Episode 37
Episode summary
Two of the most critical categories of goods for consumers—food and energy—aren’t considered for one of the most critical measures of inflation, Core CPI. Why is that? Caleb asks the questions, Liz has the answers.
Shownotes
Consumer prices up 2.9 percent from July 2023 to July 2024 [BLS]
Consumer Price Index News Release [BLS]
Real Earnings Summary [BLS]
Real Earnings News Release [BLS]
Consumer Price Index [BLS]
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Transcript
Liz Wilke (00:00:00) – Hi, I’m Liz Wilke.
Caleb Newquist (00:00:02) – I’m Caleb Newquist.
Liz Wilke (00:00:04) – And this is the Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or you need some fresh campfire chatter.
Caleb Newquist (00:00:18) – Please remember to rate, review, and subscribe to the show, or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. This better be a good episode, Liz. I got, uh, I’m backpacking this weekend, so I need campfire chatter.
Liz Wilke (00:00:36) – Okay. Well, I, I will do my very best. I think you can also-
Caleb Newquist (00:00:41) – That’s not good enough. I need, I need, I need, I need, I need Liz Wilke on fire. I need MVP Liz Wilke. I don’t need your best. I need beyond best.
Liz Wilke (00:00:50) – Ooh, that’s a tall order for the time we’re recording on a Friday, but I think me and my co-host, Caleb Newquist-
Caleb Newquist (00:01:00) – Oh, right.
Liz Wilke (00:01:02) – Could probably do it together if we tried.
Caleb Newquist (00:01:04) – Okay. Great. Um, in the last episode, we tried out a new format where we’re going to spend the first part of the show talking about a little current events, right, Liz?
Liz Wilke (00:01:15) – That’s right. Yes, we are.
Caleb Newquist (00:01:17) – So we got some, uh, we got some current event economics stuff to talk about.
Liz Wilke (00:01:23) – Yeah, that’s right. Since we last recorded, we got actually two reports that came out on the same day. The first one was one that we’ve all been watching ardently about the consumer price index, which is our measure of inflation. And the second one was on real earnings of workers.
Caleb Newquist (00:01:38) – Okay. So everybody’s talking about it. So let’s start with CPI.
Liz Wilke (00:01:44) – Great news.
Caleb Newquist (00:01:44) – What happened?
Liz Wilke (00:01:45) – On CPI. CPI is good.
Caleb Newquist (00:01:48) – Yeah.
Liz Wilke (00:01:48) – Uh, we got a, we got a CPI of 2.9%. It’s the first time in a long time that it’s been below 3%. And that I really opens up the opportunity for the Fed to move towards rate cuts later in the year and for everybody to get a little interest rate relief and also, uh, in price relief.
Caleb Newquist (00:02:07) – Yeah. People seemed pretty excited when the news came out. Like they were like, okay, this, that’s, that’s what we needed. It’s like next month we’re getting the rate cut. Everybody’s everybody’s pumped. Is that fair to say?
Liz Wilke (00:02:18) – On a people where I think jubilant is the, is like, would not be an overstatement in some corners.
Caleb Newquist (00:02:24) – Yeah.
Liz Wilke (00:02:25) – Yeah.
Caleb Newquist (00:02:26) – And so what’s, what’s, so having, since it’s been a few days and you’ve had a chance to kind of like remove yourself from the jubilance, how, I mean, or is the jubilant still there? Like how are you feeling? Does it feel like, yeah, good number, things are looking good rate cuts, better, even better chance that we have a rate cut this year.
Liz Wilke (00:02:49) – I definitely think there’s an even better chance. I actually think that there was more jubilance on this one because you know how you feel sort of depends on how you felt before. I think people were pretty bummed about the jobs number last month when we last reported on it and people were like, oh no, it’s a slowdown and we’re going to, you know, every, everything is sort of, it was a weak report. We reported on that.
Liz Wilke (00:03:12) – And so, you know, the stock market dipped, it started to rally and then we got this very nice CPI number and people were thinking, oh, we might still be in soft landing territory. We could get some interest rate cuts. You know, what you didn’t want to see was a weak jobs report and an inflation number that doesn’t budge.
Caleb Newquist (00:03:30) – Right.
Liz Wilke (00:03:31) – Because then, you know, the Fed is like, oh, we need to hold onto interest rates, but that’s going to cause the unemployment rate to go up. And then sort of, we’re going to be in a really tough place where we don’t have good price numbers, but we also have a labor market that’s sort of in heading, heading in a, in a bad direction.
