Cutter Family Finances: Where"s The Beef?
By: JEFFREY CUTTER, May 15, 2014
Last week I traveled to Des Moines, Iowa. It was a great opportunity. I was asked to speak to a group of financial advisors on effective financial strategies to use in a challenging financial environment. While I hate being away from Jill and the kids, I like flying alone because I am able to read a lot without interruptions.
Jill called on my way home from the airport, to ask me to stop at the supermarket. It was the first nice day in months and she wanted to cook some steak on the grill. Usually, when the nicer weather arrives we grill more often, but maybe not this year.
When I got to the cooler at the supermarket, I looked quickly at the prices for a package of steak and thought the butcher made a mistake pricing them. So I asked the butcher if they were priced correctly. He nodded his head yes and said that prices for meat have risen over 20 percent in a year.
Hmm. This can’t be! I had just read the latest report from the Bureau of Labor Statistics (BLS) on my flight two hours before getting to the grocery store. The BLS is the governmental agency that publishes the Consumer Price Index (CPI) report. Those folks stated in their report that inflation is at 1.5 percent for the year. So, there must be a problem with the calculation, right?
Oh, there is... it is the way they calculate the number.
There’s no question that beef prices have shot up dramatically in the past year. Price increases are driven by disease, drought, and demand. Those three factors together have resulted in significant price increases for meat.
While you and I see this hitting our budgets, it is not clearly shown in the inflation numbers because Uncle Sam has decided we do not buy enough beef for it to matter.
Hmm. Tell that to the folks who are retired and on a fixed income. Or to families like mine who spend almost $1,000 a month on groceries.
So, here is my “beef” with this situation. The CPI calculation assumes that only 0.51 percent of the average American household budget is spent on food. This is where the problems begin.
One of the functions of the BLS is to determine how our costs change every month across a broad category of spending. However, because they do not weigh different items of spending appropriately in their calculation of the CPI, it is meaningless.
I would like to see a measure of inflation that shows us how our daily lives are actually affected, which means weighing items like food and energy more than other items. We all eat; me sometimes too much. Most of us also drive cars and heat our homes. So, I would venture to say that most Americans spend a fair amount of their budgets on both food and fuel. Therefore, these items, food and fuel, would seem to me a logical measure of inflation. But the BLS also tracks, and includes in CPI, other items such as TVs, lamps, appliances, and even clocks, to name a few.
It adds price changes in all of these categories to the mix when trying to determine how our daily cost of living has changed. Lucky for us, each of these items has fallen in price over the last 12 months.
According to the BLS, appliances make up 0.289 percent of spending, and have fallen 3.3 percent in price over the last year. Clocks, lamps, and decor items comprise 0.26 percent of spending and have fallen 7 percent, while TVs, which make up 0.159 percent of spending, have dropped more than 12 percent.
That all sounds great, however, the problem is that each of these categories represents discretionary spending that can be put off until another day, if we want them at all.
You see my problem here? Even if I do not eat steak, food items clearly represent a greater portion of my spending than TVs. But they are lumped together when calculating the cost of our living. I wouldn’t care if the CPI was just another set of meaningless numbers released by another faceless government agency, but it’s not.
This number is used to determine cost-of-living adjustments for Social Security, wage adjustments and other fixed income benefit plans. If the CPI understates the increasing cost of food because the same statistic also includes the change in the price of TVs, well then, we have a problem. Even if someone bought a TV last year, and got a heck of a deal, that doesn’t do the rest of us any good. Last I checked, I cannot use my A1 sauce on my TV.
Here’s a thought. Wouldn’t it be better to use inflation statistics that track different areas of life; perhaps discretionary items like TVs versus non-discretionary items like food and energy? How about monthly purchases versus those purchased once a year, or contracted payments (cars and rent) compared to variable payments. Now that would be helpful!
Nope. The BLS went down this road many years ago. They began computing the CPI-E, which was an index meant to track the cost changes for items that retirees typically buy.
The BLS stopped doing this. Probably because showing that retirees were getting hammered would have led to demand for greater cost-of-living adjustments in Social Security payments.
Instead, the uninformed are left with Uncle Sam telling them everything is wonderful in Mayberry and inflation is historically low. Not you, Cutter Family Finance readers, you now know this combination of categories and numbers that are all boiled down to one figure—which tells us just about nothing.
Be vigilant and stay alert, because you deserve more.
Jeffrey Cutter, CPA, PFS is the managing partner from Cutter Financial Group, LLC (www.cutterfinancialgroup.com) which provides private wealth and investment management through low risk, low volatility successful strategies because you don’t have to lose in order to gain. He can be reached at firstname.lastname@example.org.
Investment advice is offered by Horter Investment Management, LLC, a Registered Investment Adviser. Insurance and annuity products are sold separately through Cutter Financial Group, LLC. Securities transactions for Horter Investment Management clients are placed through Pershing Advisor Solutions, Trust Company of America, Jefferson National Monument Advisor, Fidelity, Security Benefit Life, FC Stone, and Wells Fargo Bank, N.A1. http://www.bls.gov/cpi/cpid1403.pdf
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