LAST WEEK

News & Commentary Weekly Highlights:

• Wall Street Journal:  Many Presidential Swing States Lag Behind in Income Gain (Thursday)
• Bloomberg: The Bond Market Is Flashing a Signal That Traders Haven’t Seen Since 2012 (Wednesday)
• CRFB: Washington’s Wake-Up Call (Tuesday)
• Washington Examiner: Dan Coats: Time to address debt crisis (Monday)
• Wall Street Journal: Europe’s Bite Out of Apple Shows the Need for U.S. Tax Reform (Monday)

 

Top Economic Indicator Highlights:

• Industrial Production  (August 2016)
  • August: -0.4%, July 0.6%, June: 0.5% (Seasonally adjusted, month-to-month percentage changes)
  • Noteworthy: Manufacturing output declined 0.4% in August; while utilities declined 1.4%.  Mining output increased by 1.0% between July and August but is down 9.3% relative to August 2015.
  • Consumer Price Index (August 2016)
    • August: 2.3%, July 2.2%, June: 2.3% (year-over-year percentage changes, excluding food and energy)
    • Noteworthy: The overall CPI (including food and energy) increased 1.1% in August.  This compares with increases in July of 0.8% and in June of 1.0%.

 

JEC Releases:

• JEC Examines Dangers of Growing National Debt and Explores Possible Solutions (Tuesday)

 

THIS WEEK

Upcoming Economic Reports & Releases:

Major Indicators

• New Residential Construction (8:30am, Tue)
• Philly Fed Non-Manufacturing Survey (8:30am, Tue)
• Regional and State Employment and Unemployment (10:00am, Tue)
• Chicago Fed National Activity Index (8:30am, Thu)
• Jobless Claims (8:30am, Thu)
• Composite Indexes (10:00am, Thu)
• Existing Home Sales (10:00am, Thu)
• Atlanta Fed Business Inflation Expectations Survey (10:00am, Fri)

 

Chart of the Week:

 

This week’s chart serves as a reminder to beware of which deflator —consumer price index (CPI) or personal consumption expenditures index (PCE) price index—is used to adjust data for inflation.  The more commonly known CPI measures price changes in a fixed basket of goods, while PCE is a broader measure of consumer spending that takes into account changes in buying patterns in response to price changes and other developments.  The CPI often overstates inflation because it assumes that consumers will choose to buy the same basket of goods regardless of large price changes for some goods.  Of note, the Federal Reserve largely relies on the year-over-year PCE changes as a better measure of economic conditions when making decisions to meet its inflation target of 2%. 

In 2015 nominal, or current dollar, median family income was about $71,000.  When adjusted for inflation using the CPI, median family income is approximately $34,000 in 1987 dollars.  However, it is about $39,000 when adjusted by the PCE—a difference of 16%.

In 1960 the nominal median family income was roughly $5,300.  When deflated by the CPI, it’s about $21,000 in 1987 dollars, and approximately $19,000 when deflated by the PCE.  This is a 12% difference.

Relative to the PCE, using the CPI as a deflator tends to make the present look bleak and the past look better.  Conversely, the PCE as a deflator tends to make the present look better while making the past look worse.

More information about the CPI and PCE indices can be found in this Wall Street Journal article.