The latest inflation data for the US has been released, and the headline CPI-U annual increase of 5.4% is once again raising worries that high inflation could be a permanent part of the landscape for the near future.
My personal opinion is that the picture is much too muddled now, between temporary supply issues and low bases for 2020 prices, to say much about the medium-term picture. I think we’ll have a better picture by the end of the year. Still, it’s worth drilling down into the data, as we have done in the past on this blog, to understand some things about economics, prices, and how price changes are impacting real people.
Certainly the prices of some goods are rising at alarming rates. Many of these are related to automobiles and transportation generally, but some categories of food have rose a lot in the past year too (though groceries overall are only up 2.6%).
But I want to talk about two categories of consumption: beer and hot dogs.
Actually, my co-blogger Zachary has already written about beer. And using the producer price index, he found that canned beer is actually cheaper than it was a year ago. If you like canned beer, rejoice! And for all beer at home, the CPI shows only a 1.8% increase since last year, after a similar small 1.6% increase last July (not much of a base effect… a clue for later!).
But not all Americans consumer alcohol. So let’s talk about that most American food product: the hot dog.
Why should we care about hot dogs? Read on.
Hot dogs, or frankfurters as the BLS calls them, are a very small part of the overall consumer basket. BLS puts them in with lunch meats, accounting for about 0.2% of the CPI weight. In other words, consumers spending a very small part of their budget on hot dogs.
But symbolically hot dogs are important. Consider this recent exchange.
On July 1, the White House tweeted that the cost of a 4th of July BBQ was down from a year ago, including the dad joke “Hot dog, the Biden economic plan is working. And that’s something we can all relish.” At a press conference, reporters questioned whether Americans should be excited about saving 16 cents on their BBQ, when gas prices are up dramatically. The White House Press Secretary responded that “if you don’t like hot dogs, you might not care.” The House Republican Twitter account responded by pointing out that the price of hot dogs in May was the highest May price in a decade.
Now, some of this is just partisan bickering over something that, in the grand scheme, is not really that important to most families. But clearly, the implication is that hot dogs are an all-American food we really should care about!
So what’s actually happening with hot dog prices? The problem with the early July political bickering: we didn’t actually have July price data yet! We only had May. Now, today, we have the July prices. So what did it look like?
Yesterday I polled my Twitter followers to see what they thought would happen to hot dog prices compared to last July. My followers are pretty savvy, and they can often smell a rat, such as when I’m trying to use a poll to demonstrate a point. I had also tweeted about the June prices several times (down 3.8%), so I thought I had telegraphed the trap clearly enough. Still, even given all this, 90% of them though hot dog prices would be higher than last July.
The actual data? Hot dog prices declined by 1.4% compared with last July.
Now part of this is a trick. Last July, hot dog prices were up a lot compared to July 2019, a 15% increase! Why? It’s always hard to know, but my speculation is that it’s a food that lasts a long time, kids will eat, is easy to prepare, and might give you some nostalgia for simpler times. Perfect food to buy in the middle of the Pandemic Summer of 2020 for parents with young kids.
So the July 2021 price is actually the second highest on record, but it is still down from the past year. So what are the lessons we can learn?
First, don’t think you know too much about the overall rate of inflation from particular prices. Even though hot dogs are cheaper, most food is up (again, groceries are up 2.6% compared with last July). But this goes in both directions! Just because some good you can readily identify are way up, don’t assume they are representative of the general price level (be aware of your own biases, like availability bias and pessimistic bias!).
Second, you have to consider the base effects. In both directions. Hot dogs are being compared to an unusually high amount 1 year ago. But again think about those sky high used car prices: yes, they are up 42%, but partially that’s because last July they were at their lowest level in 3.5 years! Now even considering that base effect, used car prices are still up dramatically. The reasons for this are actually fairly straightforward, and were predictable (hint: it probably has little to do with monetary or even fiscal policy). But don’t ignore those base rates!
This insight about base rates actually applies to the overall CPI numbers as well, that 5.4% figure you will see screaming in all the newspaper headlines. If we go back to July 2020, prices hadn’t declined compared to the prior year, but they were depressed compared to normal growth rates: only 1% year-over-year growth, compared with the past decade’s average of about 1.8%. So over the past 2 years, July 2019 to July 2021 inflation has been 6.4%, or roughly 3.2% per year. That’s exactly halfway in between 5.4%, which we are seeing now, and 1.8%, which is what we normally expect.
All told, we might say that yes, price increases in July are much higher than we normally expect, but half of that is due to simple “base effects.” The other half needs to be explained too. It’s some combination of supply chain issues, stimulus checks to individuals, and monetary policy. I won’t pretend to know they exact shares. But attributing all of the 5.4% to money printer go brrr and/or government stimulus is a big mistake.
Time for a hot dog and a beer!