Inflation Update

Posted on April 14, 2010 by David Laidlaw 

The latest release of figures from the US Bureau of Labor Statistics regarding inflation shows that changes in prices have been quite tame over the recent months and during the past year.  During February, the Consumer Price Index (CPI) did not increase at all on a seasonally adjusted basis.  Additionally, the CPI only increased 2.1% over the prior year.  Looking at the elements that compose the CPI presents a different picture and suggests inflation is not as benign as appears at first blush.

Housing is the largest element used in the calculation of the CPI.  The government statisticians do not use house prices themselves, but determine housing costs changes through calculation of an “owners’ equivalent rent” trying to determine how much a home owner would have to pay if he or she had to rent his or her house.  Energy costs and other housing-related expenditures are added to this rent figure to determine total housing costs.  Due to underlying falling housing prices and lower energy costs (according to government data), housing costs declined 0.6% over the past 12 months.  For total price levels to increase in the face of its largest input declining, all other prices outside of housing increased at over 4% during the past year.  While this level of inflation is not historically alarming, 4% is significant and suggests that prices are generally increasing.

Wading through the CPI statistics, it was interesting to relearn that taxes are not part of the calculation even though taxes are the largest expenditure that many households make during the year.  Adding this expected liability to the average family budget suggests that outside of housing, inflation is alive and well.