August 2012 Index

September 27, 2012

Households Feel the Squeeze of Rising Inflation and Falling Wages

The new annual report from the U.S. Census Bureau on income, poverty, and health insurance (published this month) shows a nearly 9 percent decline in median household income from its all-time peak in 1999, and registers a 1.5 percent decline in 2011 alone. Of course, these figures are adjusted for inflation using the Consumer Price Index (CPI) — an index which, as we point out in our frequent Guild Basic Needs Index™ articles, is carefully constructed to understate the rising cost of living. CPI does little to measure the price increases American families are faced with as they acquire their basic needs — in fact, in the official CPI reports, the Bureau prefers to strip out food and energy from the index in order to provide a less volatile “Core CPI” number.

Over the last five decades, the analytical methodology used to calculate the CPI has shifted several times, and the weight and numbers of items included in the index have changed frequently. We along with others have no doubt that these changes have been instituted to improve public sentiment about the inflationary environment. This benefits a wide spectrum of institutional actors, both public and private. If data were selected and analyzed today with the methodology used in past decades, official CPI figures would show a far higher rate of inflation. As we discussed in the last GBNI™ commentary, wages rising in nominal terms have fallen far short of the rise in cost of basic needs for food, clothing, energy, and shelter. This trend is continuing, and is visible even in the official Census Bureau figures — but the contrast between actual costs of basic needs and income is more stark when income is compared to the GBNI™.

September 13, 2012

Working Americans are not Earning Enough…

The U.S. labor market was described by Federal Reserve Chairman Ben Bernanke as a “grave concern.” The concern he is referring to the lack of job creation. We agree that too many people are unemployed, but that is not the only concern. For years, the average wage earned by those who do have a job has not been keeping up with the rising cost of living.

Not only is job creation slow, the types of jobs being created in this recovery have lower than average wages. In last Friday’s week’s Bureau of Labor Statistics (BLS) unemployment report, the data showed that the average hourly wage dropped by a penny in August. The average wage per hour for a worker in the private sectors is about $23.52. According to a recent report from Wells Fargo, a disproportionate percentage of the private sector jobs that have been created (40 percent of jobs created versus 29 percent of total jobs) are in fields whose average wage is closer to $15 per hour — such as retail, leisure and hospitality, temporary staffing, and home health care.

…to Keep Up With the Rising Cost of Living

The average wage in America has gone up about 45 percent since January 1, 2000, a pace much slower than the over 84 percent increase in the cost of basic essential needs.

Each month, the U.S. government tells its citizens how much prices have risen or fallen during the previous month and for the past twelve months. The Consumer Price Index (CPI) that they use contains data collected from spending surveys given by the U.S. Bureau of Labor Statistics. The basket of goods contains prices of necessities and discretionary spending items. It is not a cost-of-living index, but a consumer spending index.

As we have been saying for some time, a key problem with using the CPI to track the rising cost of living is that the basket of goods is represented is periodically altered. The BLS adjusts the weighting of the components, and also smoothes the data based on seasonal patterns. Such tinkering usually results in an understatement of the inflation rate. In our opinion, it creates an unreliable, misleading cost-of-living index.

For our newer readers, we have created a simpler index for tracking the price changes of basic, essential needs that tend to flow through the economy and touch everybody’s wallets. The Guild Basic Needs IndexTM (GBNI) measures the changing prices of components in four essential living expenditures: food, clothing, shelter, and energy (used for cooking, heating, and transportation). The categories and components, and their values within the GBNI, are fixed. There is no seasonal adjusting, smoothing, or replacing of components.

The data will be published twice a month in this letter, and we offer the accompanying charts that compare the GBNI to the CPI data. As you can see, the prices of basic, essential needs are much higher (and more volatile) than the smoothed, manipulated CPI data since 2000.

The bottom line is that Americans’ standard of living is caught in a vice between rising prices and stagnant wages. It is incumbent on savers and investors to protect themselves from the squeeze play.