Tuesday, January 26, 2010

So What Was Your Stealth Inflation Last Year?

 This article was also a link on The Reformed Broker.
Special greetings to Sempra Energy Trading (Darien, CT), where someone really seems to like Barbarian Capital today.

So what was your stealth inflation last year? No, this is not a pick-up line from Argentina circa 2001. One has to be much more eloquent with the beauty queens from the land of Bife de Lomo and deep-hued malbec, as SC Governor Sanford can attest.
But since inflation has been a favorite topic for barbarians ever since Rome discovered it could pay more bills by reducing the silver content of the denarius, I thought I'd share some observations on what I call “stealth inflation”: price increases that are not likely to be captured by the official stats because they are household-specific and, yet, take money out of your pocket.

Most people simply accept the official CPI data, may be some even read into the first paragraph under the headline. For 2009, the headline number was negative 0.9%. But what does this mean to you personally? Is it meaningful? Probably not, unless your income is linked to some COLA index. As you probably know, the CPI tracks a basket of goods over the year, and does some adjustments if the price of one item becomes too high (i.e. they assume that if prices are high Jews and Muslims switch to pork from beef, or that Coke drinkers switch to RC Cola). The CPI does not track your basket of goods and services, nor does it track some other pertinent factors. In a couple of months, I will (probably) publish sample basket data that I collect but until then, here are a few locations where I have noticed “stealth” inflation.

Healthcare. Of course, “everyone” knows that healthcare costs outpace CPI. But here is something I have noticed that is not easily quantified. While your premiums certainly went up, did your co-pays and deductible also go up? Mine did. There are also reductions in lifetime maximums for certain conditions, as well as complete elimination of coverage for other conditions. These changes most certainly mean that you buy less healthcare coverage for your dollar, but they cannot be quantified within a basket of goods.

An additional non-quantifiable factor is if your doctor quit accepting your insurance, or started demanding full upfront payment, sticking you with the reimbursement waiting time. After all, MDs do get tired of waiting for three months to get paid 20% of the “list” price. Is there a price tag to this? Yes. Is it captured by CPI? No.

Transportation. Most places in the US one needs a personal motor vehicle to get around. While the costs of owning and operating one are known to most drivers (gas, maintenance, car loan, insurance) what happened to your registration fee this year? I am willing to bet it went up by multiples of CPI as most states are really scraping the bottom financially. Another stealth inflation factors are tolls: the Triborough Bridge here in NYC is now $5.50 each way, up from $5. It was also renamed the RF Kennedy bridge: quite appropriately for a taxing authority. I wish they’d sell the naming rights to Pepsi or something, instead of feed into this personality cult towards the descendants of Boston’s biggest bootlegger.

Speaking of NYC, the highly visible and politically important single ride is up 12.5% this year, while two train lines and several bus routes are likely to be eliminated (so you pay more with your time). Of course, the MTA really soaked the “rich” who buy the monthly passes.

Housing. Even if you own your home outright, what happened to your association fees? Property taxes? Especially if you consider property taxes vs. services provided: chances are you are getting less services locally per dollar. The only deflation in the housing market applies to people either actively shopping in the areas with the biggest decline, or to mobile renters who do not mind changing apartments every year. The alleged housing “deflation” is not helping out most households, in my view.

Stealth tax increases. Again, not likely to be captured by the regular CPI measures, but one or more of these may have happened to you in the last year. Remember that if the same item takes more money out of your pocket, this is inflation, whether the CPI thinks so or not. If you are a roll your own cigarette smoker, your federal excise tax went up 2,000% last April. If you were a saltwater fisherman in the state of NY, you now need a license, which is not free of course. Same with professional licensing fees and some permits. Are some items in your basket now a taxable sale in your state, when last year, they were not? Take a look at your utility bills: are there a bunch of little surcharges that keep increasing every year? I am sure you can come up with a load of examples on your own.

So, my message is this: Do your own thinking. CPI is a data point that may or may not have great relevance to you personally. At best, CPI presents an incomplete (and allegedly over-manipulated) picture of the real price levels across the economy. More importantly, if you are a businessman, do not price your products or services based on CPI: your finger should be on the pulse of your own costs, customers and competitors.

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

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