Exploring Inflation Over the Past 10 Years Through Charts

by: Robert Kientz

In Part four of the series Charting the Economy, we examine Inflation. This series is intended to present a recent history of the economy in an easy to understand format using graphs. You can find Part 3 here.

The first chart shows the Personal Consumption Price Index from the Bureau of Economic Analysis. Categories are shown grouped by color. The overall price index change for the group will be designated with "all" in the category name.

The inferences that we can make from the BEA price indexes are limited in that item substitutions may affect the price indexes from one period to the next (much like CPI). However we should be able to infer trends for those categories overall. In this graph we just plot the major changes in either direction against the sum of all index changes.

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From this chart, we see that the largest reduction in price index occurred in recreational goods and vehicles, and that the largest increase was in gas and energy goods. Services as a whole increased more than the net value of all PCE index value changes. Durable goods, not shown, had the least amount of positive change (inflation) in index values, which include motor vehicles and durable household equipment.

Food, housing, transportation and energy are the three most important monthly budget items for most families. Energy prices almost doubled over the last decade and rose three times as fast as wages over the same timeframe. Food increased by over 33%, outpacing wages by 4%.

Because the BEA notes the indexes are limited by substitution effects, we search for more accurate measures of price inflation.

We can look at the BLS Inflation data, as graphed below. The first graph has some of the essential budget items.

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Look at the nice smooth curve in housing inflation, which started slowing in 2005 and hasn’t stopped. Most of the values are below 5%, with transportation jumping around the most.

Energy items are specifically graphed below.

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Fuel oil and gasoline have risen the most. All items since 2001 graphed below.

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Inflation kicked up quite a bit in energy factors, which is telling of why the BLS does not include it in the core inflation. And even though gasoline plunged once, it is back up to much higher levels this year. This indicates that speculation is not the only factor driving oil prices. Fuel oil has almost tripled.

Of course we know that some of the BLS figures are largely BS, due to hedonic, geometric weighting and substitution affects. Since energy items have harder substitutes, we can reasonably rely on those from the BLS. But we’ll need to find substitutes for the housing, food and other categories.

As luck would have it, MIT professors have created the Billion Price Project. The project pulls data from online sources for supermarkets, electronics, apparel, furniture and real estate.

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The project started in 2008, so we can use its data from that time in comparison with comparable BLS values.

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MIT’s Billion Price Project, which includes data on food and beverages, apparel and housing, shows significantly more inflation since 2008 than does the BLS measures in these areas. While not a 1 for 1 comparison between BPP and the BLS measures, nonetheless the difference is substantial enough to show that BLS figures don’t reflect actual price data.

Another notable inflation statistic is tracked by economist John Williams. His website tracks several economic variables using methods previously used by the U.S. government. However, the measurements now used by the BLS have been significantly modified over time.

Here we see his inflation measurement, representing the way the U.S. government used to keep it, versus the new inflation measure.

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Courtesy of Shadowstats.com

We have successfully used alternate inflation measures to show that the BLS data is not sound and does not reflect the prices that consumers face every day in America.

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As we can see, the Austrian True Money Supply (TMS) as a measure of inflationary currency tracks the Shadowstats inflation rate very well. We can also see by this chart about an 18 -24 month lag time between TMS movements, and the resulting price movements in Shadowstats price inflation. Starting values for both measures were set to 100 index.

We graphed the Austrian TMS in Part 3.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.