The Consumer Price Index (CPI) came out for May 2022, showing 8.6% inflation over May 2021.
“Experts” claimed this was higher than expected. For the rest of us, inflation feels higher than 8.6%, when we visit the grocery store, go to lunch, or fill up at the pump. In fact, it’s difficult to name a product we regularly purchase that’s ONLY up 8.6%.
So, where’s the disconnect between what leaves our wallets and the officially reported inflation figure?
Here’s my explanation…
The reported inflation figure is the weighted average increase in prices, across all goods and services included in the CPI basket. In stable economic times, this weighted basket of goods represents a measure of average normal consumer spending. But in less stable times, consumers shift their spending from the normal weighting. I believe this is what is happening now.
To probe further, I reviewed the individual CPI values, 338 line-items, and ranked them by percent change from May 2021.1 I’ll expand on the findings further below, but the…
Bottom line – some product categories experienced so much inflation, they deflated more discretionary items, bringing the average reported value down to 8.6%.
For example, the price of eggs increased 32% year-over-year and butter shot up 20%. Given these are basic ingredients, we likely opted to continue to purchase eggs and butter, but we simultaneously and collectively reduced purchases of televisions, watches, and jewelry, because we have less discretionary funds available. That is, the price increases in eggs, butter, and other essentials wiped us out.
The reduced demand for discretionary items curbed prices in these specific categories, but these products still figure into the CPI calculation.
So, if you feel like prices jumped up more than 8.6%, your intuition is correct. They did, for the essential stuff we most need to buy.
This is best illustrated with sample data. The lists below show some of the goods and services used to calculate CPI. I grouped them into three categories:
- Items that have gone down in price, year-over-year.
- Items that stayed around break-even (0-2% inflation).
- Items that inflation hit hard.
Basically, bottom-of-the-list stuff and top-of-the-list stuff… just to see how they compare at a glance.
As you read through the items in each list, think about how necessary they are to daily life, or if you would consider them more discretionary.
List #1 – Items that have gone down in price
- telephone hardware
- video and audio products
- men’s clothing
- recorded music
- audio equipment
- wireless service
- car & truck rental
- recreational books
NOTE – I didn’t cherry pick these items (nor the ones in the lists below). This is straight down the list of items listed in the CPI report.
You will probably agree, most of the items above fall into the category “optional purchases”, or perhaps purchases that can be delayed with little consequence to general lifestyle.
List #2 – Items that are essentially the same price as last year (0-2% increase)
- telephone service
- girl’s apparel
- distilled spirits
- physician services
- recreational goods
- parking fees
- domestic services
- prescription drugs
- professional services
With a few exceptions, these are also largely optional items, or items we can delay purchasing… except prescription drugs and physician services (the prices of these two items might be more a function of insurance allowances rather than changes in supply & demand. So, we might discount these from this list).
List #3 – Items that have gone up in price the most
(excluding energy, which was up 35%+)
- eggs (+32%)
- public transportation
- men’s suits
- lodging (this one might be an anomaly due to depressed prices during COVID in 2021)
- window coverings
- fats and oils
- lunch meats
- used cars and trucks
- citrus fruits
- breakfast sausage
- vehicle parts
- frozen food (+15%)
These are listed in order from +32% to +15% price increases (inflation).
Notice how different list #3 is from the other two lists. By contrast, #3 items are less optional.
Comparing the make-up of these three lists, it seems reasonable to conclude that people are opting out of discretionary purchases so they can afford the highly inflated prices of more fundamental, necessary items.
With lower demand, the discretionary items thus experience price suppression. This, in turn, brings down the weighted average CPI figure. This also explains why we feel inflationary pressures are greater than reported, because most things we continue to purchase have gone up in price considerably more than the average 8.6%.2
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- Source: Bureau of Labor Statistics
- To be clear, because I can’t just leave this unsaid, it’s not that the value of these CPI measured items has increased, it’s that the value of the dollar has decreased. This is the natural consequence of printing money… and there will likely be more inflation to come. We haven’t inflated to the extent we have printed.