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.
September’s headline inflation rate, the Consumer Price Index for All Urban Consumers (CPI-U), posted an unadjusted 1.7 percent increase over the past 12 months, unchanged from August. Falling energy prices resulting from increased global supplies of oil and gas were offset by higher food and shelter costs. Energy prices have now declined for three straight months.
Annual CPI has been on a broad-downward trend since late-2011; however, this does not mean that prices for all items are generally falling. For example over the past year, the price of meat has increased by 9.5 percent, milk prices are up by 6.5 percent and the price of housing is up by about 3 percent. But in general price increases across most categories have been muted. This is a good thing as wages have also been stagnant, so consumers are at least able to hold their ground in terms of purchasing power.
As the chart shows, inflation has grown at a slower pace since the 2008-2009 recession, but has not, as some economists have suggested, gone away. In fact, prices are up by over 12 percent on average since the end of the recession, so a $1.00 candy bar in 2009 would cost $1.12 today. In addition, the continued low interest rate environment that has been engineered by the Federal Reserve helps to ensure that prices continue to rise even during periods of soft demand.
While it is assumed that low inflationary pressures should enable the Fed to put-off raising interest rates for some time, there is still concern that an exogenous event such as Russian military action, a terrorist attack, or even a difficult winter could stoke inflation once again. It is important to remember that energy accounts for about 10 percent of the overall CPI, so a 10 percent increase in energy costs, which is equal to only about $8.50 or $9.00 for a barrel of oil would increase the CPI by one percent in and of itself.
This means that in spite of what the orthodox economists are saying we need to continue to keep a close eye on inflation, particularly at the commodity level.
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