As I am scrolling through the latest consumer price movements as reported on the Bureau of Labor Statistics (http://www.bls.gov/cpi/cpid1103.pdf), I can’t help but shake my head. They are reporting inflation below the long term average of 3.4%! The current CPI reading is at 2.9%.
I don’t know about you, but when I am going to my local grocery store, I am seemingly spending a lot more! It’s not until I get home and unpack the groceries when I realize I didn’t get anything more than I normally do. So what gives? Little inflation?!? I beg to differ, the numbers just don’t make sense.
On top of that, gas prices at the pump are at an all-time high in most Wisconsin cities.
The cost of health insurance is also expected to rise due to the ever increasing costs of medical services. So, the way I look at it, the true cost of maintaining a standard of living; food, medical, and transportation costs are all rising; but the CPI reports that consumers shouldn’t be feeling the pain any more than usual.
So what gives??? It’s all about the weighting! The Bureau of Labor Statistics puts a much larger weight on price changes in housing. The basket of goods that makes up CPI = 100. Housing makes up an importance factor of 39.228%, so almost 40% of the weighting in price changes is determined by the change in home prices. On March 31st of this year, the 12 month unadjusted percent change for home prices was an increase of .8%.
Let’s take a look at the products that we purchase on a much more frequent basis such as gas, food, and health care. Although they are certainly factors in the proverbial “basket of goods” that make up the CPI number, their weights are only 19.418, 16.401, and 5.355 respectively. In the aggregate, these three goods that we purchase on a much more frequent basis (sometimes daily) account for only 41% of the weighting. That’s about as much as housing’s weight in the basket alone. The difference is that within the last 12 months, according to the Bureau of Labor Statistics; while housing has gone up a measly .8%, energy costs have gone up 10.7%, food costs have gone up 3.6%, and health care has gone up 4.5%.
Remember at the beginning I stated the total basket of goods has only gone up 2.9% the last twelve months? Can you see the power of the weighted averages??
Although there is not much you can do to prevent the inflationary pressures from hitting your pocket book, there are steps to protect your nest egg from becoming a less powerful tool for future income.
As an investor, what steps are you taking to hedge against inflation?