When the Bureau of Labor Statistics reports the monthly consumer price index (CPI), two numbers are the main focus - the overall CPI and CPI ex Food & Energy. For example, this morning's report showed that, overall, the CPI was up 0.2% (implying roughly a 2.4% annual inflation rate) and ex Food and Energy was up 0.1% (or at roughly a 1.2% annual rate ). The ex Food and Energy annual rate of 1.2% is below the Fed target for inflation of 2% annual rate, whereas the overall number at 2.4% is above the annual target.
Why do they even take out food and energy? After all, we need to eat and we use energy in everything we do. The party line is that food prices are volatile because of the weather and energy prices are heavily influenced by world oil producers as well as the weather. Thus, monetary policy actions by the Federal Reserve won't necessarily counteract those price pressures. Thus, to assess whether inflation is on the right track or not, according to the Bureau of Labor Statistics, it makes sense to pull out food and energy. One thing for sure - if you take out a number of things, you'll eventually arrive at a number you like.
This takes on even more importance today because the Fed's stated goal is to increase inflation. They believe that inflating the economy will lead to job creation.
Thoughts and observations for those investing on their own or contemplating doing it themselves.
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Wednesday, December 15, 2010
Why Do They Take Food and Energy Out of the CPI?
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To understate inflation. The two things I probably spend the most money on are food and energy, and there costs are increasing at a higher rate than the CPI.ReplyDelete
When the Fed runs the printing press overtime, price inelastic goods and services (i.e. necessities such as food and energy) will rise. That adversely affects lower income groups severely since it represents a large percentage of their discretionary spending. This is the very group the government claims it wants to help during an economic downturn.ReplyDelete
Good points - both!ReplyDelete
Not sure if overall inflation is peaking up or not -- it depends on if other prices are lowering and by how much. Still, if these prices are this high already, imagine if inflation does return, and with a vengeance.ReplyDelete
The price of technology is going down and has been in a long-term downward trend which is a good thing as the economy becomes more and more dependent on technology. And technology even lowers the overall costs of food and energy, but as the printing presses turn these items are rising fast in price than the CPI.ReplyDelete