Inflation Ex-Inflation Ex-Inflation

Tuesday, May 13, 2008 | 06:55 AM

I stumbled across a data point yesterday that was quite fascinating: The percentage of food and health care in the Consumer Price Index.

It turns out that Inflation may be even worse that I previously thought.

According to Mark Faber (via Bill Fleckenstein), food and health care are significantly under-weighted in the CPI. That's based on the actual consumption of food and health care by real (as opposed to theoretically modeled) people.

Faber notes that:

"In the U.S. counts food as only 8% of the CPI index. Whereas, it counts for about 10% in the United Kingdom, about 15% in the rest of Europe and more than 18% in Japan."

I have yet to validate it that percentage, but if it turns out to be true, we have Inflation (as reported) on top of the misleading hedonic/substitution adjustments (ex-inflation) on a disproportionate spending pie (ex-inflation X 2).   UPDATE: Food at home is 7.66% of the CPI according to the BLS (Thanks, Mike)

Hence, doubly understated Inflation. Unless you go Core, which is the original Inflation Ex-Inflation.

Now here's where things get really interesting. Fleck points out that if you consider the proportion of U.S. household spending on food by income quintile, all but the top 20% of earners spend at least 20% of their paychecks on food.

Hence, what the weighting versus the reality are very different. This means that for 80% of the country's populace, the CPI weightings are dramatically understates what the average American is experiencing in terms of their inflation versus the official CPI measure.

This goes a long way to explaining the difference between the official inflation data and the generally poor consumer sentiment data.

CPI data is Wednesday, with a consensus of 0.3%.


NYT Interactive Inflation Chart



Is Inflation Really Understated? (No!)  May 08, 2008

Inflation Abounds  April 29, 2008

Is the Fed Causing a Global Food Crisis?
  April 25, 2008


Why all roads lead to inflation
Bill Fleckenstein
Contrarian Chronicles
MSN Money, 5/12/2008 12:01 AM ET

Tuesday, May 13, 2008 | 06:55 AM | Permalink | Comments (68) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Como la inflación roba a los pobres y da a los ricos from
Este artículo explica muy bien y con las cifras en la mano (y gráficos interactivos) como las medidas oficiales de inflación subestiman el alza de los precios para el 80% más pobre de la población (que gastan mayor parte de sus ingresos en alimentos).... [Read More]

Tracked on May 14, 2008 1:08:06 AM


Sure as hell looks like food is 15% on the NYT chart?


BR: I am not sure if that's their take on all consumption (home and dining).

UPDATE: That 15% weighting includes restaurants also.

Posted by: Owner Earnings | May 13, 2008 7:39:29 AM

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