Mover Mike

When the Consumer Price Index (CPI) is announced ewach month, we are told the total increase for the month, then food and energy are stripped out to give us a "core" rate of inflation. I have argued that we are experiencing a general rise in prices that is not reflected in the price of gold. The price of gold has risen in four years from $250 per ounce to $475, but based on the historical price relationship to oil, should be selling at least twice its current price. (According to the "rule of 72", if something doubles in four years, its compound rate of return is approximately 18% pwe year! Have your investments compounded at that rate for the last four years?

Now to support my thesis that the core rate is misleading, FURNITUREToday has an article China factories hardly immune to higher costs.

“Right now, we’re more concerned about the cost of oil than anything,” said Steven Lee, president of dining and occasional furniture manufacturer Winny Overseas Ltd., with a factory in Zhongshan, in Guangdong Province. “The cost of oil affects the cost of everything.”
That includes anything from his power bill to shipping and related transportation costs. Since 1997, he said, gasoline costs have risen 400%.

The cost of Asian woods have increased 20%, so manufacturers are importing more US hardwoods. Shipments are up expected to be up 45% in the next six months.

Metal and steel costs, however, always seem to go up, not down, he said. He estimated that metal prices today are double what they were just two years ago.

Much of the furniture sold in the US is Chinese made and that could ultimately raise the price of Chinese-made furniture.

In a related article Shipping costs rising again, On Oct. 1, furniture importers will pay increased fuel surcharges, commonly known as the emergency bunker adjustment factor (EBAF).

The EBAF will rise from $410 to $455 for a 40-foot container, a 10.9% increase, and from $460 to $510 for a 40-foot high-cube container, a 10.8% increase. The rate for a 20-foot container will rise from $310 to $345, up 11.3%.

This is the second time since July the rates have risen and those increases don't include inland transportation costs that have also risen.

To exclude food and energy from your CPI calculations is nuts. We are being affected by a variety of price increases that start with our rising cost of energy. Soon the price of gold will also reflect what we all know is true. Prices generally are rising at a much higher rate than our government is telling us.

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Yesterday I posted the question Is the CPI Nuts? in which I questioned the advisability of excluding food and energy from the CPI, leaving the "core" rate. At Melduke's Blog I read

PGE sent out a notice to its customers in San Francisco that heating bills could be 80% higher than last winter. Don’t sound so shocked. The price of natural gas in the third quarter rose by 80%. It means more shopping for blankets, sweaters, sweat pants and sweat shirts, and flannel sheets, flannel nightgowns, and flannel pajamas. Wal-Mart’s prices are the lowest on these items.

[...]

"One could argue strongly that a key element driving inflation is indeed energy," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute, which produces a leading inflation indicator that includes energy prices. "I don't know what you accomplish by removing energy from the discussion — it's 'core' to the discussion. (emphasis added)

Indeed!

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