Inside The Consumer Price Index: November 2020

The Ominous Shadow Category of Energy

The BLS does not lump energy costs into an expenditure category. Instead, it includes energy subcategories in Housing in addition to the fuel subcategory in Transportation. Also, energy costs are indirectly reflected in expenditure changes for goods and services across the CPI.

The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 6.706 out of 100. In other words, Uncle Sam calculates inflation on the assumption that energy in one form or another constitutes 6.7% of total expenditures, 3.4% goes to transportation fuels — mostly gasoline. The next chart overlays the highly volatile Energy aggregate on top of the eight expenditure categories. We can immediately see the impact of energy costs on transportation.

Add Energy

The next chart will come as no surprise to families footing the bill for college tuition. Here we've separately plotted the College Tuition and Fees subcategory of the Education and Communication expenditure category. Note that the steady staircase in this cost matches the annual cost increases in late summer for each academic year.

Add College Tuition

The tuition series in the chart above, however, is overly dramatic. The BLS calculates tuition based on the sticker price, which is higher than many, if not most, households pay. A New York Times piece, How the Government Exaggerates the Cost of College, explains that the government data ignores financial-aid grants which substantially lowers the real cost to consumers. For a more accurate view on college tuition, see the statistics at the College Board website.

Core Inflation

Economists and policymakers (e.g., the Federal Reserve) pay close attention to Core Inflation, which is the overall inflation rate excluding Food and Energy. Now this is a somewhat peculiar metric in that one of the exclusions, Energy, is an aggregate that combines specific pieces of two consumption categories: 1) Transportation fuels and 2) Housing fuels, gas, and electricity. The other, Food, is a major part of the Food and Beverage category. Note that "beverage" for the BLS means alcoholic beverages. So coffee and Coca-Colas are excluded from Core Inflation, but Budweiser and Jack Daniels aren't.

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