The CPI: Update
Brian Trumbore
President/Editor, StocksandNews.com

Time to revisit a column I did back in March 2004 on the CPI, the consumer price index. Granted, it's an extremely dry topic and not easily transferable to a forum such as this, but whenever the data is released there is controversy as the government's statisticians don't necessarily agree with the everyday experience of us little guys.

The following information is gleaned from the U.S. Department of Labor/Bureau of Labor Statistics (BLS)? www.bls.gov.

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Let's start out with the BLS definition of the consumer price index.

"The CPI is a measure of the average change in prices over time of goods and services purchased by households."

What goods and services does the CPI cover?

The BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. These groups, and examples of categories in each, are as follows:

• Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks)
• Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
• Apparel (men's shirts and sweaters, women's dresses, jewelry)
• Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
• Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
• Recreation (televisions, cable television, pets and pet products, sports equipment, admissions)
• Education and Communication (college tuition, telephone services, computer software and accessories)
• Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses)

Knowing this, let's see how they break up the index, all #s adding up to 100.

Food and Beverages????...14.992
Housing?????????..42.691
Apparel??????????3.726
Transportation???????17.249
Medical Care????????6.281
Recreation?????????.5.552
Education and Communication?..6.034
Other Goods and Services???3.476

Now let's really break it down.

Food and Beverages???.14.992

Food???????13.885
Alcoholic beverages......1.107

Housing????????.42.691

Shelter?????.....32.776
Fuels and utilities??..5.264
Household furnishings and operations???...4.651

Apparel????????..3.726

Men's and boys'???.0.885
Women's and girls'?....1.590 .
Infants' and toddlers'.....0.177
Footwear??????.0.748
Jewelry and watches ......0.326

Transportation????......17.249

Private??????.16.188
Public??????....1.060

Medical Care??????.6.281

Medical care commodities???......1.446
Medical care services?4.834

Recreation???????.5.552

[too numerous to list numerically here, including for video and audio, pets, pet products, sporting goods, photography, recreation services (club memberships, admission to movies), recreational reading materials (newspapers, magazines)]

Education and comm. ??....6.034

Education?????...3.076
Communication??......2.958

Other goods and services?..3.476

Tobacco / smoking ??0.712
Personal care????..2.764

Do you want to break it down further? Let's just look at some of the bigger items that we all care about; health insurance, property taxes, college tuition and energy.

First off, there is no specific measurement for health insurance. Instead, it's lumped into medical care commodities (prescription / nonprescription drugs) and medical care services (physicians' services, dental, eyeglasses), both of which add up to the above figure of 6.281 of the index. From October 2006 to October 2007 this supposedly has risen at a 4.8% clip.

Property taxes, according to the BLS, "should be reflected indirectly in the BLS method of measuring the cost of the flow of services provided by housing shelter, which we call 'owners' equivalent rent,' to the extent that these taxes influence rental values." [This is 23.830 of the index] Oct. '06 - Oct. '07 it rose 2.8%. I'm sure all of you are thinking, "Oh yeah, that's about the rate of increase in my property taxes."

College tuition is now lumped with "other school fees and childcare," which collectively represent 2.872 of the index and has risen at a 5.3% from Oct. '06 - Oct. '07.

Regarding energy, let's look at two items. First, "gas and electric utilities," 4.029 of the index and up 5.1%, Oct. '06 - Oct. '07. Second, gasoline, part of the transportation component, is 4.303 of the index and up 23.4% over the aforementioned period.

Now discuss amongst yourselves????????..time's up.

So does the CPI represent the real everyday costs of Americans? While there are some areas in which the index is relatively in line with reality, there are countless instances where it is woefully short. But this is a critical barometer when the Federal Reserve sets interest rate policy.

I'm overseas next week. Wall Street History returns December 26.

Brian Trumbore