Friday, October 14, 2005

C'mon Back: Inflation Hype Premature?

After some thorough analysis cross-checked with recent events, the inflationary expectations coming from the release of the Consumer Price Index (CPI) numbers for last month may be a bit exaggerated. I recently check my inbox to find the more in-depth analysis of the CPI numbers given in the Bureau of Labor Statistics' Midwest Region release. This publication cross-references the Midwest region's numbers with those of the United States, but it also goes into the categorical price changes, i.e. food, housing, apparel, transportation, etc.

After a quick glance at some of the numbers in the housing and transportation sections, for instance that "utility (piped) gas service" prices increased 11.5% on a national average and that motor fuel prices on a whole (regular, midgrade, and premium) averaged a 17.3% price increase, we can conclude that the 1.2% CPI increase may be slightly bloated.

Here is something to exclaim, asterisk, and highlight why the CPI numbers are bloated: of all eight categories, only apparel and transportation prices increased more than 1.5% while the remaining five apart from a 1.4% increase in education/communication prices remained at or below a 0.5% increase. As is plain to see, record or near-record increases in the prices of natural gas, gasoline, and oil have catapulted the average to a level beyond belief.

Historically speaking, the last time we have had a price increase this high was in the early months of 1980. What, boys and girls, was in full gear during this time?! That's right it's the price shock from the Arab oil embargo and the hostage crisis with Iran. Throughout the perilous times between the embargo and the hostage crisis, inflation stateside was never below 6% and even approached 10%.

A table on Wikipedia's listing of consumer price index shows that between 1973 and 1981, prices DOUBLED. To put that into perspective two other historical price doubles occurred between 1947 and 1973, and from 1983 to present. The former is a 27-year span and the latter is a span of 22+ years, which together equate to nearly three times longer than during the oil price shock.

The events of the next few months will play a large role in how the economy deals with the shock to energy prices as well as import prices (which rose 2.3% last month). I predict here and now that the inflationary hype that will soon ensue across the nation via the "MSM" will be nothing more than that, hype. We can expect prices to settle back down in the near future and hopefully the upward pressure on import prices will subside accordingly as purchasing power increases.

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