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What would the Fed do if only economic factors were taken into account?
Inflation measured by the "fundamental" consumer price index, which eliminates the volatile food and energy segments, jumped 2.39% in August, its highest rate in 11 years. a slightly higher level than the previous highs of July 2018 (2.35%), February 2016 (2.33%) and April 2012 (2.32%). The last time it grew at a faster pace was in September 2008 (2.47%):
The United States is currently experiencing the second collapse of oil and gas since mid-2014, or the same collapse of oil and gas, with two parts separated by a sucker rally. As a result, energy prices, which account for 7.8% of the total CPI, fell 4.4% from the previous year, with gasoline and diesel prices falling 7%, 0%.
These declines in energy prices have reduced the overall CPI increase from last year, from 1.81% in July to 1.75% in August, reported the Bureau of Labor Statistics. morning.
Inflation in services
Consumers spend 70% of their money on services, ranging from financial services to health services (without drugs) to broadband and mobile services. It's the biggest. In August, the CPI for services reached 2.70% compared to last year.
"Inflation", as expressed by the CPI, attempts to measure the loss of purchasing power of the dollar, not the price increases due to higher quality products.
When your broadband speed goes from 2 Mbps to 50 Mbps in 10 years, but the price you pay stays the same (as was the case with our Comcast connection), you get a quality service 25 times higher for the same thing. price. C & # 39; deflationary – which means you get more for your money, even if you pay the same price.
Inflation measures the loss of purchasing power of the dollar and not the improvement in quality. This is why quality improvements are removed from the index (via the famous "hedonic quality adjustments"). At this conceptual level, "hedonic quality adjustments" make sense.
Price changes can be divided into two parts:
- The price of quality improvement,
- The loss of dollar purchasing power.
IPC attempts to measure only the loss of purchasing power of the dollar and the impact of quality improvements is removed. Nevertheless, your life is becoming more expensive because of the two factors that explain the overall increase in your "cost of living". Moreover, there is no debate about hedonic quality adjustments deliberately applied too aggressively.
Thus, the 2.7% increase in the CPI for services measures the loss of dollar purchasing power, once all the improvements made to your mobile service, to the services broadband, data storage and other services have been removed. The CPI services is relatively stable since 2012:
The special case of durable goods.
Durable goods are things like cars, washing machines, furniture, mobile phones, and so on. Automation and other efficiency gains in the manufacturing sector, as well as globalization (transfer of production to cheap countries) have resulted in lower manufacturing costs of goods.
The general rule in a non-inflationary environment is that durable goods that are not improved become cheaper as manufacturing and distribution become more efficient and costs decrease.
But under the fierce pressure of global competition, manufacturers are constantly looking to improve their products. These improvements allow them to charge more for their products, but as they improve the price you pay, they are removed from the inflation index (you know the exercise, "hedonic quality adjustments"), so the CPI for durable goods measure only the purchasing power of the dollar with respect to durable goods, not the quality improvement.
Your cost of living therefore increases because the car now has a 9-speed transmission and better safety features, better performance, more sophisticated electronics on the dashboard, front and rear cameras, automatic braking functions, etc. But once the costs of these quality improvements have been eliminated, the car should have been cheaper because of the impact of manufacturing efficiency and globalization.
And that's sort of what happened. The chart below shows the CPI for durable goods – the actual index and not the percentage change in the index. Note what could be the beginning of a slight rise in recent months, after years of decline:
Deflation of durable goods in previous years has been a topic of discussion in Federal Reserve discussions, conceding also that this deflation may be the normal condition in a competitive world with a constant concern to improve the economy. efficiency of production.
In terms of percentage change, the CPI of durable goods advanced 0.6% in August, the fastest increase since May 2012. The rebound in the CPI trend of durable goods has started in late 2017, while price declines eased in November 2018, the year of the first price increase since 2012:
Inflationary forces therefore continue to play an active role in services. But now, these inflationary forces are also starting to push prices for durable goods up for the first time in recent years.
Durable goods and services are the core of the "core inflation" measures, including the "core" PCE measure that the Fed uses as a benchmark for its goal of "core inflation". self-selected inflation of 2%. And at first glance, his fear of "low inflation" earlier this year, when the dollar had not lost its buying power fast enough, is being reversed, removing one more. economic because of further rate cuts.
Services are booming. And the # 1 Biggie jumps the fastest. But all this contributes to GDP! Lily… The financialization of the American economy
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