I stumbled across a data point yesterday that was quite fascinating: The percentage of food and health care in the Consumer Price Index.
It turns out that Inflation may be even worse that I previously thought.
According to Mark Faber (via Bill Fleckenstein), food and health care are significantly under-weighted in the CPI. That’s based on the actual consumption of food and health care by real (as opposed to theoretically modeled) people.
Faber notes that:
"In the U.S. counts food as only 8% of the CPI index. Whereas, it counts for about 10% in the United Kingdom, about 15% in the rest of Europe and more than 18% in Japan."
I have yet to validate it that percentage, but if it turns out to be true, we have Inflation (as reported) on top of the misleading hedonic/substitution adjustments (ex-inflation) on a disproportionate spending pie (ex-inflation X 2). UPDATE: Food at home is 7.66% of the CPI according to the BLS (Thanks, Mike)
Hence, doubly understated Inflation. Unless you go Core, which is the original Inflation Ex-Inflation.
Now here’s where things get really interesting. Fleck points out that if you consider the proportion of U.S. household spending on food by income quintile, all but the top 20% of earners spend at least 20% of their paychecks on food.
Hence, what the weighting versus the reality are very different. This means that for 80% of the country’s populace, the CPI weightings are dramatically understates what the average American is experiencing in terms of their inflation versus the official CPI measure.
This goes a long way to explaining the difference between the official inflation data and the generally poor consumer sentiment data.
CPI data is Wednesday, with a consensus of 0.3%.
NYT Interactive Inflation Chart
Is Inflation Really Understated? (No!) May 08, 2008 http://bigpicture.typepad.com/comments/2008/05/inflation-infla.html
Inflation Abounds April 29, 2008
Is the Fed Causing a Global Food Crisis? April 25, 2008
Why all roads lead to inflation
MSN Money, 5/12/2008 12:01 AM ET