Caleb Newquist (00:03:47) – Yep. Yep. Okay, cool. So do you, would you like to share some of the details from the report? Like what, what drove, what, what, what prices eased a little bit for this one?
Liz Wilke (00:04:00) – They were, so they report a number of metrics in the CPI. There’s one that’s just CPI, and it’s basically a bundle of goods or a basket of goods or a group of goods that they go, they literally send people out to price it. And so you can add or subtract or remove or change, right, that set of things that you measure to be the overall price level. So there’s this metric called core CPI, which is sort of everything except food and energy.
Caleb Newquist (00:04:29) – Okay.
Liz Wilke (00:04:30) – So that clocked in at 3.2%, which is also still a good downward trend from where it’s been. That number is thought to be like a truer metric of inflation and how prices are really moving.
Caleb Newquist (00:04:44) – Okay.
Liz Wilke (00:04:45) – I think we could take a lot of issue with that since, you know, food and energy like gas and electricity are like major, like there are things that we actually spend money on.
Caleb Newquist (00:04:56) – I bought both just yesterday, I believe.
Liz Wilke (00:04:58) – Yeah. Yeah. And we’ll actually talk later in the episode about why people exclude those things. But that was still a very good number. And actually, a lot of prices came down.
Liz Wilke (00:05:09) – The increase in costs for housing drove a lot of the inflation in this report. So the increase in housing basically drove 90% of all of the increase across all items. And so yeah, and we talked about this a little bit earlier, which is it’s going to be a little tricky to fight the increased costs of housing while interest rates are still high, because it affects how many new homes get constructed, how many new homes get finished, how many homes get bought and sold, and all that stuff. So I think this still remains to be seen, that last mile, if we can bring down housing and shelter costs at the same time that we’re sort of bringing down costs for everything else.
Caleb Newquist (00:05:55) – All right, so a good CPI number. You also mentioned real earnings, which I don’t believe we’ve talked about before. Have we? I don’t believe we have.
Liz Wilke (00:06:04) – I don’t think we have.
Caleb Newquist (00:06:05) – OK.
Liz Wilke (00:06:05) – So we’re doing a little bit of 101.
Caleb Newquist (00:06:08) – Yeah, so give us the real brief lowdown on real earnings and what happened there.
Liz Wilke (00:06:18) – OK, so every month, the government finds out how much people are making per hour, or how much they made in a week. And it basically calculates, what’s the average hourly rate for somebody working in the country? And that’s average hourly earnings. And then they do it, so how many hours did you work in the week?
Liz Wilke (00:06:37) – That calculates to how much money did you take home last week altogether. So your weekly earnings are a function of how much you get paid per hour and how many hours you worked, basically. And so there’s a report on that every single month to see how that’s going up or down. So real earnings are basically earnings after adjusting for price increases. So if your earnings are going up 5%, but inflation is going up 10%, your real earnings actually went down by 5%.
Caleb Newquist (00:07:07) – Yeah, and that’s not good.
Liz Wilke (00:07:08) – No, that’s not good.
Caleb Newquist (00:07:09) – Right.
Liz Wilke (00:07:10) – Fortunately, that’s not what we saw in this report.
Liz Wilke (00:07:14) – Real earnings this month are actually up 0.1%, which over the course of 12 months is 1.2%. So that’s nice.
Liz Wilke (00:07:22) – Real average hourly earnings are up by that much.
Liz Wilke (00:07:26) – But weekly earnings are actually down by 0.2%.
Liz Wilke (00:07:32) – And that’s because average hours for the typical worker are going down. So they’re getting paid more on average per hour, but they’re actually just sort of working fewer hours than they were. And so that’s actually contributing to a smaller take-home paycheck for workers, which is, again, consistent with some sort of labor market weakness that we’ve been seeing. But that’s not like a great report from a labor, like from a worker’s perspective.
Caleb Newquist (00:08:00) – Mixed bag.
Liz Wilke (00:08:01) – It was a mixed bag. Bag.
Liz Wilke (00:08:04) – It was a mixed bag of reports.
Caleb Newquist (00:08:07) – Chicago Liz showed up for this show. Jeez. OK. Anyway, so a mixed bag on real earnings. But that’s OK, because we have to take these all. We try to take all these things. Every piece of the economic puzzle is a factor, and this is just one.
Liz Wilke (00:08:23) – Yeah, there is no single metric that tells you how everything everywhere is going. We’ve talked about that a lot.
Liz Wilke (00:08:32) – And usually, you think about declining hours as a sign of slowdown. But actually, weekly hours have been on the decline since 2022.
