CPI Month-Over-Month as the BLS Sees Things

CPI Month-Over-Month 2020-12

Month Over Month Key Points

  •  The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in December on a seasonally adjusted basis after rising 0.2 percent in November
  • The seasonally adjusted increase in the all items index was driven by an 8.4-percent increase in the gasoline index, which accounted for more than 60 percent of the overall increase. 
  • The other components of the energy index were mixed, resulting in an increase of 4.0 percent for the month. 
  • The food index rose in December, as both the food at home and the food away from home indexes increased 0.4 percent. 
  • The index for all items less food and energy increased 0.1 percent in December after rising 0.2 percent in the previous month. 
  • The indexes for apparel, motor vehicle insurance, new vehicles, personal care, and household furnishings and operations all rose in December. 
  • The indexes for used cars and trucks, recreation, and medical care were among those to decline over the month. 

Year-Over-Year Key Points

  • The all items index rose 1.4 percent for the 12 months ending December, a slightly larger increase than the 1.2-percent rise reported for the period ending November. 
  • The index for all items less food and energy rose 1.6 percent over the last 12 months, as it did in the periods ending October and November. 
  • The food index rose 3.9 percent over the last 12 months, while the energy index fell 7.0 percent.

What About Housing?

The BLS does not directly include home prices in the CPI. The latest Case-Shiller home price index is up 8.4% as of the latest report which is for October.

Instead of using home prices, the BLS uses Owners' Equivalent Rent (OER).

Ask anyone looking to buy a home what inflation looks like.

Failure to properly account for housing has distorted the CPI continually from 1998 until now.

The Fed did not spot the housing bubble nor predict the Great Recession because it did not understand the asset bubble.

What About Health Care?

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CPI Medical Cared Services Year-Over-Year 2020-12

The BLS says the cost of medical care is up 15% from a year ago.

Ask anyone buying their own health care how accurate that is. Also ask anyone buying their own health care if it is only 6.97% of their budget as the BLS states.

What About Bubbles?

The stock market and risk tolerance is also a measure of inflation. It is nowhere to be found in the indexes.

Add it all up and the CPI is a gross distortion of reality on many fronts.

Addendum OER Procedure

The BLS publication explains How the CPI measures price change of Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent)

Housing units are not in the CPI market basket. Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items. Spending to purchase and improve houses and other housing units is investment and not consumption. Shelter, the service the housing units provide, is the relevant consumption item for the CPI. The cost of shelter for renter occupied housing is rent. For an owner-occupied unit, the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes. 

The expenditure weight in the CPI market basket for Owners’ equivalent rent of  primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: "If someone were to rent your home today, how much do you think it  would rent for monthly, unfurnished and without utilities?” 

My key objection remains. Home prices are not in the CPI and they used to be.

The BLS explains homes are a capital investment. OK fine. And the majority of people are sheltered from huge medical increases because their company picks up the tab. OK Fine. 

And anyone with kids in college has their own set of problems. OK fine.

The CPI purportedly measures consumer inflation. The problem is "consumer inflation" is a very poor measure of actual "price inflation" for everyone looking to buy a home, with kids in school, or who pays their own medical insurance.

Mish