CPI, Your Way

By: Michael Ashton | Fri, Jan 22, 2016
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For those of you on the East coast, looking for something fun to do with your weekend between shoveling turns, I thought this might be a good time to introduce our "personal CPI calculator."

Sounds exciting, right?

It is an old idea: one of the reasons that people don't like the Consumer Price Index is that no one is an "average" consumer. Everyone consumes more or less than the "typical" amounts; moreover, everyone notices or cares more about some costs than they do for others. It turns out that for most people, the CPI is a decent description of their consumption, at least close enough to use the CPI as a reference...but that answer varies with the person.

Moreover, CPI turns out to be a very poor measure for a corporate entity, which cares much more about some costs than others. Caterpillar cares a lot about grain prices, energy prices, and most importantly tractor prices, but they don't care much about education. (This is one reason that corporate entities don't issue inflation-linked bonds...it isn't really a hedge for them. Which is why I have tried for years to get inflation subindices quoted and traded, so that issuers could issue bonds linked to their particular exposures, and investors could construct the precise exposure they wanted. But I digress.)

The BLS makes available many different subindices, and the weights used to construct the index from these subindices. Last year, the Federal Reserve Bank of Atlanta published on their macroblog an article about what they call "myCPI." They constructed a whole mess of individualized market baskets, and if you go to the blog post they will direct you to a place you can get one of these market baskets emailed to you automatically every month. Which is pretty good, and starting to be what I think we need.

But what I wanted was something like this, which has been available from the Federal Statistical Office of Germany for years. I want to chart my own CPI, and be able to see how varying the weights of different consumption would result in different comparative inflation rates. The German FSO was very helpful and even offered their code, but in the end we re-created it ourselves but tried to preserve some of the look-and-feel of the German site (which is itself similar to the French site, and there are others, but not for US inflation).

Here is the link to Enduring's "Personal CPI Calculator." I think it is fairly self-explanatory and you will find it addicting to play around with the sliders and see how different weights would affect the effective price inflation you experience. You can also look at particular subindices, through the "products" button. Some of these are directly BLS series (but normalized to Jan 1999=100), and some are collections of subindices that I did to make the list manageable.

I think you'll find it interesting. If you do, let me know!

 


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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