Real life inflation

Agricultural commodities like soybeans, wheat and corn are on a tear. You probably have felt that sting yourself when visiting the grocery store. For quite some time, people have asked, “How can inflation be as low as the government says it is when I am paying more for everything?” That is a very good question, especially in light of yesterday’s release of the January Price Index and last week’s Consumer Price Index.

According to the data, consumer prices have risen +4.3% year-over-year, the biggest increase since September 2005. Additionally, the core rate of inflation, which strips out the volatile food and energy sectors (also known as the stuff you actually need every day), has increased at an annual rate of a 3.1% annual rate. Yesterday we found out why consumer prices increased more than expected: the prices that wholesalers paid (PPI) surged 1.0% in January, while the core jumped 0.4%, despite the slowdown gripping the US economy.

To measure the real effects of these numbers, Fox Business News has created a great new feature called the “Fox Business 32-Item Shopping Cart”. [To read more about the Fox Shopping Cart, go to www.foxbusiness.com/markets/economy/article/fox-business-shopping-cart-48-cents-january_492165_3.html] Senior Economist Mark Lieberman got his shopping list together and decided that it was time to track the true experience of inflation in our lives. The FOX Business Shopping Cart includes basic food items -- milk, butter, eggs, bread, meat, fruit and vegetables -- as well as fun foods such as potato chips, chocolate chip cookies, soda, beer and ice cream. Liebman found that “the price for the FOX Business Shopping Cart…rose 48 cents from December to January to $73.72. The basket costs $4.32 more than it did in January 2007.” In other words, the rate of inflation for the items in the Fox Shopping cart is running almost 7%, versus the government figure of 4.3%.

Before you become a conspiracy theorist, remember that there are in fact many things that you purchase that have dropped in price---computers, TVs and cars, to name a few. The problem is that since we do not buy those items day in and day out, we tend to focus on the more obvious price increases like food, gasoline and health care. That’s why when the Fed monitors inflation data, it uses three broad measures: surveys of households, forecasts by business economists, and market-based measures. Although all three have ticked up recently, they remain muted in terms of long-term views on inflation. That’s the good news---unfortunately, you can’t take it with you to the store.