Few things generate as much pushback from clients as telling them that inflation is tame.
"The most frequent response I get from clients is 'that's not true at my house,'" said Mark Bass, a financial planner in Lubbock, Texas. Clients cite the cost of food, medical care and everyday repairs as being far more than the inflation rate. "They say, 'a guy came over to repair the air conditioner and I felt like I should have bought a new unit," Mr. Bass said.
The Bureau of Labor Statistics goes to great lengths to make sure the report is accurate, sending out scores of workers to check prices. The government ties
Social Security, cost of living payments and some bond yields to the Consumer Price Index.
But everyone has a different personal inflation rate, and that's what concerns them. "Most people are more interested in knowing what time it is, rather than how the watch works," Mr. Bass said. A client who drives a great deal is probably more sensitive to gas prices, while someone with college-age children or health issues worries more about tuition and prescription drug prices. And people with lower incomes are more sensitive to food prices than wealthier consumers, because food is a larger percentage of their budget.
The CPI also draws the ire of money managers occasionally.
Bill Gross, then at PIMCO, called the CPI “
a con job foisted on an unwitting public.” Most concede that inflation is extremely difficult to measure, in part because its weightings — based on a survey — doesn't match everyone's budget.
“The Consumer Price Index doesn't measure things exactly right,” says Chris Christopher, director of U.S. and global consumer economics at HIS Markit. “It could be the weights or the sampling.”
Friday's report from the Bureau of Labor Statistics may (or may not) alleviate suspicions about the CPI. The so-called headline CPI, which includes food and energy, has risen 1.1% in the 12 months ended Aug. 31. Toss out food and energy, and the CPI has gained 2.3%.
What can you tell clients to alleviate fears that inflation is rampant, but not reported by the government?
Tell them:
1. Wall Street trusts the number, even if you don't, and that's a primary consideration of what determines bond yields. Currently, the implied inflation rate on 10-year
Treasury Inflation-Protected Securities, or TIPS, is 1.5%. That's the inflation estimate of the marketplace.
2. The core CPI and the headline CPI actually track each other pretty closely over the long term.
3. The Federal Reserve's favorite inflation measure, the PCE deflator, also agrees with the CPI. It's up 1.6% the 12 months ended August.
4. The Billion Prices Project from the Massachusetts Institute of Technology measures online prices for goods. It's up about 0.5% year over year. But Mr. Christopher isn't surprised: Price-cutting is the name of the game in online sales.
5. The Everyday Price Index, launched by the American Institute for Economic Research, tracks items that consumers use and buy frequently. Thanks to falling gas prices, the index has fallen 1.3% the past 12 months.
Mr. Bass said he tries to tell people about how their own personal situation affects their views on inflation. "If they're complaining about auto insurance premiums, I do say, 'Well, you've got three teenage sons," he said.
Beating headline inflation numbers hasn't been a problem in the last decade. "We do tell them that this is an unusually long period of low inflation," Mr. Bass said. "We do think that it's part of our job to say, 'Look, it's not always going to be this way.'"
