The horizon is not so far as we can see, but as far as we can imagine

Core CPI is exactly the wrong thing to watch

Our lords and masters (h/t Americablog):

Those trends came as real income dropped 0.5 percent for the month.

The Labor Department said its Consumer Price Index increased 0.5 percent after rising by the same margin in February. That was in line with economists expectations.

Core CPI is vindication for officials at the Federal Reserve who have viewed the recent energy price spike as having a temporary effect on inflation.

Food and gasoline rose 0.8 percent, the largest gain since July 2008, after increasing 0.6 percent in February.

When thinking about inflation, think of individual’s (or companies) surplus income, that is, how much income do they have left to spend after their necessities.  Necessities include food, housing, heating and transportation.  To a lesser extent, clothes, though most people don’t need to buy clothes every month.

Goods inflation, that is to say, core inflation, is mostly in items that you don’t have to buy. Sure, you might want to, but you don’t have to have a new toaster, or TV, or computer.  Food, on the other hand, you have to have.  If you live off rapid transit, and most Americans do, then fuel for your car is something you have to have otherwise you can’t get to your job: you must buy it, at whatever price it is selling for.  Heating oil is something you have to have, freezing to death is bad.

If you earn $2k a month and your fixed bills come to $1,600, your expendable income each month is $400.  If oil and food rise enough that you have to spend an extra $50 you’ve lost 12.5% of your income.  If they rise enough to cost you $100 a month, 25%.  That margin is what matters to most people.  And for people close to the line, the extra money they must spend may kick them from surplus into a personal deficit, at which point they have to start borrowing money, usually at usurious credit card rates of over 20%.

The day laboring class is particularly vulnerable to this.  A bit of drying up of work, an increase in the price of food, and they can reach the point where they can’t afford to eat enough every day.  When that happens you either get a revolution, or you get famines.  This was particularly a factor, by the way, in Egypt.

Inflation in what people must have is what matters to most of the population.  But it isn’t what matters to your lords and masters.  Food costs and fuel costs, are, for them, roundoff errors.  If  you’re really rich, spending $1,000/day on food doesn’t even show on the scale.  So, by and large, goods inflation is what matters to them, personally, though they may have business concerns about fuel inflation (and note that inflation in oil leads to food inflation very directly.  Modern agriculture is how we turn oil into food, essentially.)

So when someone talks about core inflation being the most important form of inflation, check your wallet, it’s likely lighter than it used to be.

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8 Comments

  1. That first link is broken.

  2. Ian Welsh

    Thanks. Fixed.

  3. BDBlue

    Fortunately, this is one area where it’s hard to make propaganda successful since most people know what they pay for food and gas. I was heartened, for example, to read this a month or so back (Dudley, FYI, is President of the NY Fed):

    In Queens, New York, on Friday, William Dudley was bombarded with questions about food inflation, and his attempt to put rising commodity prices into a broader economic context only made things worse.

    “When was the last time, sir, that you went grocery shopping?” one audience member asked.

    Dudley tried to explain how the Fed sees things: Yes, food prices may be rising, but at the same time, other prices are declining. . . . “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said referring to Apple Inc.’s latest handheld tablet computer hitting stores on Friday. “You have to look at the prices of all things,” he said.

    This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment “tone deaf.”

    “I can’t eat an iPad,” another quipped.

  4. marku

    I caught this over at Mark Thoma’s place,in a Tim Duy Fed speak piece:
    “The core of the Fed will resist panic unless unit labor costs start spiraling upward. Then they will panic.”

    To which I commented:
    Ya gotta love it. The only inflation the Fed cares about is the kind that puts money in *ordinary* peoples pockets. Ordinary People Get a Raise? Whoa, gotta put a stop to that! The rest: food, gas, not so much.

    The fact that QE may be driving some of those increases is irrelevant as long as it puts money in bankers pockets. (and their wives….)

    Kind of surprised he printed it….

  5. guest

    “The core of the Fed will resist panic unless unit labor costs start spiraling upward. Then they will panic.”

    Well, duh. That is the only inflation that matters to the capitalist elites. The rest is more like a tax and is essentially deflationary. If wage inflation is keeping up with CPI and other measures of inflation, the only losers are those living on fixed income and those living off savings, whose cash is worth less, and whose investments are worth less unless their values are also rising. The pie is getting bigger, but they holders of capital are left with a smaller share.

    With inflation in food and oil but not in wages, you basically have a pay cut for labor that leaves those able to hold cash in a better position to gain more control over the productive assets. The danger is that the workers start defaulting on their debts and make the some of the assets held by the banks and elites worthless. Which is why they own the government, so that the government will guarnatee their losses. The pie is getting smaller, the banks and investing classes aren’t giving an inch, so the workers are getting crowded out.

  6. Ian Welsh

    Which is why debtor’s prisons are coming back, and why as much as possible they are making it impossible to go bankrupt on loans. Student loans were only the canary in the coal mine. (At this point, by the way, the numbers do not support it being worth going into debt just to get a BA.)

  7. >>>Which is why debtor’s prisons are coming back, and why as much as possible they are making it impossible to go bankrupt on loans. <<<

    Much of the problem now was anticipated years ago. Recall the push to change the bankruptcy laws to add "means testing" back in 2001-03. The legislation got delayed due to 9/11, but once things settled down, the banksters rammed it through congress fairly quickly. They have us in a vice. If you're indebted and out of a job, you're screwed and if you're debt free and a saver, you're still screwed with inflation. Basically, the people are on their own and always have been, the only difference was that they used to bother with the illusion that you mattered.

    The solution for most lies in attempting to get off grid and reduce dependencies on the existing system of things. That means debt avoidance, bank avoidance, growing one's own food and whatever else that can be done to get off grid. But even doing that may not be enough insurance as we're likely going to be entering a period of outright tyranny.

  8. It’s interesting to think of going off grid (or developing the skills to do so) as a form of insurance. But I suppose it is.

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