Disposable income falls as prices jump, data show

Marketwatch ^ | 3.28.11 | Greg Robb

[Free Vulcan]

U.S. PCE inflation up 0.4%, most since July 2008; spending up 0.3%

Real disposable income declined in February as consumer prices jumped by the largest amount in 2 1/2 years, the Commerce Department reported Monday.

Economists said the data show that higher prices for gasoline is starting to take some of the steam out of the economy.

The personal consumption expenditure index, which Federal Reserve officials say is a more accurate gauge of inflation than the better-known consumer price index, increased 0.4% on the month, the largest monthly gain since July 2008.

[American Quilter]

...if gas prices hit the projected $4.50/gallon. If they go over $5/gallon...

I have a round-tip commute of 52 miles (groan).

[CommieCutter]

So the spending only increased because everything went up? Ha!

[DannyTN]

Captain Obvious explains Economics!

[algernonpj]

The chart is from Shadow Stats. You can read on the home page how John Williams, a private consulting economist, out of necessity became a specialist in government economic reporting.

I got interested in Shadow Stats when I found that Williams chart more closely reflected reality for me and friends who ran small businesses that the government stats.

There are links to various primers including the CPI, Unemployment, & GDP.

SS Primer on CPI

In addition to separating out the cost of food and energy from core inflation, there are several biases understating inflation that have been built into the CPI.

Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment in relation to inflation, and to be able to accurately measure how the standard of living one can afford on a given income stands in relation to inflation.

In the early 1990’s the ‘substitution effect’ was introduced as a result of the Boskin Report which deemed the fixed basket of goods was irrelevant. For example if the price of steak went up ‘too much’ the price of hamburger, chicken, or Spam was substituted. The CPI morphed from the cost of maintaining a certain standard of living to the cost of maintaining a declining standard of living.

Information about using substitution is found here (Boskin Commission Report). The example used is chicken vs beef.

The actual steak vs hamburger is found here (Panel Sees a Corrected Price Index as Deficit-Cutter). In the same article you'll see references to substitution and quality change.

Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting which automatically gives a lower weighting to CPI components that are rising in price, and a higher weighting to those items dropping in price. Weighting works in conjunction with the substitution effect.

Hedonics is my personal favorite. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from modifications to those goods, e.g. if you pay more for gas because of federally mandated additives, the additional cost does not count toward the CPI because of your increased pleasure in breathing ‘cleaner air’.

A Hedonic Price Index for Airline Travel:

Re: Hedonics and Quality Adjustment - QUALITY ADJUSTMENT FOR GASOLINE

"A quality adjustment has been made to gasoline prices used in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent. In those areas required to sell the reformulated gasoline, virtually all of the January price quotes were for reformulated gasoline."

From the 1999 Economic Report of the President: " reason for the slowing of reported price indexes has been methodological changes to both the CPI and the indexes used in the national income accounts ".

Intervention analysis is an enhancement to seasonal analysis; it tones down severe upswings.

John Williams welcomes questions at his web site.

[gleeaikin]

Yes, gasoline prices are a serious problem. Not only do they affect our travel, but also the cost of operating machinery to produce our food. The link below points out that the main cause of escalating gas prices is not shortage of supply, buy runaway ETFs. Companies like Goldman Sachs are pushing sales of these oil ETFs to everyone. The solution in the article, which I agree with, is to restrict large purchases of commodity futures like oil to actual users like airlines and fuel companies. NOW IS THE TIME TO LOBBY YOUR CONGRESSCRITTERS TO DO JUST THAT. With such a limitation, oil would drop way down and our economy would blossom.

http://www.dailyfinance.com/story/the-real-reason-gas-prices-are-soaring/19893347/?ncid=webmail

[Marine_Uncle]

Just further verifies what a number of of have been saying for the past six months.

[gleeaikin]

If after reading my link, you wish to contact your CONGRESSCRITTER, phone 202-224-3121 and ask for the Congressperson or Senator of your choice. If you don’t know who that is tell the operator where you live and they will identify the right rep for you. Also, if you have the name, you can Google and find contact information there.

[RetiredArmy]

Both being retired, with gov SS pensions, IRA pension and military retired pension and no hope of pay raises on two of those, we have cut back about as far as we can. I think if I cut off the power, dump the water company, disconnect the phone, quit eating, quit paying my house payment and taxes, then we might break even this year. Otherwise, we are gonna have a few problems.

[Marine_Uncle]

Thanks. In my case all congressmen/women are socialist. I live in hard core Stalin land, Philly.

[no-to-illegals]

restrict large purchases of commodity futures like oil to actual users like airlines and fuel companies

Not sure this will work. Why not issue permits and allow drilling and mining of our resources? Speculators will dive out of the market in six months or less is my opinion, and when speculators jump out, price should also dive downward. I guess I am a fool for wanting to see Americans have jobs. Drilling and mining would create jobs....imo

[SunkenCiv]

Thanks Free Vulcan. OPEC’s fault.

[de.rm]

The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah Mcgrath Goodman

She was on Book tv (C-span) repeatly this past weekend spilling all the beans.

Just get the book.

[de.rm]

http://www.amazon.com/Asylum-Renegades-Hijacked-Worlds-Market/dp/0061766275/ref=ntt_at_ep_dpi_1

[Cementjungle]

And its a vicious cycle. Folks are cutting back everywhere they can... fewer dinners out, cutting back on phones, tv programming, movies, vacations, and everything else that can be cut. This of course hurts people selling stuff... and the cycle continues.

[SouthTexas]

starting to take some of the steam out of the economy

They've basically banned coal, then oil, and working on nuclear, steam was our last hope!

[no-to-illegals]

Sometimes books do not address the issue. This book may address the issue, if the democRATS are blamed. Does the book blame the democRATS? If so I will consider reading.

[Uncle Miltie]

That just gave me a visceral “Oh Sh*t” moment.

I’ve heard the CPI is cooked, but this guy destroys it as a figment of a federal kleptocrat’s wildest imagination.

Wow.

Just another reason to hate bonds.

[de.rm]

I'm sure there are Demonrats in the pits, she points out with alacrity that the very evil art they are practicing was outlawed in the past for upsetting markets.

Like the Glass Stegal debacle & the Dick Cheeney reversing the clean water act for gaswells, the dirty cat keeps getting out the bag and causin' trouble.

When you get the cat in the bag you should throw it in the river with a rock!

[RKBA Democrat]

“Yes, gas will hit $5.00 this summer. Count on it.”

Is that all? A bargain I say. Try $6-7 by Christmas.

[no-to-illegals]

Is the dirty cat not controllable without killing the cat?

There are so many regulations on the environment, therefore little to nothing takes place to produce energy efficiently and cheaply. Nuclear power is safe, yet the fission waste is only stored at the plants making those plants more dangerous in the even of earthquakes or other calamities. Why not open Yucca Mountain and store the waste properly? One can only blame democRATS.

If no mining or drilling takes place, eventually the energy is still in the ground and nobody has energy. This will not allow economic development, nor create jobs, should this practice continue. No energy, no economic engine. Therefore again, one has to blame democRATS.

Someday maybe the majority of Americans will wake up. Till then, Americans are being fooled by fools. May 2012 remove more of the fools.