Reclaiming Common Sense

We are experiencing commodity deflation and service inflation, again.

It would take too long to list all of the articles that have reported that we are experiencing commodity deflation and service inflation. It would take too long to list all of the articles this column has written regarding shelter inflation being steady at roughly 3%. It would also take too long to list all of the articles that have pointed out to the number of times that Health Insurance has been experiencing inflation at a higher rate that he total inflation . What was recorded and what was reported in the December CPI Inflation Report?

What is inflation? Simply put, inflation is paying more money for the same good or service. The annual rate of inflation can be measured a number of ways. There is the A"All Urban Consumers," rate of inflation, the "Urban Wage Earners and Clerical Workers" inflation, and the "All Urban Consumers Chained CPI" form of inflation. The "headline" value is the "All Urban Consumer" value. The headline number was 1.9%. This was not quite accurate. It is a seasonally adjusted rate of inflation.They also quoted a -0.1%rate of inflation, also called deflation, month to month

Did we have 1.9% inflation or 1.77% inflation or 2.02% inflation. If you look at the CPI Index for the CPI-U Urban wage Earner data, non-seasonally adjusted, then we had an inflation rate of 1.77%. If you use the data from last year's December CPI report and use the distribution of the basket of goods then we actually had inflation of 2.20%.

We had Shelter Inflation, Health Insurance Inflation, Service Inflation, and Commodity Deflation. Again. We saw the most inflation in Household Operations, Health Insurance, Water, Sewer, and Trash Collection (WST,) and Shelter.  We saw deflation in Education and Communications Commodities, Recreation Commodities, Medical Commodities, Apparel, and Energy. The data table can be found here.

No Deflation. The predecessor to this  column has used the CPI-U, or Urban Wage and Clerical Workers" value to show that we had ten months of deflation during 2015. We have had two periods of deflation since 1980. The first happened during 2009 and the second one happened during 2015. One month of seasonally adjusted deflation is not deflation. It is a blip.

The Phillips Curve is broken. The Phillips Curve is an Economic theory that you either have High inflation and low unemployment or low inflation and high unemployment. The problem is that the current non-seasonally adjusted unemployment rate does not factor in the changes in participation since the Great Recession. The participation rate had slid with the unemployment rate. The effective unemployment rate, or U-7, is closer to 10%. The Phillips Curve is actually a scatter plot of Unemployment versus inflation.We are on the low end of the curve right now - Low inflation and Low Unemployment.

This inflation data is good news. We are experiencing wage inflation and commodity deflation. It is unfortunate that people are ignoring the health insurance inflation. I also continue to be amazed that they calculate our monthly spending on health insurance at only 1.08%. Shelter inflation is stable. This is good for renters and homeowners. People who want to buy a home may want to jump into the market before shelter costs spike.

It's the economy.