Thursday, September 15, 2011

A Unique View of CPI from Doug Short

If you want to look at charts that help you understand what's going on in our economy, Doug Short's Updates is a great place to start.  His charts are crisp, clear, concise and easy to understand and he provides a wide multidimensional view of many potentially inter-related metrics all launching from his Update landing page.

Here is one of his charts that gives a unique view to the CPI data that I have not seen expressed elsewhere and is worthy of emulation and further extension..
In the previous two posts, we showed year over year data which is a traditional and well respected method for smoothing out the month to month variability.  But as we all know, inflation is cumulative and so it makes sense to look at year over 2 years, year over 5 years, or year over 10 years changes and compare those to how our earning power has changed over that time period.  E.g. for those on fixed income in retirement, the longer view translates more directly to the degree to which inflation will impact their lives.  A 4 percent difference over the year will have a small effect.  A 35% change over 10 years will have a huge impact for anyone whose income is not keeping up.

Doug's breakdown of the component changes is also highly revealing. 

UPDATE 20 September 2011 at 3:00 PM
Of all the published charts I found online covering the latest release of CPI for August 2011, I found this chart from Doug Short to be by far the most valuable & useful by itself, while inspiring further questions encouraging the viewer to dig deeper.  The big advantages of this chart compared to the others are that
  1. it shows the cumulative impact of inflation over an almost 12 year period
  2. it breaks down the overall cpi effects into a series of selected and interesting sub-components which show a wide range of cumulative change during this time period.
  3. it reveals Doug's thinking about which of the subcomponents he things might be the most important to pay closer attention to (Energy, Medical Care, and Tuition)
  4.  And with a little thought it lets us get a hint about how the average headline cpi cumulative increase of 34.2% came about from a weighted average of the three (left most) componentss: a core cpi reading of 26.3% an energy reading of 124% and a food reading of 37.7%.  To me this showed up the weakness of focusing on either the headline cpi number or the core cpi number whether by themselves or even when combined becasue doing so leaves the cumulative impact of energy and food invisible to the viewer.
For me, this chart inspired me to dig deeper because it was crystal clear that headline cpi value cannot be understood unless you get a feel for its key components while looking at the cumulative change.  This letter eventually to the series of cumulative cpi charts we created in our subsequent posts: 

A 20 year cumulative view of headline cpi from FRED - showing cumulative readings of headline CPI by itself for 5, 10, 15, and 20 years periods

Drilling down into CPI 20 year trends - showing a set of interesting sub-components and their 5-20 year cumulative history

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