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Inflation

Copyright © 1998-2000, 2003-2024 by David E. Ross

Inflation affects more than merely consumers. It also affects businesses. Thus, the inflation reported here reflects both retail and wholesale prices. That is, what is reported here represents the total effect of inflation on the national economy. In the short term, consumers might see something different than businesses; but in the long term, the effect will be the same.

In planning for my retirement, one important factor I considered is how inflation impacted both my pre-retirement income — which determined my eventual Social Security benefits, my employer's pension benefits, and how much I could afford to invest — and my need for post-retirement income. I hear on the news about inflation, but I never hear how it is measured. Therefore, I created my own measure — something tied both to the national economy and to the local cost of living.

To measure inflation, I use both the consumer price index (CPI, which tracks how much money I need to maintain some standard of living) and the producer price index (PPI, which tracks the underlying costs of bringing goods to the retail market). I obtain these from the U. S. Bureau of Labor Statistics (BLS).

I view both current inflation (over the past 12 months) and long-term inflation (over the entire period in which comparable indices are available).

• Current inflation is generally considered by employers when trying to establish competitive compensation rates. It is also a baseline against which to evaluate whether investment returns are appropriate. Cost-of-living adjustments in Social Security taxes and benefits are based on current inflation. I measure current inflation by considering year-to-year changes in the indices, thus eliminating any fluctuations caused by seasonal availability of fresh foods, seasonal demand for fuel, etc.
• Long-term inflation is of primary concern when determining the adequacy of retirement savings. This also eliminates any effects of short-term spikes or troughs in economic activity.

Living in southern California, I am affected by local economic trends in Los Angeles. Although we live outside of the Los Angeles-Long Beach-Anaheim statistical area, we live very close to Los Angeles County and often shop there. Thus, besides considering national indices, I also consider the local CPI for that area. For those not living in this area, the table below includes the latest month's national inflation based on the same methodology that I use for local inflation.

Recent values of current and long-term U.S. inflation are plotted below.

Methodology

Current Inflation is computed from non-adjusted indices over a one-year span (i.e.: to the report month from the corresponding month in the prior year). By using year-to-year data, I eliminate the need for seasonal adjustments, which are sometimes questionable.

Long-Term Inflation is computed from non-adjusted indices from July 2010. For all three indices, I use the rate that would yield the current value if compounded annually from the base period. NOTE WELL: As the time-span for Long-Term Inflation gradually increases in one-month increments, the results gradually show less variability than does Current Inflation.

I use the following computations:

• US Infl is computed by multiplying the inflation factors (1 + percentage), taking the square-root of the product, and subtracting 1. This is the geometric mean of the PPI and CPI-US.
• LA Infl is obtained by first computing the geometric mean of the CPI-US and CPI-LA factors. The result of that is then used with the PPI inflation factor to compute a new geometric mean. Thus, local inflation reflects US Infl weighted to include local factors. I do this because the local economy is influenced by the national economy.
• Combined is obtained by computing the geometric mean of current and long-term inflation.

I use geometric means because they are usually a better representation of the "average" of percentages than the more common arithmetic means.

In February 2024, I changed the computation of all long-term factors. Having a span longer than 34 years masked systemic, non-short-term changes in the United States economy. Instead of a base of July 1990, I now use a base of July 2010, which still gives less variability than the year-to-year values. Where this change might cause a discontinuity in the plot of long-term inflation, a vertical green bar is drawn.

The PPI index (WPU00000000) is for all commodities. Generally, this is initially reported as preliminary and subject to revision. My tabulation is not revised if the final value does indeed change. Many estimates of inflation ignore producer prices, using only consumer prices. However, the PPI index reflects future changes in consumer prices. More important, the PPI reflects inflation as seen by businesses, which should not be ignored when considering the totality of the national economy.

The CPI indices are for all urban consumers for all items. The CPI-US index (CUUR0000SA0) is the U. S. city average. The CPI-LA index (CUURS49ASA0) is for Los Angeles and Orange Counties in California. It was suggested that I use CWUR0000SA0 and CWURS49ASA0, which include housing components, instead of CUUR0000SA0 and CUURS49ASA0, which do not. However, the CWUR series are for "Urban Wage Earners and Clerical Workers" and thus exclude spending patterns of the self-employed, salaried workers, and retirees. The CUUR series are for "All Urban Consumers". The CUUR series is thus more reflective of my own situation — formerly salaried and now retired. The omission of housing components from the CUUR series has negligible impact on my situation since I have owned my house for more than 50 years and do not plan to move.

Interpreting the Results

Because of this methodology, Current Inflation reports what happened over the past 12 months; it cannot be used to project future inflation. Long-Term Inflation, however, reports what happened over more than 13 years; while it cannot be used to project near-term future inflation, it may be used to project long-term future inflation since month-to-month fluctuations in PPI and CPI values have only minor effects. Combined Inflation might be used for a very approximate projection of intermediate-term future inflation since it smoothes the fluctuations in near-term values by combining them with stable long-term values; nevertheless, such a projection should be used only with caution. I use Combined Inflation when I need a single estimate that covers both the near-term and long-term.

Manipulating the Indices

The BLS is an agency within the Department of Labor, part of the President's cabinet. Thus, there are occasional pressures to "adjust" the indices for political purposes.

The most frequently discussed adjustment for the CPI is substitution. This involves monitoring how consumers change their spending habits in response to inflation and changing the way the CPI is computed accordingly. For example, if the rising costs of food mean that we are forced to eat more hamburger and less steak, the significance of steaks in the CPI is reduced while the significance of hamburgers is increased. As a result, the CPI does not rise as much. This manipulation would hide the degradation of our standard of living caused by inflation. A 2011 version of this concept is called chained CPI and is being proposed for use in adjusting Social Security benefits. This, of course, would subject seniors to an ongoing reduction in their standard of living. Michael Hiltzik, a columnist for the Los Angeles Times wrote a lengthy criticism of chained CPI.

Such manipulations are not the only way politics becomes involved with the indices. The President's administration (all Presidents, not merely the current one) will sometimes select the most favorable index when discussing the nation's economy. Thus, during soaring prices for food or fuel, only the core CPI (which omits those two items) is mentioned. During a decline in the real estate markets, the CWUR CPI series is cited because it makes inflation appear less; conversely, during a real estate boom, the administration may tend to cite the CUUR series, which omits the inflationary impact of rising housing costs.

An article on the front page of the Los Angeles Times "Business" section on 20 May 2010 raised the specter of deflation. It cited a month-to-month (March to April 2010) decrease of 0.1% in the CPI and a year-to-year (April 2009 to 2010) increase of 0.9%. From March 2010 to April 2010, however, the CWUR0000SA0 increased 0.2%; the year-to-year increase was 2.24%. Both of those CWUR0000SA0 changes clearly did not indicate deflation. The statistics in the Los Angeles Times article were taken from a BLS press release in which core CUUR CPI changes were reported after seasonal adjustments. Thus, the article fostered fear over deflation by citing statistics that are doubly flawed: they involve highly subjective seasonal adjustments and they omit food and fuel costs, which are among the most significant recurring expenses for consumers.

There is no perfect measure of inflation.

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I do not know if this "average" is the mean or median.

While the data from the US BLS seems to be in the public domain, my copyright on this page applies to the text, the table and computed values therein, and the graphic plot.