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 suggest 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) report on the CPI for the month of June 2014 was released showing an increase of 0.3 percent in overall price levels for the month. This means that inflation is running at about 2.1 percent over the past 12 months. Even though CPI as a whole was quite muted, food and energy prices have been rising at a much faster level. In fact over the past 12 months, food prices have been increasing at about 2.3 percent per year, and energy costs are up 3.2 percent. It is the cost of apparel, communications services and vehicles (which together account for about the same percentage of the CPI as does energy) which are helping to hold the overall index down. Interestingly, the price of health care is rising just slightly more than overall inflation (2.6 percent on an annualized basis) but this does not include government spending on health care or on Affordable Care Act subsidies.
The low headline inflation numbers belie the fact that prices are continuing to rise at a fairly good clip – particularly prices for necessities like food and energy. In fact, since the beginning of 2010, food prices are up by about 11 percent, and energy costs, are up by 18 percent. Considering that wage growth has been virtually non-existent and taxes at both the Federal and state levels are rising, it’s no wonder that many consumers do not even believe that the recession has ended.
We have forecast significantly 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. If this is the case, low inflation rates could rapidly turn if the economy were to grow only modestly faster.
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