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Inflation Part 3: Understanding the numbers

It might sound complicated, but understanding the Consumer Price Index is easy. See what drives inflation and how the price of energy and food can skew the numbers.

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In the last video, we talked a little bit about what inflation is and the consumer price index, and so I thought I would actually show you data and maybe point out a few interesting things right over here. So this right over here is the monthly press release, or it's the table from the monthly press release issued by the Bureau of Labor Statistics, and this is Table A, which is really a summary of all the important things. It's the percent changes in CPI for all urban consumers, the CPI-U, and they do it for non-urban consumers and all the rest, but the CPI that is quoted is the one for urban consumers, the U.S. city average.

And what I always find is that the details are much more interesting than what you hear just on the news when people say, "Oh, the CPI changed by, you know. 0.5%." And one thing I do want to point out, and this is true of the CPI, this is true of all government statistics, in fact this is true of any report that any company gives you, it's very important to keep in mind whether they're giving a sequential change or whether they're giving a year-over-year change.

So for example, there might be a press release like this one, and the text of it, or maybe the headline number when you look at your local newspaper or your news report will say, "Look, in June 2011, inflation on all items, on the entire basket of goods, went down by 0.2%." And you might say, "Oh, wow, look, there's no inflation. In fact, prices are going down." This would be minor deflation.

But it's important to realize that this is only the seasonally-adjusted prices from May to June, and when I talk about seasonally adjusted, traditionally maybe people use a different amount of energy, a different amount of gasoline from May to June, and they try to factor that in when they compare the basket of good, the price of the basket of good from May to June, so that's what they talk about seasonally adjusting.

But if you look over here, the prices went down from May to June according to adjusting it for the season, but the year over year changes are still up. If you compare June 2011 to June 2010, it is still up by 3.6%, and in general, the monthly things are going to be a little bit more volatile. Obviously you have the seasonal adjustments. You have other short-term factors that might change it, but the year-over-year one is a stronger signal for what is actually happening for inflation, although someone might want to pay attention to the monthly one because that’s obviously giving you kind of the most up-to-date of what’s happening now.

And what you'll often see is they'll give an inflation number for everything, and then they'll subtract out actually food and energy, so this is all items less food and energy, and that's because food and energy, they represent a good bit of the basket, but they're very, very volatile. You can see it right here in this report. Year over year, energy has gone up double digits, 20% for energy generally. If you look at fuel oil, 35.6% at least on this report. It's been coming down more recently but year over year it's been up a huge amount, and so that's actually the main driving factor for this 3.6%.

If you take food and energy out of the equation, if you compare the basket of goods minus that, inflation was only up 1.6%. It's interesting, even within that, you can look at which parts of the economy or which products and services are getting a lot more expensive and which ones are getting cheaper. It's actually interesting that used cars and trucks are up 5.1%. That seems like a pretty strong price increase for used things.

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