November 2014 CPI

The decrease in energy costs moved into the November CPI. There was a hint in the October numbers, but it seems like the full impact hit in November. Since I show the price change over ten years, the change in November moved the energy component from 60% to 40%. That makes the energy component the same level as Medical Care.

In terms of core measures, the graph of CPI and Core Measures is quite telling this month. The Federal Reserve likes to remove certain items that have a high degree of volatility. There are five of them and this month, all five have moved above the average of 23.64%. One of the reasons I like looking at ten years of history is to eliminate the volatility. After ten years, if prices move up and down more than others during that period, there will be an obvious central tendency. Here in the November numbers, we can see all of the components that are excluded from the core measures have been higher than average.

With our ability to handle increasingly complex data, it is difficult to accept the need to exclude certain items because of excessive volatility. I know benefit indexing is set once per year based on a one-year look back at CPI, but that seems disingenuous since a computer can handle the mathematical calculations required. I’m not presenting a formal change to the way benefits are indexed, but it appears there are ways within our grasp to provide a more realistic approach to indexing.

It could start with an examination of how money is spent by age category. Developing a CPI by age category shouldn’t be difficult given our survey abilities. For example, Medical Care is 7.5% of the total for all ages. For people over 65, I would suspect the weighting would be closer to 25%. Housing is 41.4% for all ages, but it might be closer to 25% for people over 65.

Component Weighting Importance
Food & Beverage 10.2 14.901
Housing 55.5 41.448
Apparel 0.7 3.437
Transportation 14.44 16.418
Medical Care 1.3 7.551
Recreation 3.0 5.793
Education & Communication 7.0 7.087
Other 7.8 3.365

I have wanted to pursue looking at my personal price index and finally found the time to categorize my spending. In the past year I have a weighting of 55.5 for Housing compared to the index importance of 41.448. This will cause my personal price index to be higher than average. Similarly, my Food and Beverage weighting is 10.2 versus the index importance of 14.901. This will cause my personal price index to be lower than average. Overall, my price index is 1.53% versus the published CPI of 1.33%. Not much different, but it isn’t a rounding error either.

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Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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