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Inflation: This Week’s CPI Numbers

Posted by T.W. Hanson - Feb 21st, 2008 at 21:02

Earlier this week, the Bureau of Labor and Statistics released data on the change in the prices for goods and services for the month of January. The numbers showed the continuation of a disturbing trend. Prices continue to rise at uncomfortably high rates.

There are two numbers cited in the CPI (consumer price index) to which economists pay attention: the “CPI” and the “Core CPI”. The CPI is a measure of the prices of a fixed basket of goods and services, and it rose 4.3% from January 2007 to January 2008. The Core CPI is a measure of the prices of a fixed basket of goods and services excluding food and energy, and it rose 2.5% in the past twelve months.

People will use both numbers to try to convince you of different things. Some will say that inflation is wildly out of control because it is increasing at 4.3%. Others will say that 2.5% inflation isn’t that far from historical levels and is perfectly tolerable and healthy.

Know the difference between the numbers and interpret what they mean for yourself.

There are good things and bad things about using both numbers. Historically, people have followed the Core CPI more closely. Energy costs are historically volatile and can skew data from month to month. Another reason why people look at the ex-energy number is the potential for double counting its effects. When you buy almost any good, energy was used in its production and transportation. This is being reflected in its final price. Food is another volatile commodity with a long term stable trend. Panic over inflation because droughts in Australia moved U.S. grain prices for a season aren’t necessarily warranted.

However, there are changes in the global economy such that there is a very credible case to be made that there has been a secular shift in energy and food price trends. Increasing demand and the realization that there is a finite supply of these commodities is distorting long term historical trends, meaning that ignoring food and energy price appreciation is no long an option.

This means that average prices for goods and services increased on average somewhere between 2.5% and 4.3% in the past year. Keep this in mind when people are citing these numbers. Know when they are taking them out of context to further their own agendas.