Thursday, March 4, 2010

More On Inflation

As I mentioned in an article not a long time ago, inflation has been a favorite topic for barbarians ever since Rome started debasing its precious metal coins. I just wrapped up my annual inflation tracking survey and I would like to share the results with you, along with some commentary.

I track a number of pricepoints in several general categories: consumables, housing, transportation, education, financial assets, clothing and healthcare. To get an accurate picture of the price changes, it is important to track the same item unit price across for the year: be it a gallon milk, gas or a credit hour at a university. I do not weigh the baskets or the items to get an "alternative" CPI number but will highlight a few points in the data set.

Consumables Section:
Food: of 52 items, 26 were up (range 1.90-50%), and 11 were down. Excluding produce items (those should be looked at over longer cycles due to crop variance), leaders were Domino sugar (up 33%), Bud Light (up 23%), M&M's (21%), pork chops (17%) and Lenders frozen bagels (15%). At the bottom, again ex-produce, ribeye steak (-14%), Crisco vegetable oil (-13%), Cheerios and Corn Flakes (-10%ish). The average increase was 3.30%, and the median 0.95%. I fail to see widespread "food deflation". Both General Mills and Kellogg increased cereal pricing last year so there might be some givebacks there.
Household and personal care, over-the-counter medicine: of 14 items, 4 were up and 1 (Tide detergent) was down. On the other hand, Charmin tissue was up 21% (yes, calculated on a per sheet basis) and Huggies Newborn diapers were up 6.7%. All OTC was flat year-over-year. Tracking prescription drug prices is much harder due to scarcity of information and the changes in various plans year-over-year, so I did not even try: I just looked at various Tylenols, Benadryls and the like.

Transportation Section:
The MSRP on the cheapest 4-door Chevy compact stayed the same. So did a one way Chinatown bus ticket from NYC to Washington DC. On the other hand, nationwide gasoline for the year is up 42%, diesel is up 29% and NYC subway single ride is up 12.5%. There was deflation in new cars for most of the year, between the incentives and the stupid stimulus- which increased the prices for the people looking to buy used-, so you might have benefited from that if you were in the market. However, for most drivers, the people that did not score on a new car, there is inflation.

Education Section:

You always hear that education is getting more expensive, so let's look at it. 2009 was a year of deflation according to the official government CPI. Someone forgot to tell that to the members of the self-congratulatory ivory tower establishment. Harvard increased its tuition by 3.5% and Stanford did by 3.75%. But wait, those are the elite schools, who cares about them? Well, SUNY increased resident tuition by 5.47%, SUNY room and board is up by 5.62%, and the University of Minnesota-Twin Cities, increased its resident tuition by 7.24%. No deflation for these folks, by far. If Obama wants to stimulate education, the affordability does not start with more loans and guarantees, but with taking a serious look at how these pig troughs operate and the financial damage they do to our youths.

Healthcare Section:

Gathering pricepoints on healthcare is very difficult, in part because there is absolutely no transparency in pricing. I used several state-level databases to track state median billed prices for hospital procedures. Of the ones that got updated over the last year, normal newborn costs are up 11%, psychoses hospitalization is up 13% and minor bowel procedure without complications is up 27%. Heart failure and shock billing was down 15% in the one state that I tracked that. You can look at your insurance premium, copays, benefit cuts and figure out what your healthcare inflation was. Nevermind the time spent filing forms and being on hold with some clueless insurance adjuster. Here, like with education, I fail to see deflation.

Housing Section:
Housing is the only segment where there was deflation along all pricepoints that I tracked. The most recent NAR single-family median price is down about 1% versus a year ago: this includes the $8k stimulus effect so the real deflation is deeper. Of course, this only helps if you are in the market. Rents (tracked 2-bed apartments in 3 major cities via rentbits) are down in the teens for all three cities. Again, helps only if you move. Interestingly, the national average kWh electricity and cf of natural gas are both down, 2 and 11% respectively. However, this does not mean that your bills are down: the increase in delivery charges and other fees probably gobbled up the cut on the actual energy units.

Clothing Section:
Clothing is not easy to track, either, because fashions do change. So I had to stick to the basics from one vendor here, WalMart, to have a consistent year-over-year read. 6-pack boxers were up 0.3%, cheapest jeans were up 37.5%, single t-shirt, up 22%. Basic work shoes were down 7%. Again, I do not see deflation here. I am sure there are "good sales" with deep markdowns here and there, but what I am trying to do is have something that can be compared consistently year over year.

Assets Section:
On to everybody's favorite part, assets. Well, assets also got very expensive over the last year. A big chunk of that is timing, of course, as we had a major market low last year at around this time. So what has been happening? The S&P is up 30-40%+, gold 20%, oil about 100%, copper 130%, DBC (a wider commodity measure) 21%. 30-year mortgage rates are down marginally. CD yields are down 17% for the 3-year. What does this mean? This means a very strong asset inflation over the last year. If you view your savings as an "expense"- which it is in a way- then your dollar this year will not go nearly as far as it did last year. Not when measured against gold, oil, or stocks. A big part of Greenspan's failure was ignoring asset prices in his view of inflation. Do not do that: there is rampant YoY inflation in financial and some hard assets. Whether this is due to them being mispriced a year ago or due to money supply growth or something else is obviously a matter of discussion. Also, if you were all-in last March, asset inflation is actually good for you.

So, there you have it. There is no deflation if, over the last year, you: ate, used toilet paper, drove a car, saved/invested, used healthcare or education, or bought clothing. There was deflation if you moved to a new apartment, bought a new car or a house. I already wrote about "personal rate of inflation" a few weeks ago: this basket might not be anywhere near your basket, but I think it is a wide enough data set for one to get at least a binary answer as to whether there is inflation, despite the official statistics.

(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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