The EPI Continues Its Upswing
Monday, 22 October 2012
On an annualized basis, the prices of frequently purchased goods rose nearly 13 percent last month.
The cost of frequently purchased goods and services rose 1 percent in September before seasonal adjustments, according to AIER’s Everyday Price Index (EPI). That’s the second consecutive month-to-month increase and follows a 1.8 percent surge in everyday prices in August. At a current annual compound rate of 12.7 percent, the EPI indicates a rise in routine costs that is not reflected in other, widely used price measures.
AIER’s proprietary EPI is based on the same survey data used to create the Consumer Price Index (CPI), the official measure of prices reported by the U.S. Bureau of Labor Statistics. While the CPI includes big-ticket items and occasional purchases such as cars and major appliances, the EPI includes only regularly purchased items such as groceries and gas. In order to better reflect the out-of-pocket prices that consumers experience, the EPI does not use seasonally adjusted prices, while the CPI does.
The two indices tell consumers markedly different stories. According to the EPI, everyday prices have increased 5.2 percent so far this year—about three times the 1.9 percent increase that the seasonally adjusted CPI shows over the same period. (For purposes of comparison in the chart below, we show both indices without seasonal adjustments.) Falling or slow-rising prices of some infrequently purchased items help keep the CPI lower. Television prices, for example, dropped a steep 14.9 percent over the past year. The overall decline in the cost of durable goods was less dramatic at 0.3 percent. But that drop is well below the CPI’s 1.9 percent increase in prices.
The past two months’ EPI increase is primarily driven by continuously rising oil prices. Motor fuel prices rose 4.1 percent between August and September and 17.1 percent so far this year. This is on track with AIER’s predictions. Our July EPI update warned that the temporary declines in energy costs were coming to an end. That’s what has happened. At the end of July, gas averaged $3.71 per gallon nationally; by the end of September, it averaged $3.89. In California, gasoline prices spiked about 50 cents per gallon in early October, pushing prices over the $5 mark in some locations.
The climbing cost of entertainment is also driving up the EPI. The price of cable and satellite television and radio service rose 4.4 percent so far this year, while prices for admission to movies and sporting events rose 3.5 percent. Video discs, on the other hand, declined 1.7 percent year-to-date—perhaps reflecting diminishing demand as more consumers turn to streaming devices and media players like iTunes. The cost of postage and delivery services has also risen by 3.7 percent this year.
All this may be of particular interest to seniors in light of the slight cost-of-living increase in Social Security benefits starting January. See box next page.
COLA Lags Behind Everyday Prices
Starting January, retirees will see their Social Security payments rise by 1.7 percent. That’s the result of the cost-of-living adjustment (COLA) for 2013, announced by the Social Security Administration October 16.
This year’s COLA increase is right in line with AIER’s projections. Earlier this month, AIER Research Fellow Polina Vlasenko predicted a 1.5-1.7 percent hike in benefits.
The Social Security Administration determines the COLA by comparing the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the third quarter of the current year to the index in the third quarter in the previous year.
The COLA increase is meant to ensure that Social Security benefits keep pace with inflation. But seniors may find that it’s not enough to keep up with the rising price of everyday purchases. AIER’s Everyday Price Index (EPI), which helps seniors track month-to-month changes in the cost of basic expenses, shows that the prices of frequently purchased items have risen 5.2 percent year-to-date. The EPI also shows that the price of prescription drugs, which many seniors rely on, rose 3.2 percent so far this year—well above the COLA increase.
For more on why the COLA lags behind the rate of inflation for many basic goods and services, read “Social Security to Rise Slightly” in AIER’s October 5 Special Report.