Archive for the ‘stagflation survival’ Category

Double Digit Inflation

Wednesday, July 16th, 2008

Randall from Credit Withdrawal just got done poking fun at me for not having something up on this morning’s inflation numbers, and I might as well admit to being sort of lazy lately where the blog is concerned.

For those who missed the news, the official CPI numbers for the month of June came in at a scorching 1.1% … WITH seasonal adjustment still in effect.  I didn’t comment about last month’s 0.6% because that shocked me coming in that high.  Some “fun” and simple math:

  • 0.6% x 12 months = 7.2% annualized inflation based on the May numbers
  • 1.1% x 12 months = 13.2% annualized on the numbers for June!!!

Break out the disco now, the BLS can no longer hide the doo-doo we are standing in, inflation-wise!  Not even with seasonal adjustments, not with hedonics, not with substitution bias.  I could have lots of fun raking Ben Bernake and 8 others from the FOMC over the coals here, but that’s pretty much like shooting fish in a barrel.  Oh yeah, the “good” news: those rate cuts that went on from fall until April still haven’t worked into the economy completely … which means inflation will keep going up for a while.

Thankfully for me, the state board limited my college to “only” (?) a 6% tuition increase, but I am pretty sure they will hike the unregulated fees to cover that and the budget cuts the state is handing them.  Eh, I’ll tackle tuition next post.  It’s going to be on my mind constantly for the next month until I get both mine and the Teenager’s tuitions paid up.

CPI, Inflation, and Reality

Thursday, May 15th, 2008

So what do the CPI numbers released yesterday, the inflation that they supposedly measure, and reality all have in common?  Apparently, not much … especially between the first and third.

If you’ve been following my ramblings on the CPI and inflation, you were probably as puzzled as I was yesterday when the BLS released numbers way way WAY  under what you expected.  If you missed the announcement, the official CPI says inflation was only 0.2% for the month of April, with the food and energy prices showing a complete divergence from reality.

CPI and Food Prices

According to the CPI data, food prices only rose a “seasonally adjusted” 0.9% for April.  Yet the report admits that fruit and vegetable prices rose 2% for the MONTH, bread prices rose 1.5% for the MONTH, and milk prices went up 1.2% for the MONTH.  Apparently what brought the official food inflation measure down was the idea that less people are eating out at restaurants, which only grew at 0.3% (still positive though).

The news media is calling this the sharpest food price spike in 18 years, with the official number of “year-over-year (y-o-y)” food price inflation being 5.1%.  That means according to the government, food prices overall were 5.1% more expensive in April 2008 than they were in April 2007. 

My personal y-o-y food price inflation looks a lot more like 12.5%, but I don’t count eating out in that figure because eating out is not a necessity.  In fact, that is where the “give” in the budget is coming from, partly.  Here we do follow the behavior the BLS uses.  However, cutting back on restaurant spending is an EFFECT of inflation, not a component of it.

And I haven’t quite figured out just what this “seasonal adjustment” for food prices is.  Does anyone have a link that explains it in plain English?  In my experience, many food prices go down during the spring because of produce sales.  So shouldn’t a seasonal adjustment for the month of April adjust those numbers UP to compensate for the sales?

CPI and Energy Prices

For those who have argued that the BLS’s CPI numbers are accurate, please explain the energy prices numbers released yesterday to me!  According to the official report, gas prices went DOWN 2% for the month of April after seasonal adjustment.  Of course, before the seasonal adjustment, gas prices show a 5.6% jump … so that must be one (heck) of a seasonal adjustment they made!!

Apparently, the number crunchers at the BLS figure that gas prices always rise in the spring.  So they seem to toss out any price rise for April, even though the Department of Energy and AAA say gas prices rose 10% and 9% respectively for April.  Also according to AAA, gas prices posted record high prices for SIXTEEN days in a row in April.

