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The Inflation
Update: March 2004 Waltham, Massachusetts After paying the alternative minimum tax, the last thing I needed yesterday morning was to open the Wall Street Journal and read a story about how restaurants have been raising their prices.[1] This is a clear warning that inflation may be taking off. My original work on core inflation more than a decade ago taught me to watch for signs of inflation in two places: housing and restaurants. Regular readers of this update already know about my preoccupation with Owner Equivalent Rent (OER), today you learn about my obsession with Food Away from Home; and not just because I like to eat out. This morning’s CPI report confirms my worst fear: Inflation is rising. The all-items CPI rose 6.0% on an annual rate for the month of March. Core measures fared only a little better, with the CPI excluding food and energy up 4.4% (a.r.), and the Median CPI computed by the Federal Reserve Bank of Cleveland rising 3.3% (a.r.). These are above last month’s increase, and well above their 12-month changes of 1.7% (headline measure), 1.6% (ex food and energy), and 2.2% (the Median CPI.)[2] Looking at details of the report, we see that core service prices (services excluding energy services) rose 6% for the month, while core goods prices (commodities excluding food and energy commodities) increased 1.7%. These numbers are astronomical by recent standards, suggesting that some combination of increases in product demand and dollar depreciation is finally having the impact many of us had anticipated. These details confirm that the inflation increase isn’t in some isolated place, or the consequence of some “special factor”. Medical care costs are up 6.9% (a.r.) for the month, 4.5% for the year. Used car prices, which have been consistently falling, rose (albeit a very modest 1.8% a.r.). And then there is housing. Inflation in OER was 3.3% (a.r.) in March, up from 2.7% (a.r.) in February – levels that are well the 2% average for the past 12 months. Finally, we come to food away from home. Historically, this component of the CPI has been the median good roughly one-tenth of the time – that’s twice the rate we would ordinarily expect. OER is the median good one-half of the time. Ever since learning this, I have felt that these two components were what I needed to gauge inflation trends. When prices of housing and restaurant meals start rising rapidly, watch out. Well, watch out! [1]
Non-U.S.-taxpaying readers are hopefully unfamiliar with the
alternative minimum tax. The
American tax code is notoriously complex, and this is one of its most
complicated parts. The
easiest way to describe it is that the Federal Government assesses tax
as the maximum of an average tax rate (15%) on income prior to
deductions for things like mortgage interest and state tax payment,
and the normal marginal rate times income after those same deductions.
The alternative minimum tax is the first of these, and it is
hitting more and more people both because it is not indexed and
because of the reduction in the marginal rates.
This is the second time I have had to pay it. Consumer
Price Inflation, Various Measures
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