The Consumer Price Index (CPI) is the Federal government’s measurement of monthly and annual inflation at the retail level. The statistic is created by the Bureau of Labor Statistics using a “secret shopper” survey whereby firms throughout the country are surveyed on the prices of a market basket of goods and services. Much of the methodology is kept secret so that individual firms or industries cannot knowingly influence the inflation index number. Economic theory suggests that price stability is a good thing and that changes in prices should reflect supply and demand factors rather than government policies; however, over the past 100 years, the government has maintained a fairly inflationary policy, meaning that notwithstanding market conditions, prices generally rise over time.
The Bureau of Labor Statistics’ (BLS) projection of CPI for the month of April 2014 was released showing that overall price levels for the month were up by 0.3 percent. This means that inflation for the past 12 months has been running at about 2.0 percent. Even though CPI as a whole was quite muted, some products experienced significant inflation in April, with gasoline by 2.3 percent on the month, new car prices up 0.5 percent and the cost of transportation services up by 0.7 percent. Most other energy costs were down sharply for the month, specifically electricity prices which fell by 2.6 percent and fuel oil prices down by 3.0 percent reflecting an end of winter and a shift in refining capacity toward diesel fuels.
Overall year over year prices are running about 2 percent higher with big increases in natural gas costs (up 11.8 percent), meat prices (up 6.4 percent) and rents up by 3.1 percent. Other costs, including those for beverages, apparel and air fares are down year over year. Prices are rising faster in the south than in the north, and slightly faster in smaller cities than larger ones.
We have forecast higher prices for the past 4 years resulting from high levels of government debt and what we believe is an overly expansionary monetary policy. Fortunately we have been wrong about this; however, I think the reason that inflation has been slow is because the economy has been kept artificially weak by bad government policies, over-regulation, and an unwillingness to invest in future production. Also, the business cycle seems to be topping out so the potential for higher wage inflation, and higher “demand push” inflation is muted as well. These factors are offsetting each other but inflation can always come when it is least expected. We continue to think that companies and individuals would be well placed to keep inflation in the back of their minds when making decisions with a medium-term (3 to 5 year) time horizon.
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