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CPI Says “Deflation,” But U.S. Households Face Inflation

Angst exists in the capital markets over the “deflation” issue. Basically, the markets are worried about a lack of demand which forces prices down, causes consumers to wait longer for the prices to fall further before they purchase, and ends up in a downward price spiral which leads to recession or worse. I’ve read plenty of this lately. This is simply not the case. Oil prices are a result of a glut of oil, not lack of demand (miles driven in the U.S. are now at record levels – how is that a lack of demand?). What goes on in China has very little impact on U.S. GDP because the U.S. is the most closed economy of any industrial nation, and it is mainly driven by services. Finally, recent data shows that the U.S. consumer is doing well if you consider that auto sales are at record levels and the consumer is borrowing once again. So, a “deflationary spiral” does not appear to be a real issue in the U.S.

The biggest political complaint, and one that should be of concern, is that wages are not keeping up, i.e., are not rising faster than the “official” inflation number (CPI) despite what appears to be a very tight labor market. Stated simply, the problem is that the CPI doesn’t come close to representing real inflation in the U.S., but is used as a proxy for it, and, as a result, wages have lagged significantly behind the real cost of living.

So, let’s look at the CPI itself. The month over month September CPI showed a negative reading (-.15%) when compared to August, and the year over year September CPI showed a 0% growth in prices. As a result, the Social Security Administration has announced that Social Security recipients will receive no cost of living increase in 2016 because there was no increase in the CPI. Really!

The U.S. is in no danger at all of having a “deflationary” spiral. Rather, because the CPI in the U.S. is used as a proxy for wage increases, the fact that it hasn’t represented reality for more than 30 years continually puts America’s middle class in jeopardy. The fact is, the CPI does not represent inflation in the U.S. and is a very serious, but unrecognized, problem. Because it is used as a proxy for inflation, America’s wage earners suffer as a result.

Long ago, in the 80s, when inflation was quite high, the government changed the way the CPI was calculated so as to curb the increases in social security and federal pensions that would have bankrupted the Treasury by now if real inflation had been recognized. Today, the CPI calculation uses more than 80,000 items. There is an imputed price decline when an item embodies more technology. And a very complex and controversial seasonal adjustment process (concurrent seasonal adjustment) is used.

Think about 80,000 items – do you really purchase that many items – in a year? In 5 years? In 10 years? In Dallas, there is a firm (Chapwood Investments) that calculates the changes in prices of the 500 most frequently purchased items (500 items seems like it would be more meaningful for the consumer than 80,000). The calculation occurs every 6 months for the 500 items in America’s 50 largest cities. Chapwood does not massage the data in any way – no seasonal adjustment, no alterations, no gimmicks. It just reports the prices. And, while it may be ignoring some quality improvements, when you look at the accompanying table, the differences between the prices changes of the 500 most common items purchased and the CPI are so stark that you, like me, will conclude that quality improvements couldn’t possibly be at play here.

The table shows the last 4 years and the annualized rate of change for the past 6 months for 10 cities I selected from the Chapwood list. I selected them to represent all of the regions in the U.S. Compare these changes to the official CPI which is shown at the bottom.

City Rank by Population  

Pct. Change in 2011


Pct Change in 2012


Pct Change in 2013


Pct Change in 2014


Pct Change in 2015 thru June

2. Los Angeles 12.3 13.2 11.3 12.4 11.2
3. Chicago 10.9 13.6 12.1 10.9 10.1
6. Phoenix 8.7 11.1 9.4 7.8 7.1
9. Dallas 9.4 10.2 9.8 9.1 8.3
13. San Francisco 12.5 13.4 13.0 12.7 12.8
20. Memphis 9.1 10.3 8.9 8.9 8.9
22. Boston 11.2 11.4 11.0 10.7 10.1
24. Washington, DC 11.4 12.6 12.7 11.4 11.8
40. Atlanta 10.2 11.1 11.0 10.4 8.6
44. Miami 9.1 10.3 10.5 10.7 10.7
CPI 3.0 1.8 1.5 0.7 0.0*

*September 2014 to September, 2015.

As you can now imagine, and as stated clearly on the Chapwood website, the real economic issue in the U.S. is that wage increases are tied to the downwardly biased CPI. As we all know, since the 80s, middle class families have had to move to 2 incomes in order to make ends meet. The middle class continues to disappear, and, with each passing year, a greater percentage of the population has become dependent on some form of government transfer. Could it be that wages (mostly earned by middle and lower income groups) are simply not keeping up with prices because the real level of inflation is not recognized by the CPI?

The complaint today by the political class is that wages are not rising fast enough and that is hurting the middle class – yet there is no complaint that the reason for the slow growth in wages is an inflation guage, the CPI, that not only doesn’t measure inflation, but its most common use as a proxy for inflation ends up being quite harmful for both the social structure and the economy.

Robert Barone (Ph.D., Economics, Georgetown University), an advisor representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor.   Robert is available to discuss client investment needs. Call him at (775) 284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of Concert Wealth Management, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.


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