Earlier this morning, I showed a 20 year chart of inflation, relative to consumer income and purchasing power. It was a surprise to see that since 1985, energy, oil and gasoline didn’t even make the top 3.
I asked Michael Panzner what the same chart would look like over 5 years. He noted "Although earnings have kept pace with reported inflation and the prices of some goods and services over the past five years, the average worker’s purchasing power has lost ground in several key areas."
He was nice enough to generate this:
click for larger graphic
Chart courtesy Michael Panzner, Rabo Securities
This chart is noteworthy for two reasons: First, the impact of energy is inescapable, as its 2 of the top 4 5 areas where consumers have been losing real purchasing power, i.e, the costs of these goods or services are accellerating faster than earnings.
Second, and perhaps most significantly, this chart shows how much CPI understates actual inflation.
Any time you see a fund manager or eoconomist on CNBC discussing how benign inflation is, you can comfortably file that person away as clueless cheerleader.
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UPDATE: July 14, 2005 10:28am
Michael Panzner writes:
The original 20-year chart is accurate (which has housing as the second most "inflated" category), but when I rejigged the data to make you that five-year chart, I decided to drop the "alcohol" category and re-sort the list in ascending order to try and make it look a bit tidier.
Unfortunately, between the two steps, I actually ended up dropping the "housing" data, and inadvertently labeled the "alcohol" ratio as "housing". All the other data in the graph is/was correct.
Perhaps the thought of alcoholic beverages muddled my brain…?
Anyway, attached is the new graph [above] (with the "alcohol" category now included) and housing at the end (where it belongs). It was a silly mistake. Sorry.
No harm done –thanks for the fix — and kudos to eagle eyed Tim (The mess that Greenspan made) for the catch
And the housing bar is fantasy land as it’s based on rentals rather than purchases if I remember correctly? Did you talk about how housing artificially depresses CPI due to the rental-based calculation rather than mortgage? Or am I remembering this wrong?
The is also the CPI housing measure that is massively biased downward.
The section of suburbia in which I play had seen a massive rise in the percentage of SUVs over the 5 years from 1995 to 2000… but I would say that I have seen a distinct turn of events… and the ratio of SUV to MiniVan has gone difinitively in the direction of MiniVan.
Not only would the purchase ratio of MVs in this area ruduce the average vehicle price, but would also do a great deal to save those people money on gas. They’re pretty much giving away SUVs at dealers around here. People save $10,000-$20,000 getting the van instead of the SUV… and another couple hundred a year on gas.
Now… why I let my wife buy that Suburban… I have no idea. $2.40/gal…. 30 galons… 15 mpg (downhill)…. leasing a private jet is often less expensive than a road trip.
Once again, hourly earnings are used and not household income. Hourly earnings have been going up but household income has been on a downtrend for quite a few years now.
Well who cares about the middle and working classes anyway – this is a corporatocracy, remember? Those ‘citizens of the world’, the multi-nationals, so far above us mere mortals in their greatness and wisdom, they run our govt and economy in their own interest, and the rest of us just listen and obey.
The OFHEO housing data is based on Fannie Mae and Freddie Mac “resales” (i.e., what the same house fetched as it was resold over the years).
Not sure how valid that measure is over a six year span, but nonetheless, if you look up the data at the OFHEO website you see that for the entire U.S, the index was at 218 in Q1-1999 and was at 348 in Q1-2005.
That’s a 60% increase!!
I don’t think average hourly earnings have gone up more than 60%, as indicated on the chart, have they? Not my hourly earnings, at least.
Here’s the link to the average hourly earnings data – just click the top box, then hit Retrieve Data and you should see a table that says Dec 1998 – $13.19 and Mar 2005 – $15.95.
That’s about a 20% increase.
Here’s the link to the OFHEO data – scroll to the bottom to get the numbers referenced in the last comment.
Hourly earnings up 20%, housing up 60% – what’s the deal?
I think this is what the chart is supposed to look like, unless it was the CPI housing prices (equivalent rent) that was intended, which was probably the case.
Just goes to show the difference between real house prices and what the CPI uses for house prices.
How exactly am I clueless? The energy dates are well chosen to show a big rise, any trader could tell you that. Healthcare is fucked. So I would imagine that you are refering to housing. A couple of points, one is that you can’t extrapolate hot markets for the broad country. However, I will acknowledge the measure isn’t accurate since owning a house is a consumption good. It should be included as such. That said, a rise in home ownership is generally bad for the lessors and probably does help keep down inflation. It doesn’t mean that everything is experiencing inflationary pressures. The broad economy looks to be in fine shape as far upward pricing pressures go.
The chart doesn’t show how CPI understates inflation. The chart shows that inflation can be measured in a number of different ways. The chart shows that there are relative price shifts, as well as a generalized rise in prices.
OFHEO’s house price index is rising faster than rents are rising, true enough. Until we decide (arbitrarily) how to divide up home prices between the consumption and asset value of homes, OFHEO’s index doesn’t really measure the cost of living in a house any better than a rent-derived index does.
It is surely a comment on our priorities that medical care has become more expensive even as consumers of medical shoulder more of the burden for their own medical care and as the GINI coefficient is going the wrong way for the poor. That is important, but medical care costs are still just one component of inflation.
I am looking for a calculation regarding the purchasing power of the US dollar as of January 1, 1998 as compared to January 1, 2006. The consumer price index suggests a 20% reduction in purchasing power. However, housing in California has quadrupled, gas and cigarettes have doubled, etc, etc. Therefore, the 20% figure seems insufficient. Any suggestions? Thank you! -Byron