The dollar’s purchasing power drops sharply to an all-time high, but it’s much worse than the CPI shows

If the homeownership component of the CPI mirrors the Case-Shiller Home Price Index, the CPI would go up 5.1%! Not to mention the prices of new and used vehicles, which I’m talking about nonetheless.

By Wolf Richter for WOLF STREET.

The Consumer Price Index jumped 0.6% in March from February, the largest month-over-month increase since 2009, according to the Bureau of Labor Statistics today, and was up 2.6% from a year earlier, after rising 1.7% in February.

The infamous base effect, which I discussed last week in anticipation of what’s to come, was partly to blame: The CPI fell in March of last year, which created a base lower for today’s annual comparison. In the 13 months since February of last year, which eliminates the base effect, the CPI rose 2.3%.

  • The prices of durable goods continued to rise, increasing by 3.7% compared to a year ago (purple line);
  • The prices of non-durable goods, which are mainly food and energy, including gasoline, jumped 4.2% (green line);
  • The prices of services increased by 1.8%. That’s the big problem, which accounts for two-thirds of the overall CPI. It is dominated by a measure of homeownership costs, which, ridiculously, as house prices skyrocket, has only climbed 2.0% from a year ago. More on that in a moment.

Consumer price inflation means the loss of the purchasing power of the consumer dollar, and hence the loss of the purchasing power of dollar-denominated labor. And purchasing power thus measured fell 0.5% in March from February to a new all-time low, according to BLS data. Given the Fed’s insistence on perma-inflation, the dollar’s purchasing power continues to decline from a record high to a record low:

But wait, it’s much worse …

The three main consumer price indexes – CPI of durable goods, non-durable goods and services – over the long term, give a fascinating picture of what is happening with the CPI itself. These indices, shown below as an index value, and not as a percentage change from year to year, were set at a value of 100 in 1982-1984. Since:

  • The services CPI has risen steadily (red line below).
  • The non-durable goods CPI rose until around 2012, then hovered in the same range, but now appears to be outside that range (green line below).
  • Durable goods The CPI peaked in 1996 and has trended downward since then, even as real prices for most durable goods, especially big ticket items like vehicles, have jumped. The recent increase in the durable goods CPI barely registers in the long-term decline (purple):

Services CPI held back by homeownership costs, which have skyrocketed in real life.

Housing costs – rent and homeownership costs combined – weigh about a third of the overall CPI and about half of the services CPI. Primary residence rents (representing 7.8% of the overall CPI) rose only 1.7% in March compared to a year ago. In fact, rents have jumped in many markets and plunged in the more expensive markets. So the national rent increases of 1.7% could be close.

The problem with the CPI is the homeownership component, the “home owner’s equivalent rent,” which accounts for 24% of the overall CPI. It is based on surveys of homeowners’ estimates of the value of their home. rental for. And that “owner-equivalent rent” CPI in March rose only 2.0% year-over-year (red line).

But the Case-Shiller Home Price Index, which is based on the pair-selling method and has a better understanding of the reality of the housing bubble, climbed 11.2% year-over-year. (purple line).

Had the homeownership component of the CPI increased in line with the Case-Shiller index, the headline CPI would have jumped 5.1% year-over-year – nearly double the rate published by 2.6%!

And just when you thought it couldn’t get any worse …

The long-term decline in the durable goods CPI is of course a mirage in terms of the real prices paid for durable goods – anyone who has ever paid for durable goods knows this.

This is due to the increasingly aggressive use of “hedonic quality adjustments”. As a product is improved and the price increases, this price increase is then attributed to the additional costs of the quality improvements, and is therefore excluded from the CPI, because the CPI is supposed to follow the trend. loss of purchasing power of the dollar, and not the costs of product improvement.

The theory is that you pay more because the product is better. This is true for consumer electronics and motor vehicles, which have improved dramatically in all respects over the past 20 years. But the aggressive application of hedonic quality adjustments leads to bizarre results, including the decline in the long-term CPI for durable goods that weighs down the overall CPI.

The CPI for new vehicles – even as the largest dealer group in the United States brags to Wall Street about the record prices and profit margins it gets – has not changed at all in the past two month and only increased by 1.5% compared to last March. year, and has barely increased since the mid-1990s:

For reality check and for your amusement, here is my annual F-150 and Camry Price Index, representing the MSRP of the top-selling truck and top-selling car in the United States from model year 2021 to model year 1989. year. The green line shows the annual CPI of new vehicles:

The shock and hedonics of used vehicle prices.

The used vehicle CPI is also subject to aggressive hedonic quality adjustments, but there are times when prices skyrocket so quickly that they even exceed hedonic quality adjustments – and it took a long time. .

The used vehicle CPI rose 0.5% in March from February, after four consecutive months of month-over-month declines. These declines were likely due to hedonic quality adjustments that eventually caught up with prices that went haywire from July of last year and soared historically in the vast liquid wholesale market as well as the retail market. .

Compared with March of last year, the used vehicle CPI was still up 9.4%, after double-digit price increases at the end of last year. The chart shows this peak which peaked in October of last year and has since given up on giving up some of the earlier gains. But this recent drop has not been confirmed by actual market prices, which remain scorching.

It should also be noted that despite the surge, the used vehicle CPI has remained below levels of 20 years ago, even though actual used vehicle prices have skyrocketed. The March 2021 index was 5.4% lower than the index value in March 2001. That’s the power of aggressive hedonic quality adjustments:

And there is more inflationary pressure in the pipeline as companies report soaring costs and are able to pass those rising costs on to their customers. Read… Producer prices explode

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