WSJ: Inflation Data not good for the incumbent


Yet another good analysis by the WSJ: CPI, or consumer price index, shows inflation to be relatively benign. Despite this good data, most middle income families are feeling a cost squeeze.

To make matters worse, real wages are not keeping up. By many measures, families are actually sliding backwards. (This is not good for the White House).

Why the disconnect? Some of its due to the outmoded way we measure inflation. Look at what’s is causing a squeeze for the typical family:

Health care costs are way up. Food has gotten pricier. The costs of sending your kid to a decent college is through the roof. Property taxes have risen — and in some areas, quite aggressively. State and City taxes have generally increased. And of course, energy costs are dramatically higher than they were this time last year.

The Journal observes:

“Favorable inflation numbers should be giving President Bush a boost in his re-election campaign. But while official figures show inflation remaining in check, consumers are being pinched by higher prices and that could affect votes in November. At the Sam’s Club warehouse store here, Jim Long now buys food in bulk and complains he can no longer afford steak.

Recently, everyday expenses seem to belie government statistics. The Labor Department’s July inflation report found prices rose 3% over the previous 12 months, down a bit from 3.3% in June and still low by historical standards.

Because food and energy prices can be volatile, economists often look at a gauge that excludes those categories to measure underlying inflation trends. The index, which includes prices for goods such as housing, furniture and cars, has increased at an annual rate of 1.8% in the past year.

This is a perfect example of where classical economics fails: The inflation data is volatile and sloppy, so the focus shifts to a more reliable, but far less informative, analysis: CPI ex-food and energy.

Now if only someone can figure out how I can go about my day without: eating, using heat or electricity, or fuel to commute to work. Hey, we whipped inflation! and all we had to do was ignore the ugly data (a/k/a cooking the books).

Here’s another excerpt:

The Federal Reserve in July pronounced “underlying inflation” to be “relatively low” and said that some of the recent rise in prices “seems to reflect transitory factors.”

For consumers who have been paying about $2 a gallon for gasoline, $5 or more a pound for steak and $3 for a gallon of milk, inflation seems to be a lot higher than the government numbers indicate.

Inflation08252004201315 The consumer-price index, instituted during World War I to adjust wages for the cost of living, is a survey of prices of more than 80,000 goods and services. Categories in the index are weighted for their relative importance to households. Housing, for instance, represents 42% of the index. Changes in the method of computing the CPI have shaved almost half a percentage point a year from the inflation rate since 1995, according to Patrick Jackman, a Labor Department economist. Among other things, the government added an adjustment for quality improvements to the prices of various products.

“The problem is, the everyday citizen still doesn’t feel like there’s a recovery. They judge it by the price of a quart of milk, a loaf of bread or a gallon of gasoline,” says Robert Denton, a professor of political communication at Virginia Polytechnic Institute and State University in Blacksburg, Va.

Lower-income voters say they are worried about increased commodity prices, although consumers overall think inflation will remain at an annual rate of about 3% over the next 12 months, according to the University of Michigan consumer survey. Consumers also believe housing prices are too high, and there is widespread concern among older Americans about rising out-of-pocket health-care costs, says Richard Curtin, director of the university’s consumer surveys.

But prices are only part of what is driving consumer unease. Some feel a pinch because their wages have risen less than prices. In July, average weekly earnings of production and nonsupervisory workers in the U.S., adjusted for inflation, were down 0.7% from a year earlier.

That is little comfort to consumers who seem to pay more attention to higher prices for food and gasoline. Prices of meat and poultry are 9.2% higher than a year ago, dairy products are up 14%, and gasoline has jumped 26%, according to the Labor Department.

Inflation creeping higher while real wages fail to keep up? Hardly a beneficial economic backdrop for an incumbent.

Inflation Data May Not Aid Bush
Although Rate of Price Increases Steadies, Consumers Feel Sting of Higher Food, Gas Costs
Michael Schroeder
The Wall Street Journal, August 26, 2004; Page A4,,SB109347145118001226,00.html

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  1. spencer commented on Sep 1

    For those looking at the recent data on real income and poverty in 2003 that showed only the top income groups actually showing increased standards of living the real wage data implies that it is actually worse this year than last.
    And remember, real GDP was up 5% last year, yet the overwhelming bulk of the population did not benefit.

  2. kharris commented on Sep 1

    Oh, please don’t say stuff like that! Economists don’t look at core inflation because they don’t like what they see in the headline number. They look at core inflation in ADDITION to looking at the headline number, because they can learn more by looking at both than just at one. And you know better, so shame, shame.

    And “classical” economics is not the same as “standard behavior among economists.” Classical economics is Jevons and Say and Marshall, not a habit of looking at core inflation rather than (actually, in addition to) the headline figure. If Greenspan chooses to say things about the causes of and prospects for inflation with which you disagree, then the thing to say is “I disagree with Greenspan” rather than “classical economics fails.” The latter is barstool talk, the former is, as far as I can tell, what you really mean.

  3. Chibi commented on Sep 1

    Really good post, B.

    Let me tell you how I see things in my daily life:
    Housing, most folks’ first priority. Through the roof if you’re trying to buy a house right now. Rents have been flat, but they were already through the roof from the dotcom boom. Food, meat and fish is definately more expensive than even last year. Fruits, vegetables & grains not so much. I don’t buy much prepared food, so I’m not sure about that. My co-payment for my HMO is $20. Those used to be $10. Gas for the car we all know is up. TV, cell phone and internet access charges are more expensive than a few years back. If you want to hire a contractor to do some work on the house or property, those prices have definately gone higher.

    However, any sort of manufactured good has gotten either cheaper or amazingly more advanced.

    What’s the difference between the two sets of categories? Foreign labor and a (still relatively) strong dollar?

  4. Eric chaudron commented on Sep 1

    PUllleeeease. don’t piss on my back and tell me it’s raining. this economy stinks on ice. Housing bubbles, the price of energy rising to it’s true value, and a tax system that is held together by smoke mirrors spit and paper. I weep for the country when the facade falls after the election. Can you say depression?

  5. Pete Harrigan commented on Sep 1

    I can say depression. I have been hearing it predicted every year since I became aware of economic conditions in the late 70s.

    Good post, but I have, as usual, two nits to pick. Housing price increases are probably inflationary to someone who does not own a house, but to a homeowner they feel like a big win. (notice the weasely use of the verb “feel”) Secondly, while college tuitions have gone up, the actual dollar amount paid by most families has gone down. There are more aid dollars available than there were a few years ago and tuition increases have absorbed a lot of them, but real costs to the average student is either down or not up anywhere near the amount of the headline number.

  6. Barry Ritholtz commented on Sep 1

    I don’t believe this round of housing price rises were inflationary —
    it was a f’n of ultra low interest rates

    As to college costs, the aid increase — assuming you qualify — aren’t even remotely
    compensation for all the increases; tuition, books, room & board, etc.

  7. Jeff Lawson commented on Sep 4

    You can get steak for $5 a pound, or milk for $3 a galon?? And they say wages in Arkansas are low because it’s cheaper to live here….bleeeaaaah

  8. 张家界 commented on Jun 19

    what a nice site..i enjoy reading your posts!

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