Liz Wilke (00:08:40) – So it’s really difficult for us right now to interpret that as a big sign of slowdown. But I think we really are at the point now where the rubber hits the tarmac.
Liz Wilke (00:08:51) – You can’t have a soft landing without having a landing.
Liz Wilke (00:08:56) – And it seems like we’re getting closer and closer to that plane coming onto the runway and it either being very bumpy or worse than that or just fine.
Caleb Newquist (00:09:07) – Slamming into the runway.
Liz Wilke (00:09:10) – Yeah, exactly.
Caleb Newquist (00:09:11) – Regular occurrence coming into Denver, if you’re not familiar.
Liz Wilke (00:09:15) – We’re entering the time when the risk is more on the downside. And the Fed now needs to think a lot more about balancing full employment with price stability and also taking into account the long and variable lags that everybody talks about, which is that stuff you did six months ago is going to have an impact right now and into the future.
Liz Wilke (00:09:38) – And so the Fed needs to figure out is the stuff we did six or three months ago enough to get us and are we able to ease off now. And whether or not the Fed decides that it has is going to determine whether or not we get a rate cut in September.
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Caleb Newquist (00:10:27) – Okay, so our main topic for this episode, Liz, we’re gonna go back to inflation. We’re gonna go back to core inflation, just briefly, because you said something that not everyone maybe knows, which is the prices of food and energy are not included in the core CPI number. Correct?
Liz Wilke (00:10:50) – Correct.
Caleb Newquist (00:10:51) – All right. Why? Why is that? Because, like you said, lots of people, everyone- buys food and virtually everyone consumes energy in one way or another. Maybe they’re not buying gasoline, but they certainly use electricity. So energy is.
Liz Wilke (00:11:10) – Public transit, yes, uses gasoline, which uses gasoline, right?
Caleb Newquist (00:11:13) – Yeah, so we all need to eat and we all use power in some kind of way, shape or form. So why exclude those things?
Liz Wilke (00:11:24) – That’s a great question, Caleb, and I think I’m gonna. I’m gonna oversimplify, because this is a big, big world of economics.
Caleb Newquist (00:11:30) – That’s what we’re here to do.
Liz Wilke (00:11:32) – It’s just a little bit of economics knowledge is what we promised.
Caleb Newquist (00:11:35) – Yeah, it’s a little bit right.
Liz Wilke (00:11:37) – The two primary reasons are: one, that the prices of food and energy fluctuate a lot- they’re really volatile and more than other things- and so it sort of creates a lot of noisiness in the indicator and doesn’t really tell you, like how the prices of all the other things are trending and which direction.
Liz Wilke (00:11:56) – So if we clean those out, it’s thought that we get like a better signal about like the price level overall and how it’s changing and we feel okay, we feel economists feel generally okay doing that because of the second reason, which is that food and energy aren’t really thought of as being responsive to short-term monetary and financial policies like the interest rate or like the money supply.
Caleb Newquist (00:12:20) – Hmm. So, if I remember from my econ courses, energy and food are inelastic goods. It does not matter what the price of these things are, we’re still going to buy them because they’re so critical to us. You know, being in the economy doing things is that right?
Liz Wilke (00:12:42) – It’s half right, it’s right for energy, right so for. So elasticity- for those of you that don’t remember from your high school econ course or did not take a high school econ course, elasticity is how sensitive you are as a consumer to prices, right? So if the price of something goes up and you buy less of it, that’s a measure of your elasticity. And if the price goes down and you buy more of it, that’s that’s related to your elasticity. So we say you’re inelastic when the price can go up by a lot, a lot, a lot, and you don’t really change how much you’re buying, right?
Liz Wilke (00:13:14) – Energy is one of those things that are inelastic, right. So right, if, if the you know price of gas goes from two dollars to three dollars a gallon, you don’t buy that much less gas, right, you maybe start to carpool, you maybe take one fewer trip, but, like, you basically buy about the same number of gallons of gas and it’s really difficult to switch to anything else.
Liz Wilke (00:13:36) – Like you can’t power your car on biofuel, you could get an electric car, but lots of people won’t do that, just for the short term, right, and so, because you can’t switch to other things, you, you sort of just consume the same amount. So when the supply changes of you know gas or electricity, because demand doesn’t change at all, that can really cause a lot of fluctuations in the price. But it’s the other way around for food, right.
Liz Wilke (00:14:04) – So if I, if the price of chicken goes up, I can easily substitute for beef or tofu or beans or whatever I think is a good protein supplement or substitute. Or if the price of apples goes up, I buy more oranges, no problem, right, or more bananas or what-have-you. So the price. So it’s two: consumers are actually really elastic to the price of food, but the supply is not elastic, right and right.
