The Exchange

No Inflation? Not Exactly

Unless you're an economist or an economics reporter, feel free to ignore the main numbers on the consumer price index. While it wouldn't be fair to call them fabrications, they're hardly that useful when helping explain why prices are rising for many of the things that most affect the lives of ordinary Americans.

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Fruit stand: Photo credit AP
True, it's very impressive to offer stirring commentary detailing that prices are little changed when looking at seasonally adjusted numbers and core rates, but too often, that doesn't remotely reflect reality for the U.S. consumer. And unfortunately, we have to live in reality, not in core rates and seasonal adjustments.

A regular person spending actual money in the actual economy probably doesn't need to be told this, though at the very least, that person also doesn't have to believe inflation is entirely a figment of their imagination. If you want to dwell on the statistically altered arguments, that's perfectly fine, but if you're trying to get closer to the facts, you're better served looking at the comparisons from one year to the next and leaving out the adjustments.

The Monthly Lowdown

Let's begin with the latest monthly numbers from the Labor Department's Bureau of Labor Statistics. Surveys by both Dow Jones Newswires and Bloomberg showed economists were expecting 0.2% increases in the overall consumer price index for July and in the core rate. On both counts, the numbers were lower than expected, with the all-in figure unchanged from June and the core rate, which excludes food and energy prices, ticking up 0.1%.

Remember, these numbers are seasonally adjusted, which is a common economic practice meant to smooth out factors that can unfairly influence readings. Seasonal adjustments aim to provide more of an apples-to-apples comparison across time periods. A good explanation can be found in Bernard Baumohl's book The Secrets of Economic Indicators.

The trouble is, this probably doesn't give you a sense of calm when you think about the prices you pay for things, which are, in a number of cases, increasing. Instead, this is the type of finding that usually puts the citizenry at odds with economists and the media.

Can't We Agree on Anything?

Suppose someone tells you that, on a seasonally adjusted basis, you're not paying more for stuff. Does that make you feel better? If you read that you simply don't understand economics, will that make you rest easier? In the real world, you don't go into the pharmacy and say you want the seasonally adjusted price for your medications, for example. If you did, you wouldn't be paying 3.4% more for drugs than you in fact are when compared with last year.

In its defense, the BLS is trying to produce an accurate view of trends in the economy. As it notes in its releases, "seasonally adjusted changes are usually preferred since they eliminate the effect of changes that normally occur at the same time and in about the same magnitude every year -- such as price movements resulting from changing climatic conditions, production cycles, model changeovers, holidays, and sales." However, the BLS does point out that the "unadjusted data are of primary interest to consumers concerned about the prices they actually pay."

The good news is that, for the month of July, the CPI index actually decreased 0.2% before the seasonal adjustment -- on average, you are paying less than you did in June.

In short, there's what matters to people who collect and report on these things, and there's what matters to consumers. That isn't to say economists and media types don't consume. They do, after all, but let's try to consider the whole story.

The entire CPI, which has a tremendous number of inputs, was up 1.4% last month from July 2011, on an unadjusted basis. That isn't insignificant, but it isn't overwhelming. On its own, that's actually down from 1.7% in June and was the least pronounced year-over-year change since November 2010.

Still, examine some of the key components of the CPI, and you'll likely see troubling areas that show up in your bills. Food prices have risen 2.3% from a year ago, including 1.9% for what you eat at home and 2.9% for what you eat elsewhere. Breaking down food costs, the BLS says you're paying less for dairy products, non-alcoholic drinks and fruits and vegetables, but prices for cereals, baked goods and meats and fish have risen. Food costs could be about to get worse owing to the horrible drought that's hit multiple states in the U.S. this summer. You might actually see meat prices go down again before another rise, due to a sell-off of cattle as a result of the feed shortage. But the long-term picture points to rising costs for your sides of beef, and this should be reflected in future data.

What else is up since last year? Apparel costs are 3% higher. Medical care services -- doctor and dentist visits, eyeglasses appointments -- increased 4.4%. New vehicle prices are up 0.8%, and used car and truck costs are ahead by 1.1%.

On the plus side for consumers' wallets, energy prices fell 5% overall in the past year, and gasoline dropped 5.5%. Electricity costs were 1.3% lower, and natural gas was down 12.7%.

Leaving out food and energy, the prices for items were up 2.1% year over year. Again, not immaterial by any means, but still down a bit from the 2.2% annual change seen in June, and it's the smallest advance since October.

Quaint Notions

The takeaway is that prices for many things are, in fact, up. Not everything, but anyone who contends there's absolutely no inflation is off the mark.

If you want to get closer to the truth with the CPI, and not merely make an academic argument, try using the year-over-year numbers that aren't adjusted. Fluctuations are going to happen in both what you pay for goods and services and in the data, but a longer-term trend can be more meaningful than a month-over-month adjusted reading.

Then again, an even better idea might be to park the CPI data, like most government figures, somewhere in the lies, damned lies and statistics files.

Where did we get it wrong? Tell us below if we're being fair with the data or not. Are you seeing price inflation where you are, and if so, for which goods and services?

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