I have to really wonder what gas stations the CPI survey-takers are filling up at.  I also wonder what kind of discount card they carry … because I want one too!  At the beginning of April, I was grumping about gas being $3.28 per gallon locally.  By the end of April, that was looking good since gas prices were up to $3.49 per gallon.  According to my handy little calculator, which does straight math, that is a 6.4% increase in gas prices for the month of April.

The May numbers ought to be even more interesting, as gas prices have gone from $3.49 per gallon on Monday to $3.68 per gallon last night.  Local gas stations usually don’t raise their prices from Monday to Wednesday … they wait until Thursday night after they close to do the weekend hikes. (note to self: fill up again tonight after work!)

Experts Now Questioning CPI Accurracy

It isn’t just me scratching my head over these numbers that have absolutely nothing to do with my reality.  More and more economic experts are starting to publicly question the CPI methodology for figuring inflation, with the harshest being Bill Gross of Pimco Total Return bond fund calling the CPI

a “con job” that deliberately understates the price pressures faced by Americans in order to keep Social Security payments and other government costs pegged to the index unduly low. (source here)

These experts not only question the CPI accuracy, they are also questioning the BLS’s unemployment numbers … and suggesting both are “understated” by the government.  The alternative numbers they offer for both statistics suggest the American economy is in deep (doo-doo).  I won’t get into the unemployment numbers today, but I totally agree the CPI numbers are completely wacky and don’t seem to reflect reality, even to the most imaginative mind.

So, what do ya’ll think?  Am I still a “tin-foil hat” nutjob?  And just what is this seasonal adjustment that can swing the gas prices from a 5.6% rise to a 2% decline??  How in the world can the BLS claim gas prices went DOWN?  And that food prices rose less than 1%?  This doesn’t reflect MY reality … does it reflect yours?

Inflation Then and Now

Friday, May 9th, 2008

I’ve been on this stagflation kick, and a few readers haven’t shied away from calling me out on the official BLS CPI numbers.  This has sparked an intellectually interesting conversation, and a whole lot of mind-numbing research on my part in finding out how the CPI (Consumer Price Index, the government’s measure of inflation) is calculated and how this has changed over the years.

And it HAS changed over the years, with major changes in the methods in 1983 and 1998.  That isn’t what is up for debate LOL  The debate is whether those changes are a more accurate way of measuring inflation or just number manipulation to ensure we don’t see  inflation numbers like we did in the 1970s again.

These changes also mean people cannot compare today’s inflation numbers to the 1970s inflations numbers without adjusting for the changes (just as wages and prices get adjusted for inflation when comparing time periods).  To compare today’s inflation numbers the pre-1998 inflation numbers without the adjustment is apples-to-oranges.  To compare today’s inflation numbers to pre-1983 inflation numbers is apples-to-bananas.  That is why I posted that chart last week:

inflation calculation methods and differing numbers

If we use the pre-1983 numbers to compare today’s inflation to the inflation experienced in the late 1970s, we have to use the 11.6%, not the official 4% that gets used in news reports.  Otherwise, it would be like comparing minimum wage in the 1970s versus minimum wage today, without any adjustment.  Without the adjustment, you’d think minimum wage workers today make out like bandits at $5.85 per hour, as opposed to $1.25 per hour they used to make in the 70s.  Trust me, when I get my hourly check from work, I don’t feel very rich.

So just why did the government go and change the inflation calculation methods, anyway?  One argument is that it wasn’t an accurate reflection of true consumer behavior, which is why the substitution bias was introduced.  Yes, consumers DO substitute when the price of one thing gets too high.  The classic example is steak.  When steak gets too expensive people will forego the steak for something cheaper (the classic substitution is hamburger).  But figuring that into the CPI sort of masks the reason WHY people substitute.

Then there’s this strange thing called “price hedonics” which weights the price versus the perceived “quality” of an item.  Commenter Traciatim used the example of cars, and the other classic example is computers.  If you look at the price tags from earlier computers versus today’s computers, they haven’t changed much.  Yet according to the BLS’s numbers, computers have come down in price significantly.  Their rationale is that even if you pay the same price, you get a faster and better computer, so they have a complex mathmatical/statistical formula that says the price for a computer today is much less since you (theoretically) get more bang for your buck.

