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Getting a Real-Life Handle on Inflation in This “Tale of Two Figures”

Frank Trotter | April 1, 2016 4 MIN READ

Several years ago, a former colleague gave me a t-shirt with the phrase “Oh, look! It’s a squirrel!” emblazoned on the front. This was his friendly way of suggesting how natural attention deficits may at times impact my train of thought. It was a fair suggestion. My thinking doesn’t always occur in a straight line, but I do always make it a point to consider the full picture. Unfortunately, the same cannot be said for the Fed and European Central Bank (ECB) when it comes to how they assess inflation.

In my opinion, when it comes to placing a number on inflation, both the Fed and the ECB are obsessing over the wrong figure - the Consumer Price Index (CPI) - and should instead be taking in the bigger picture when developing policy, rather than relying on this one measured rate. Each has placed a line in the sand by stating that their target inflation rate is 2%.

Complaining about the price of things has been a discussion sport for as long as I can remember. It was back in the 70s - the era of stagflation and malaise - that I really began to take notice. I was entering the banking world during the Volker years, and within my company, we were debating vigorously with our Asset/Liability Committee that consumer inflation could soon hit 30%. My 30-year mortgage had just come in at 19.2%. Well, then the 80s rolled in, and brought with them the start of an over 35-year decline in inflation. So much for forecasting.

Since 2000, we’ve frequently argued in the Daily Pfennig® how the widely quoted CPI seriously underreports inflation. This underreporting can be linked to how the index accounts for daily costs, commodity costs, housing indexes and improvements (the car may cost more but since it has new features that’s actually deflation).

So, when I want to understand the practical side of inflation, I often take a look at the research being done by our long time friends at the American Institute for Economic Research (AIER). Their Everyday Price Index (EPI) strives to show the changes in what people really pay – the same objective as the CPI – but with radically different results, as you’ll see in a minute.

So what’s really going on with inflation?

In 2015, Our Cost of Living Decreased

For all of us as individuals, 2015 was a great year. Our money bought a little more at the end of the year than it did at the beginning and wages, on average, rose. Thus giving many a double dip victory.

The table below comes to us from Dr. Max Gulker of the AIER. As it shows, the price of consumer goods as tracked by the EPI fell over the last year ending November 2015. The CPI, however, measured a rise in inflation of 0.9%. This 2.3% difference is significant and is a glowing example as to why there is still disagreement about the level on inflation in the economy. The table also supports our position that the CPI has significantly underreported inflation during the current century, as inflation was appreciably higher over the past 15 years when viewed through a personal market basket lens (and despite the fact that several of these years ended with an EPI lower than CPI).

Table 1. How the cost of living affects three household profiles
Inflation Profile and Description Total Inflation
Price Indices
11/2014 - 11/2015 01/2000 - 11/2015
Consumer Price Index (CPI)
Common inflation measures calculated by Bureau of Labor Statistics
0.9% 45.5%
Everyday Price Index (EPI)
AIER’s measure of inflation for everyday spending
-1.4% 54.8%
Typical household examples
Urban Renter
Starts with the EPI and removes gas, fuel oil, and propane. Adds shelter (rent) and airfare. Overweights food at a restaurant, alcohol, and public transportation.
2.1% 49.0%
Retired Couple
Starts with the EPI and removes fuel oil and propane. Adds medical-care services. Overweights prescription drugs and medical services. Underweights food at a restaurant and gas.
0.3% 53.2%
Young Family
Starts with the EPI and removes propane, gas service and tobacco. Adds educational supplies, college tuition, child care, and miscellaneous professional fees. Overweights educational supplies, college tuition, child care, and fuel oil.
-1.0% 73.2%

Total inflation uses constant category weights as of November 2015. For this reason, total inflation figures will differ from published numbers that update category weights over time.

EPI includes non-prescription drugs, and data exist only back to 2010. For data prior to 2010, prescription drug price changes are used.

Source: Bureau of Labor Statistics, author’s calculations.

Chart Source: Gulker, Max. “Average American’s Cost of Living Falls.” American Institute for Economic Research. February 1, 2016.’s-cost-living-falls

The bottom line, which I also noted last month, is that rightly or wrongly, the market continues to suggest little to no inflation and growth, as do the figures presented above.

A Final Word on World Currencies

I’ve worked in the global markets arena for over 30 years, so I’ve always got a close eye on currency trends and movements. And today, it seems that much of the financial commentary out there is suggesting that the U.S. dollar remains very strong and is growing stronger. I can’t say that the numbers bear that out completely, particularly among the following currencies, which are all popular options for investors looking to diversify in currencies.

Early 2016 Performance Figures - 1/1/2016 - 3/11/2016

Source: EverBank Research Team, based on analysis of Bloomberg data.

So, what do you think? Do these numbers suggest a turning of the tide for currencies? You decide.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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