to the move higher for housing at 38%.
Clearly, a 106% move higher in education has a dramatic effect on young people, while an almost 70% increase in medical costs hits our aging population.
The 100%+ move in energy smacks everyone.
As we move through the rest of the Economic Winter Season and then into Spring, we’ll keep track of these numbers and let you know when they’re getting too far afield from the official releases.
That way you can have the right set of facts, and useful information to boot!
P.S. We released our Dent Index numbers last Friday. If you missed that, you can read it here.
|Follow me on Twitter @RJHSDent|
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