That’s the pro-changes argument in a nutshell and vastly simplified by me.  I am firmly in the cynical con-changes camp, and offer up four little words as a reason why the government changed the methods of calculating CPI: cost-of-living adjustments.  Social Security, disability (SSDI and VA), plus all the civilian government employees and the military all get their annual raises through cost-of-living adjustments.  If the inflations numbers aren’t as high, then the COLA isn’t as high.

If I want to indulge my truly cynical side, I could offer up another reason: No politician ever wants to be associated with double-digit inflation ever again.  But that would be hideously cynical of me, especially during a presidential election year.  But I digress … sorta.  Could y’all imagine the media feeding frenzy that would be going on if we still used the pre-1983 method of figuring inflation?

In the interest of equal air time for the opposing view, here is one blogger who doesn’t think the CPI numbers are manipulated.

The bottom line with inflation numbers is that they are different today than they were 25 years ago.  Whether you agree with the changes or not, we can at least agree on that much.  And I advance the notion that to compare inflation rates then and now, we have to use the same methods … so to compare today’s inflation to the 1970s, we need to go with that top line on the chart and say “Using pre-1983 methods of calculation, we are currently running 11.6% inflation which is comparable to the double-digit inflation rate of the 1970s stagflation period.” 

Let the CPI and inflation discussion continue …!

Teenager on a Budget: Stocking Up

Tuesday, May 6th, 2008

Over the weekend I had “the talk” with my son … not that talk.  I talked to him about inflation and grocery prices and our food budget experiment, and how I intend to give him $5 extra per week if he agrees to stock up on items he eats constantly that are on sale.

He’s already seen inflation in action at the grocery store for himself.  Remember the episode with the apples?  The first week we did the budget experiment, the apples were $1.29 per pound.  The 2nd week they were on sale for $1.19 per pound.  The next week, back up to $1.29 per pound.  Then, last week they jumped up to $1.49 per pound, and were that price again this week.

He didn’t buy apples last week or this week, but didn’t get the bagged apples either.

He also stuck with me for most of the shopping trip, seeking my input on what would be good to stock up on.  Hmmm, all it takes to get a teenage boy to ask his mother for grocery shopping advice is notice-able food price inflation!  LOL

I wouldn’t say he really stocked up on this trip, but then again I hadn’t given him *that* much more to stock up with.  Since his big bags of cereal were on sale, he grabbed an extra one at my urging.  He actually spent his entire $40 this week, and even went a little bit over for donuts and stuff to make banana pudding (I bought the bananas so I get some of it LOL).

The good news is he has more than a week’s worth of food now.  The better news is I am getting him to think a bit more about what is actually a good sale price and what isn’t.  The best news is he is learning that just because they post the price on bright stickers or cardboard does NOT mean it is actually on sale … sometimes they just want to push a product and try to make a regular price look like a sale!

As for myself, I was in full “lead by example” mode, scouting for killer deals on meat in particular for hubby and myself.  My efforts paid off :) as I snagged some beef sirloin tip for $1.79 per pound!  I have five impressive size steaks and one roast out of it after it was cut. (She shoots … she SCORES!)  I also snagged my hamburger patties and hot dogs BOGO (Buy One Get One … Free in this case) because it’s that time of year again, and hubby has been indicating all winter he wants a grill.

So, today’s shopping expedition was a marked success for me in the stocking up department, and a primer for the Teenager on just how to do it.  Now, if I can just teach him the “safe following distance” concept with shopping carts!

Stagflation Survival Tip #2 Avoid Debt

Monday, May 5th, 2008

Here is the second “stagflation survival tip” I’ve picked from an older friend’s brain over the weekend: avoid debt.  (First stagflation survival tip was stock up.)  Gee, I say that one in any economic situation LOL so what makes stagflation any different?

Debt and Inflation

The big difference is that the talking heads and economic “gurus” out there will try to tell you that debt is the smart thing to do with money in inflationary and stagflationary times!  The rationale is that the dollars you repay debt with will be worth less than the dollars you borrow.

