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WSJ: Inflation Data not good for the incumbent

Posted By Barry Ritholtz On September 1, 2004 @ 12:10 am In Finance,Politics | Comments Disabled

wsj_format_logo [1]

Yet another good analysis by the WSJ [1]: 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 [1] 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.

Source:
Inflation Data May Not Aid Bush [1]
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

http://online.wsj.com/article/0,,SB109347145118001226,00.html


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