Caleb Newquist (00:14:31) – There’s all talk about why that is, yeah, okay that I am curious because you’re right, like even though we- it’s not that we don’t buy food, but we buy slightly different food. That’s where the elasticity comes, like you say the apples and oranges, for example. Or maybe you stop buying Honeycrisp because they’re For God’s sake, $4 a pound somehow. It’s like, I can eat Fuji. It’s fine. I’ll eat a Fuji for $1.99, because God, who’s going to pay $4 a pound for apples? Anyway, yes, Liz. Please, please continue.
Liz Wilke (00:15:10) – So one of the things, and in fact, you’ve touched on one of the things that determines the price of food, which is how well can you store it over time? Apples are actually one of the fresh foods that you can store for months. Apples, potatoes, onions, these things are easy to store for three or four or five months in cold storage or climate-controlled storage. However, blueberries, on the other hand, are very difficult to store for more than a couple weeks or less.
Caleb Newquist (00:15:40) – They rot basically on the drive home. They rot on the drive home.
Liz Wilke (00:15:43) – Exactly. So if you’ve ever thought about it, the price of apples isn’t that different between December and April and August. But the price of berries is a lot different across the year. And one of the major reasons for that is because it’s easy to store apples. So you can spread out the supply over the course of the year. And it’s really hard to store berries. So when they’re fresh, you have to get them to market. But they’re all fresh at the same time. And that drives the price down when they’re in season. And it drives the price up when they’re not in season.
Liz Wilke (00:16:16) – That’s one reason why the supply of food is not really responsive to interest rates. You get the food to market when it goes. Related to that is weather. So one of the big categories of food cost increases have been sugar and sweets and all of the things that are made with sugar. And the reason that sugar prices, one of the reasons that sugar prices are so high right now is because we had terrible harvests in prior years in Thailand and India, which are major global sugar producers.
Liz Wilke (00:16:48) – And so you can’t make more sugar in a matter of days or weeks. It takes a whole growing season to get more sugar. And so if you have a bad year, you can’t really do much to change that. So weather has a really big determinant on prices of food.
Caleb Newquist (00:17:07) – What about geopolitical events, Liz?
Liz Wilke (00:17:11) – That’s another one.
Caleb Newquist (00:17:12) – That’s another one, right?
Liz Wilke (00:17:13) – So yeah, war and conflicts can affect production and export in regions that produce this. And the sort of poster child for this right now is Ukraine, which is a major global producer of wheat, which is an input into bakery goods and cereal products. But the war in Ukraine has really disrupted the supply chain at the global level because there are lots of places in the world that produce wheat, but there are not that many. And so Ukraine is a major wheat producer, so the supply chain getting messed up in Ukraine has ripple effects all across.
Liz Wilke (00:17:47) – And that’s also because these are global commodities. You can ship wheat from Ukraine to anywhere, and not everywhere can produce wheat.
Caleb Newquist (00:17:56) – OK. What else? Is there anything else that kind of goes into the food equation?
Liz Wilke (00:18:04) – Yeah. We don’t have to talk just about plants. We can talk about animals, too.
Caleb Newquist (00:18:10) – Sure.
Liz Wilke (00:18:10) – Yeah. So eggs are also sort of a classic current example of price inflation, right?
Caleb Newquist (00:18:18) – People were really freaking out about eggs in Denver just a few months ago.
Liz Wilke (00:18:22) – I mean, the price of eggs has more than doubled in most places in the last couple of years. I mean, it’s a significant increase.
Caleb Newquist (00:18:29) – It’s pretty crazy.
Caleb Newquist (00:18:30) – Yeah.
Caleb Newquist (00:18:30) – Anyway.
Liz Wilke (00:18:31) – It’s pretty crazy. As a person who loves an egg taco, I am personally affected by the price of eggs. This is not because of the buying power of chickens or the interest rate fluctuation. This is because of avian flu. And a ton of birds have had to be killed in order to stop the spread of avian flu. So that has caused the price of chicken to go up, and it has also caused the price of eggs to go up, which has nothing to do with the interest rate or monetary policy to try and control prices. But then on that, all of these things are like inputs into other things, right?
Liz Wilke (00:19:08) – So cereals, which are getting more expensive, are inputs to animal feed. So that makes beef more expensive. Or energy prices are getting more expensive, but you put energy into tractors, right? You put gas into tractors, and you put gas into trucks that get food to market. So prices sort of across the board sort of stack up in the food supply chain. But none of these things are determined by the interest rate, right? They’re determined by geopolitical environment, the weather, disease, et cetera.
