Becoming a Smarter Consumer
The world of highly specific price data that you probably never knew about
If there’s one “hot metric” these days, it’s the monthly inflation number. People on Wall Street like to wait for the 8:30am Bureau of Labor Statistics Consumer Price Index (“CPI”) release to help inform their view of how the Federal Reserve’s Open Market Committee might revise interest rates.
People on Main Street are just trying to afford groceries and pay their energy bills.
In the quest to be smarter consumers… to stretch our food budgets and figure out the right time for bigger ticket purchases, we would be wise to do our diligence.
Today, I’m going to play statistical tour guide by sharing more about what’s in the proverbial “basket of goods” that prices are calculated on, how it’s measured, and some interesting applications of the data. For example, did you know that the CPI can help you discover price trends for eyeglasses, daycare, pet food, lettuce, women’s dresses, and even your music subscriptions?
At the “print” (colloquially, the reference to the old days of analysts and stockbrokers standing around the fax machine waiting to receive the data), there are 21 line items listed in the monthly CPI release. The main brackets are food, energy, commodities, and services (like shelter, transportation, electricity, gas, and medical care). Those things matter to most of us, but they are a bit useless when we try to apply them to our own lives and situations.
I took Abby Cohen’s Global Economics elective at Columbia in January of this year. Abby is the former Chief Investment Strategist at Goldman Sachs. Of all her viewpoints and perspectives, the one that still stands out to me is this.
Averages are fairly meaningless, especially when considered for regionally disparate economies. When we look at “US” data as a whole, it is a blended snapshot of the idiosyncrasies of very different regions.
The generative-AI boom enveloping the Pacific region is definitely not showing up in the Southeast. And when we look at national averages for countries with heterogeneity, it’s hard to see the whole story.
Well, it turns out that the CPI data is also cut by 23 metropolitan areas. So if you live in San Francisco, you can get a better idea of what’s happening in the Bay Area.
Did you know that?
I doubt you knew that. Of the many economics classes I’ve been required to take in my life, no one ever taught me about the 4 Census regions, the 9 Census divisions, or the 2 population-size classes.
No one told me that I could look up the price history for a pound of chocolate chip cookies.
The US government puts extensive effort into measuring price levels. A recent LinkedIn search identified 2,033 employees at the Bureau of Labor Statistics, the governmental agency tasked with keeping tabs on inflation, unemployment, wage data and productivity.
What might all of these employees be up to?
Well, for starters, there are a few variants of CPI.
CPI for All Urban Consumers is the one most commonly discussed in the news. The index contains data all the way back to 1913 just in case you want to feel rich on a relative scale.
CPI for Urban Wage Earners and Clerical Workers excludes households of professional and salaried workers, part-time workers, the self-employed, and the unemployed, along with households with no one in the labor force, such as those of retirees. This subset of the main CPI data represents about 30% of Americans.
Chained CPI accounts for changes in consumer spending behavior by using weights based on expenditures from both a base period and a current period. This formula requires consumer spending data that are not immediately available; therefore, the Chained CPI is published first in preliminary form and is subject to three quarterly revisions.
The CPI includes 200 categories. Just to keep it spicy, the 8 major groups that these 200 categories segment into do not correspond to the North American Industry Classification Systems, other price indexes or other statistics. The eight major groups are food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, other goods and services (like tobacco, haircuts, and funeral expenses… some examples of what might fall into “other” as a catch-all).
There are around 94,000 prices for approximately 80,000 goods and services captured in the CPI. Pre-pandemic, around 60,000 of these price points were obtained by personal visits of CPI data collectors to brick and mortar stores. The rest are captured by phone or website. There are 8,000 rental housing unit quotes used each month to compute the housing component. Rent information is collected by personal visit or phone.
If that sounds like a massive effort, you’re right. It is. Moreover, much of this data is gathered every single month. City data is collected every other month, except for New York, Los Angeles, and Chicago, which as the three largest cities, are gathered monthly.
Because I’m definitely high on the cynicism scale, I must muse that one fascinating hypothetical cause of financial market manipulation would involve price tampering at those CPI polling places. Does that sound like a big-screen blockbuster or what?
Of course, you’d have to have insider knowledge of where the price sampling is done. There are methodologies that ensure fair and distributed data collection. And if you think that the CPI doesn’t reflect where you’re from, well… maybe. But the current sampling protocol ensures representation of 93% of the US population reflected in the 2010 Census.
Since our tax dollars are at work producing this mammoth data set, it’s my view that more of us should be taking stock of it. You do not have to work at a hedge fund trading rates or commodities to gain real-world insights from the information rolled up in the CPI.
You could be using this data to figure out when to feast on steak, what month to buy your holiday ham, or whether it makes sense to upgrade your mattress right now.
Maybe you’re going to eat the steak when you’re hungry for the steak. But based on the outcry over egg prices in January 2023, there are millions of people who do not have the everyday elasticity of wallet to pay drastically more this month. Those folks could be looking at what food items have exhibited price stability and reconfigure their shopping lists accordingly.
If you’re considering a job offer in a different state, you’d be well advised to consider cost-of-living factors that are up-to-date and tell a more comprehensive story from the comfort of wherever your computer screen is than assuming a $200,000 salary in San Francisco is going to be a major upgrade from the $125,000 you’re pulling in from the Chicago suburbs.
So where to begin?
I recommend familiarizing yourself with what data is collected at a US city average, regional, and metro area level. That’s Appendix 7, here.
A related reference is Appendix 6, which helps you figure out what items you can find at the US city average, regional, and metro area level. One generalization here is that individual item prices are available for the 4 regions (Northeast, West, Midwest, and South) and US city average. Energy prices are available for the 23 US cities.
To see consolidated city-level price differences, download Excel news release Table 4, for monthly year-over-year price increases. As of April 2023, Miami prices were up 9%, while Phoenix followed close behind at 7.4%.
News release Table 7 shows us annual data for nearly 400 items. As of April, frozen veggie prices were up 18.9%. Fuel oil was down 20.2%. Major appliances were down 10.4% (go buy an appliance!). Smart phones were down 20%. Here’s a shocking one. Health insurance prices were down 15.8%. That’s a tough one to change, unless you have a qualifying life event. Motor vehicle repairs were up 20.2% but car and truck rental was down 11.2%. You’ll find a treasure trove of data in Table 7, and my favorite aspect is that Column G will tell you the most recent month there was an increase or decrease of the given size. For example, if 20% for car repairs feels steep, the table offers some context. In January 2023, the annualized increase was 23.1%. If you have a non-urgent issue that can wait, maybe hold off.
Lastly, the next CPI release for May 2023, is Tuesday, June 13th at 8:30am ET. The number will be all over the business news, as it always is, but you’ll want to check the BLS Archives shortly after for all their news release tables.