This makes sense on the surface, and if the only problem we have is straight inflation I might be half-way inclined (if I could put aside my zealous anti-debt sentiments, that is!) to agree.  But we don’t have only inflation to worry about: the economy is in some form of downturn - heck even the president has admitted that much!  Some economists think we are in recession, and the true pessimists among them are calling this the start of a depression.  While I haven’t gone quite that far into economic pessimism just yet, the truth is the economy is not as good as it was even a year ago.

Debt and Stagflation

So it ain’t just the inflation, it’s the economic downturn and inflation (classic definition of stagflation for those wondering).  How does this change your battle plan?

Well, if you read this blog regularly, you won’t be wanting to run out and get into (or back into) debt in this lifetime!  LOL  For the record, my friend who gave this advice has and uses credit cards, and believes debt is a tool, not a form of indentured servitude or slavery.  So, when someone who uses debt says to avoid it, it’s time for folks to listen up!

First, the inflation side: since the value of the dollar is no where near what it used to be, and a dollar will buy you less and less in inflationary times, you want to build in an “inflation cushion” into your budget.  I just did this for the May budget, with $50 extra allocated for groceries “just in case” while raising my gasoline category for the second straight month and the third time this year.

If you go out and get yourself some debt during these times, that reduces the amount you have as inflation cushion.  Your wages will be behind the power curve in regards to inflation and expenses, as employers will have higher costs just as you do and will try not to increase their expenses.

Debt and Recession (economic downturn)

Finally, while reading up on all the factors that go into a recession as defined by NBER (the ones who get to make the “official” call on whether we are in a recession or not) I noticed economists break up the parts of a recession into three categories: leading indicators, coincident indicators, and lagging indicators.  The leading indicators can be considered warning signs, the coincident indicators are the confirmation signs, and the lagging indicators are like that nagging cough that sticks around even after you are over a bad cold.

The lagging indicator that really caught my eye has to do with unemployment: duration of unemployment.  This is a  LAGGING … which means it doesn’t start up until the recession is already underway.  The most troubling thing is that duration of unemployment (how long until the next job is found) is one of the really straggling lagging indicator, and lasts partway through the recovery period.

So, the longer the downturn - or recession - lasts the greater chance you have of losing your job and having problems finding another.  Why in the world would anyone want to take on new debt with that possibility looming?  While I believe “Now” is always the best time to work on getting out of debt, stagflation is an even better argument for those who don’t share my disdain (or hatred) of debt.  Reduce your debt load as much as possible, because you might need the extra breathing room in your budget! 

I’m starting to sound like a true egghead, but this is what happens when college students have time off.  LOL  Besides, well-informed is well-armed, and the economic situation looks like it may be a big financial battle.

Stagflation Survival Tip #1: Stock up

Friday, May 2nd, 2008

I’ve started doing the research to compile my “stagflation survival guide” I mentioned earlier this week, and while Googling online has yielded no good results, asking a friend of mine who is my father’s age has yielded a good tip: he recommends stocking up on good sales for things you know you use on a regular basis.  He especially mentioned nonperishable grocery items when offered at loss-leader sales, because “the prices feel like they go up before your eyes” during high inflation times.

Of course there are a few catches to this advice:

  • GOOD sale prices.  This requires you to stay on top of current prices around the other stores and do some serious comparison shopping.  With the advent of the internet, this should be easier than it was in the 1970s, but it still takes some work.  Start now and get a feel for what a good price is for items you buy constantly, like canned goods, dry goods, and frozen foods.
  • Regular use.  Don’t buy something just because it’s a good deal.  It’s time to cut back on “adventures in cooking” as I like to call my cooking experiments.  A “great deal” isn’t so great when no one in the house will eat it.  (See note below for what to do if this does happen to you)
  • Stock up!  Although my father-in-law has declared there will be no more appliances for gifts for us, his last purchase has proven valuable beyond measure: a large chest freezer.  It didn’t take me long to get that freezer up to half filled, and my goal is to keep it at about two-thirds full at all times, with as many on sale items as I can find.  Also, I was quite lucky my house had a large pantry for canned and dry goods … it’s even bigger than my closet in the bedroom.

