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..

http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?inflation-since-2000.gif

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

Taking a longer view of CPI trends

Doug Short has now posted some longer views of the Consumer Price Index CPI to complement those published by the Bureau of Labor Statistics (BLS).  This provides additional context to help us think about what the latest numbers mean.

Here's his view of the data since 2000 with the shaded area from 1.75% to 2.00% representing the Core (CPI less food and energy) target rate for the Federal Reserve. 

http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?CPI-headline-core-since-2000.gif

UPDATE 20 September 2011

With the benefit of this 12 year view, we can now put the 1 year view from BLS into better perspective.  For example, we can see the headline value of 3.7% (in red) is now back up into it's 2004-2007 range following a 2 step process which looks like a reversion to mean process.  Will it overshoot? we can't tell?  We also see that the CORE CPI (in blue) looks like it is reverting to the mean of the past 12 years.  

And here's Doug's  really long view since 1957.

http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?CPI-headline-core.gif

UPDATE 20 September 2011

In this much longer view, some further nuances come into view including the obvious 3 peaks of inflation in 1970, 1975, and 1980, the much lower inflation rates from 1960 to 1965. We can also see how the Headline CPI and the Core CPI are more likely to diverge from each other after 1985.  We also see the CORE rate showing a steady decline since 1990 that was not matched by the Headline CPI.

Doug also has some charts showing the PCE (Personal Consumption Expenditure) Index and the Core PCE Index as shown below since 2000.:

http://advisorperspectives.com/dshort/updates/CPI-Headline-and-Core.php

Check out Doug's original post for additional details.

We will keep our eyes open for other alternatives view of these metrics that get posted today.

Michael O'Hanlon Year over Year Iraq Update

Here's a recent Michael O'Hanlon New York Times article which includes year over year table showing some 17 trend metrics from Feb 2004, year by year through Feb 2007.

The State of Iraq: An Update:

We plan to graph some of the more interesting of these trends in a future post to see what patterns we can discover that may be hiding in the data once we have transformed the posted table into a more readily reusable format for further investigation and discussion.