“We’ve underrun our 2% inflation expectation almost since we announced it in 2012.”
- Charles Evans, Chicago Fed, 9/27/2021
Back in 1988, I designed and built a 12’ tall skateboard half-pipe in the wooded area behind our house. Every Saturday, my dad and I would go to Hechinger's to buy a load of plywood and 2 x 4’s. Plywood at the time cost about $7/sheet and the 2 x 4’s were usually under $1. What I earned delivering newspapers that week purchased enough lumber for the next week of construction. I have not shopped for lumber in a long time but I do track lumber commodity prices. Despite being aware of the spike in lumber over the past year, I was shocked to see a similar piece of plywood that I used on my half-pipe selling for nearly $80 earlier in the summer at Home Depot. Although that was partially related to supply chain issues and the price of lumber has retreated over the past several months, the price of plywood is still about 6 times what it was in 1988. I’m so old I remember when you could buy a sheet of plywood for $7.
Inflation is an interesting subject. You can write books about it, author thousands of white papers on it, give speeches on how it is "transitory" and try to explain to the viewers of CNBC how we do not have enough of it. Most of us are pretty aware of price inflation. This is assuming you actually get out of bed everyday (check out those mattress prices) and eat, drive, pay for shelter, buy health insurance, pay for college, etc, etc. We can see it everywhere. If it’s not in the prices, it’s in the size of the packaging (shrinkflation). Wait, you didn’t notice your favorite coffee now comes in an 11oz. bag instead of a 12oz. bag which used to be a 16oz. bag?? There is also another reason you still feel hungry as you walk out of your favorite restaurant grumbling over the bill. Yes, you were served less food. Was that Pale Ale really $8??
The question has to be raised, how can academics and government officials think that it is possible to calculate an accurate consumer price inflation (CPI) number for all 330 million Americans to within a decimal point in a $23 Trillion economy? The answer is they cannot. Another question is why do we need inflation at all? Some of the most prosperous times in history were in periods of zero inflation and even deflation in the late 19th century in the US and several other countries. I can think of about 29 Trillion reasons government likes inflation (A Million Here...A Trillion There...). For years, the Federal Reserve has been mystified about the apparent lack of inflation in the economy. It has been a struggle for them to reach their magical 2% target while the rest of us wonder how we just dropped $400 on barely a week's worth of groceries. Does Publix even still have BOGO's?
The struggle to reach this 2% inflation rate of course has to do with how the CPI is calculated. The calculation metrics of the CPI have been changed many times over the past few decades (when you don’t like the answer, just change the equation!). If we used the same CPI calculation that was used in 1980, inflation would be running closer to 14% as opposed to the latest report of a “transitory” 5.3% in August. There were some major changes made in 1998 that made the entire calculation even more obfuscated. Many adjustments were made regarding how things are weighted, hedonic adjustments (your new car isn’t really more expensive since it has more features than your old '95 Buick) and substitutions (if steak prices go up, it is assumed that you switched to eating chicken wings instead). In other words, even though something went up in price, utilizing their black box calculations, it didn’t.
One of the more bizarre things with the CPI calculation is the fact that home prices are not factored in at all. Home prices were removed from the calculation back in 1983, two years before Madonna and Rosanna Arquette starred in Desperately Seeking Susan. The metrics currently used in the ‘Shelter’ part of the calculation (30% of the CPI) are ‘Rent’ and something called ‘Owner’s Equivalent Rent’ (OER). Owner’s Equivalent Rent is based on a random survey of homeowners that are asked, if you were to rent your own house, what would you pay? Yup, this odd benchmark that has no correlation to house prices at all actually makes up 23% of the entire CPI calculation! The very same calculation used to guide global monetary policy [The Fed actually uses the Personal Core Inflation (PCE) measurement to set policy but it is a very similar type of calculation and is equally, if not more understated]. Is there any wonder as to why the Federal Reserve Presidents continue to desperately seek inflation?
While they are busy making speeches about “transitory” inflation and how they are worried about not having enough inflation in the near future, here are some real, unadjusted commodity price increases over the past year:
Natural Gas +121%
Heating Oil +113%
Oats +112%
WTI Crude Oil + 97%
Soybean Oil +88%
Coffee +80%
Cotton +65%
Sugar +40%
Copper +40%
Corn +37%
Wheat +22%
Lumber +20%
Case-Shiller Home Price Index +20%
Now that is some real, actual inflation that affects everyone, but instead our government officials celebrated and advertised the fact that our 4th of July cookout was a whopping 16 cents cheaper this year compared to last year. Maybe Mr. Evans is a big fan of hot dogs? In any case, with sheets of plywood running about $40, I guess I’ll hold off on building that new half-pipe.
- Eric
- Author on his half-pipe, 1988