by Mish
Let’s take a closer look at what the BLS says is going up and down and by how much.
CPI Change Details
Discussion Questions
- How many people believe cost of in-home food declined 0.5% in the last year?
- Did medical costs really only rise 3.6%?
- What about education?
- What the heck is OER?
1A. I cannot answer that, but it could be reasonable, depending on what’s in your food basket and how much you agree with BLS substitution that says if beef is high people eat more chicken.
2A. I find this nearly preposterous for most people. However, there is a huge chunk of retired people, on Medicare, whose costs many not have risen much if at all. Nearly everyone else got clobbered with plan increases coupled with a decrease in benefits. I highly doubt the BLS bothered to factor in hedonic decreases in benefits as they do hedonic increases in alleged improved products.
3A. Education is obscured in detailed tables. Education and communication services has a weight of 6.479. Included in this category are tuition, child care, postage stamps, and internet services. Supposedly the overall category is up 1.8%. Tuition has the highest weight at 1.796%. Tuition is up 3.1% The education and communication commodities category (e.g. books) has a weight of 0.641. Supposedly that category is -4.6% for the year.
4A. I like discussing Owners’ Equivalent Rent (OER) because the method of calculation is absurd. The BLS has a PDF on OER.
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?”
If you own your own house, the BLS asks you how much you think it would rent for. Those answers make up 24.281% of the CPI.
Direct cost of purchasing a house is not in the CPI because the BLS considers housing as “capital goods”.
However, ignoring housing prices ignores inflation. This was a key component of the housing bubble. The Fed is still clueless about housing and asset bubbles.
Conclusions
A college student and families with college students have a vastly different basket than someone retired.
When it comes to rental increases, someone in San Francisco has a dramatically different viewpoint on rent than someone in Danville, Illinois or the Midwest farm belt in general.
The above pie chart and discussion questions show how absurd it is to come up with aggregate baskets of goods and services.
It is nonsensical how much emphasis the Fed and economists place on a construct as fatally flawed as this one.
Yet here we are.
In related discussion, please see University Professor Asks: How Accurate and at What Cost is BLS Data?
Mike “Mish” Shedlock