I would be remiss if I didn’t mention a simple share-the-wealth idea that tags along with this tip: if you find a simply killer deal on nonperishable food items, buy a few dollars extra and donate that to your local food bank.  These high grocery prices are truly hurting some folks.  Also, for oopses that happen, clean out your pantry from time to time and take anything you won’t use into the food banks as well.  I heard on NPR just yesterday the food banks are running out of food to give!

Finally, I am seriously thinking of a plan that may help teach the teenager the value of stocking up on nonperishable food when it’s a great sale.  I am thinking of offering him $5 extra per grocery trip for killer sale items that he really does eat and can stock up.  I think he is learning about inflation the hard way, with this grocery budgeting experiment going on now.

Then again, I haven’t lived through a high inflationary period as a purchasing adult either.  I was a kid the last time we had significant inflation (born in 1973), which is why I am asking those who were adults and consumers at that time for advice.  There is going to be a whole lot of us learning about inflation and stagflation over the next couple years, and more importantly, how to survive it with our finances intact!

Stagflation is HERE

Wednesday, April 30th, 2008

Y’all have heard me gripe and grumble about the Fed cutting interest rates, with my main concern being inflation or even worse stagflation.  Break out the polyester leisure suits and disco albums (yes, vinyl LPs), because it looks pretty official to me: Stagflation has returned to the U.S.

Short definition of stagflation

Stagnant economic growth or recession coupled with higher level of inflation.

The president is currently denying that we are in a recession right now (Wow, he not only looks like his father but now he sounds like him as well!).  Technically, he is right when you apply the classic textbook definition of recession, which is two quarters of economic contraction.  The official government numbers say we haven’t had actual economic contraction, but the anemic “growth” of 0.4% and 0.6% would put snails to shame.  Basically, the economy is moving about as fast as swamp water … stagnant, in short.

Inflation numbers DO lie

Now for the other half of stagflation, which is inflation (prices inflate like a balloon).  The “normal” government numbers show an annualized inflation for the past month of 4%, but then they get downright sneaky and strip out food and energy prices for some (male bovine excrement) figure they call the “core inflation” figure.  I’ve made several snarky remarks about how Ben Bernake must not eat or drive to think the core inflation number is anywhere near realistic.

Doing a little digging around on the web I have discovered the government has changed how they figure inflation several times, and each change they make doctors up the numbers to make things sound much rosier than they are.  Sit down and hang on to your hats, because here is a graphical representation of MY budget reality versus the government’s rose-colored glasses:

inflation numbers real and imaginary

(original article and image source here)

That’s a huge difference in figurings!  And when you take into consideration food and gasoline, that top line reflects how I had to adjust my budget for April … and how I’ll be working the numbers again for May.

Stagnant Economy + Inflation = STAGFLATION

There you have it folks, stagflation is back … I am not at all happy about having seen this coming either.  Supposedly the members of the FOMC are old enough and educated enough to have seen the signs of this economic catastrophe sooner and clearer than I could have!  Yet they have been on an interest rate cutting spree reminiscient of those 70s slasher horror films in hopes of keeping the Wall Street markets happy and every consumer in America spending like before (at unsustainable levels).

This could have been avoided.  Energy costs, especially oil, are priced in dollars and the dollar has fallen with just about every rate cut.  Even OPEC says the price of oil wouldn’t be nearly as high if the dollar was strongerThis round of stagflation is on Ben Bernake and seven others in the FOMC - excluding inflation hawk Richard Fisher of the Dallas Fed and recently Charles Plosser of the Philly Fed.

I’ll do some rooting around and asking the older generations how to survive stagflation and report here when I come up with something good.  In fact, I’ll make it my post-finals project, hopefully starting tonight.  Until then, turn on the 1970s classic rock radio station to get into the mood … the angrier the better.