Liz Wilke (00:19:41) – And so a lot of economists strip it out of the price level because they’re like, well, you can’t change any of these things anyway. We want to measure the things that are changing as a result of us fiddling around the knobs with monetary policy.
Caleb Newquist (00:19:55) – Right. OK. Now my question is, we understand why food and energy is not included in your everyday inflation number. What does that mean for people listening to this podcast? Like when they hear things, when they hear, when they hear things, when they hear, when.
Caleb Newquist (00:20:16) – business reporting or economic reporting on food and energy, should they not care? Or is it that they should focus on those things more because they have to be looked at kind of separately? Like how do we process these two kind of critical things in relation to everything else that we kind of process when it comes to the economy? Food prices have been a thing. So food prices especially have gotten a lot of media coverage. I’ll just start there.
Caleb Newquist (00:20:44) – And people have been, and that’s what’s driven a lot of the sour sentiment that we’ve talked about in prior episodes, right? And so now that we’re seeing, let’s see, inflation kind of ease a little bit, but, and that’s a good thing. And people are probably, I don’t know if people are, if sentiment is really changing. And a key part of that is because food prices, cumulatively, still feel kind of high. And we’ve talked about that, I think before. But that seems to be something that sticks out in people’s minds.
Caleb Newquist (00:21:17) – And that’s kind of where their feelings diverge, right? We’ve talked about this too, where, oh, yes, inflation is now below 3% and we might get, and that might lead to a rate cut. But if my bread is still $7 at the store, people aren’t gonna forget that bread is still $7 at the store.
Liz Wilke (00:21:37) – Yeah, I think that’s a good point. So I think there are a couple of things that you could take away. One is these numbers get reported together. So when somebody says inflation is up or down year on year, it matters if they’re using the whole CPI number, right? Which includes food and energy and is more volatile, or it’s just the core CPI number. So as you’re listening to the news, you can differentiate those things, right? And sort of figure out what it means.
Liz Wilke (00:22:01) – But I think to your other point, Caleb, the things that we’ve stripped out of CPI are things that real households and real consumers and real people care about. They spend their money on it. They feel the effects of those price changes every day, right, and it determines how they sort of think about how expensive things are. What I would say is this. One is that’s gonna be tricky from a communications perspective, right? To say that the price of things is coming down if the price of these things is not necessarily always coming down, right?
Liz Wilke (00:22:39) – And right now, those two numbers are in alignment because food is not getting less expensive. Food is getting expensive less quickly, and energy is getting expensive less quickly, right? And so while those two things are moving in the same direction, that’s generally good news. But if core CPI is coming down, but food and energy are getting more expensive, it’s gonna be hard to tell people that prices are getting cheaper, right, when people don’t really feel like prices are getting cheaper.
Liz Wilke (00:23:09) – And then I think what I would say onto that is what’s extra difficult about that is that these are things that don’t really respond to policy measures, right? It’s very difficult to bring down the price of wheat if there’s no wheat to be had, right, sort of on a global scale because there’s a war. Or it’s very hard to bring down the price of chicken if you have to cull a third of the flock because of avian flu, right? There’s not, I mean, you can definitely make birds healthier, but you can’t do much to control the price, right, of the thing.
Liz Wilke (00:23:41) – And so I think that’s a really tough spot for both consumers to be in, but also for like policymakers to be in, which is that people really feel this in their pocketbook, but there is like a more limited set of things you can do about it.
Caleb Newquist (00:23:55) – Right, like gas is the other classic example that came to mind for me where it’s like people can, people love to rage about gas prices, but there’s very little that policymakers can do to actually get your local Exxon station to reduce the price by any amount at all.
Liz Wilke (00:24:14) – Not in the short term anyway.
Caleb Newquist (00:24:16) – Right, not in the short term, like where people will notice, yeah, right.
Caleb Newquist (00:24:19) – Yeah.
Caleb Newquist (00:24:20) – Yeah, okay.
Liz Wilke (00:24:21) – Technically food is energy, so we’re all really talking about just one thing.
Caleb Newquist (00:24:25) – Yeah, oh, so meta.
Liz Wilke (00:24:26) – So meta. So meta.
Caleb Newquist (00:24:28) – And on that note, that’s it for this episode. We hope you learned something new and useful for your business. Please let us know what you think of the podcast by leaving a review or sharing it with a friend or colleague who might enjoy it. I’m Caleb Newquist. I’m Liz Wilke.
Liz Wilke (00:24:42) – Thanks for listening.
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