Everyday Prices Dip in October
Wednesday, 21 November 2012
Thanks to falling prices for household fuels, gasoline, and recreation, the EPI ticked downward last month. But that’s not enough to reverse the climb of everyday prices over the last 12 months.
Prices of frequently purchased goods and services dropped 0.6 percent in October, according to AIER’s proprietary Everyday Price Index (EPI). This downward adjustment follows a 1 percent increase in everyday prices in September.
The EPI is based on the same survey data that the U.S. Bureau of Labor Statistics uses to create the Consumer Price Index (CPI). But the indices differ in several ways. The EPI is comprised exclusively of day-to-day purchases such as groceries and telephone bills, eliminating major purchases like cars and contractually fixed items like mortgages. In order to better reflect the out-of-pocket prices that consumers experience, the EPI does not seasonally adjust prices.
The EPI’s October drop can be explained by price declines in three categories that make up a large part of the average American’s daily expenditures: household fuels, motor vehicle fuels, and recreation.
The household fuels, utilities, and supplies price index fell 1.74 percent in October. Electricity prices declined 4 percent because of seasonal changes. These large drops were somewhat offset by prices of fuel oil and natural gas, which are still trending up.
Motor fuel and transportation prices dropped 1.35 percent in October, thanks to a 2.1 percent decrease in the price of gasoline. Gasoline has been particularly volatile in the past few months: This month’s decrease followed a 4.1 percent increase in September.
Several economic factors signal that these prices are likely to decline further in the near future. First, the manufacturing industry, which is the engine of the recovery, has weakened over the last few months. Second, many analysts expect sluggish economic growth in the first few months of 2013. All this may lower the demand relative to an ample oil supply. Meanwhile, spot prices for Brent crude oil dropped 2.4 percent to $109.89 per barrel in October.
Recreation services decreased 0.21 percent in October. This change can be attributed to prices for cable and satellite television and radio, which fell 0.72 percent. Audio discs and tapes experienced a 1.31 percent increase.
The EPI’s biggest price increase in October was in the food and beverages category, which climbed 0.23 percent. Since average urban consumers spend about 39 percent of their daily expenses on food and beverages, even smaller increases make a difference in monthly budgets. The increase was mostly because of higher grocery prices, which rose 0.36 percent from September. The prices of food served away from home grew just 0.07 percent. This means that restaurants didn’t change their prices much, while grocery stores did.
The second biggest EPI increase for October was in communication services prices, which grew 0.14 percent. The prices of telephone services rose 0.22 percent, with prices of wireless services experiencing a second consecutive monthly increase of 0.3 percent. This is because companies tend to charge more for their wireless services as technological innovations offer consumers additional or improved functions. Prices for Internet services, by contrast, have shrunk steadily for the past five months. They dropped 0.23 percent in October.
While the EPI fell in October, the CPI showed an increase of 0.15 percent. The biggest contributor to the CPI’s increase was housing. This category carries no weight in the EPI, since rents and mortgage payments may change in the aggregate but typically do not fluctuate from month to month for individuals.
The CPI’s shelter index climbed 0.3 percent last month. Not only was this the largest price increase in housing prices since March 2008, it also accounted for more than half of the CPI’s increase. This means that future renters may feel the pinch of price hikes as landlords charge them more. However, most homeowners’ mortgages won’t increase, and those who rent out their houses can expect higher incomes. While this is good news for homeowners, it is just a short-term benefit of inflation’s impact on housing prices. Once inflation spreads to other categories, overall prices will catch up with housing prices.
Although the EPI’s monthly changes are not usually dramatic, they add up over the long term. The October EPI shows that prices of frequently purchased items have risen 3.5 percent over the past 12 months. That’s almost 60 percent higher than the seasonally adjusted Consumer Price Index (CPI), which shows a 2.2 percent price increase over the same period.
This is in keeping with the EPI’s historical relationship with the CPI, as the chart at left shows. The EPI has a more volatile course than the CPI’s steady climb. But the EPI has also trended higher since 2002. Three factors can help explain why. First, since the EPI’s smaller basket includes such goods as oil, food, and prescription drugs—three categories that have experienced very high price growth since 2002—those categories get more weight. Second, the EPI does not include contractually fixed items and durable goods, which tend to have more stable prices.
The final reason the EPI trends higher than the CPI is that the CPI uses quality adjustments to calculate prices. For example, cell phones cost more now than they did 10 years ago, but they also often include Internet services, cameras, and GPS systems. The CPI adjusts the price of the phone down because consumers are getting more bang for their buck. This is a sensible way to get a full picture of the economy’s overall trends, but it does not capture the everyday experiences of consumers. Since the EPI does not include durable goods, it contains a much smaller percentage of items that are quality adjusted.
These differences shape the gap between the CPI and the EPI—which in turn suggests that Americans are experiencing a higher rate of erosion in buying power for day-to-day items than the CPI implies.
How we measure day-to-day inflation
AIER’s Everyday Price Index (EPI) measures the changing prices of frequently purchased items like food and utilities. We do this by selecting the prices of goods and services from the thousands collected monthly by the Bureau of Labor Statistics in computing the Consumer Price Index. We choose prices of goods and services that are typically purchased at least once a month and are not contractually bound over the longer term. Our staff economists then weight each category in proportion to its share of Americans’ average monthly expenditures.
To learn more about our methodology, view the weights assigned to each component, and browse past EPI updates, visit AIER’s EPI Methodology page at www.aier.org/epi-methodology.