CPI stands for Consumer Price Index. The CPI is a measure that is used by most governments around the world. It measures the changes in the price level of consumer goods and services purchased by households. The CPI is a statistical estimate that is constructed using the prices of a sample representative of the population. The annual percentage change in CPI is used to measure inflation. Governments usually base their interest-rate policies on the level of change in the CPI.
While the U.S. economy is apparently improving (at least that’s what the media has been telling us), there are more municipalities defaulting on bond payments and facing widening budget deficits.
Moody’s Investors Services just released a study on the municipal bond market that showed that, for all of the municipal bonds it covers, there were only 71 bond defaults between 1970 and 2009. Moody’s rates over 17,000 municipal bonds.
The world has changed since the financial crisis hit in 2008. The pressure has been on the municipalities and their widening budget deficits since 2008, because the cities and states no longer have the revenue to cover their expenses.
From 1970-2009, Moody’s cited 2.7 annual municipal bond defaults per year on average. In 2010 and 2011, there were 5.5 average annual defaults per year—a more than 100% increase in the annual rate of municipal bond defaults. Clearly, there is a shift here in the wrong direction. Of course, no sooner does Moody’s release these results than we hear of more budget deficit trouble with municipalities.
Harrisburg, Pennsylvania, is back in the news saying that, for the first time in its history, it will default on its municipal bond payments today, March 15, 2012.
In 2009, when Harrisburg first got into trouble, it was able to lease municipal land to the state to receive the funds to cover its municipal bond payments. In 2010, the state simply sent aid over to meet the city’s debt service obligations.
Thank you to the thousands of our readers who participated in last week’s inflation survey. Here are the results with my comments.
On the first question, as to which index best reflected the inflation rate in this country, the Everyday Price Index at eight or the Consumer Price Index (CPI) at 3.1%, 94% of our readers believe that eight percent is better reflection of the true inflation rate in America:
This is a landslide victory for the Everyday Price Index. This result was further confirmed by the second question in which I asked what the true inflation rate is in this country.
The winner of the true inflation rate by a wide margin was 10%. The great majority of Profit Confidential readers believe that inflation is running at 10% per annum.
Of course, not everyone who responded to the survey left comments, but I can tell you that, out of the hundreds of comments that were left, less than one percent of readers believe that inflation is NOT a problem. Everyone was very, very worried that the inflation rate was worsening.
Below are survey respondent comments that reflected what the majority had to say:
“Yes, we’re worried about inflation big time. Although our house is losing value, we still need to pay for the fixed amount on our mortgage. Without wage inflation, the inflation rate (food, gas, child care) in everyday items really eats up our budget. We’re worried we can’t even save for retirement if the inflation rate keeps up at this pace, no matter how we try to save money.”
“I’m on a fixed income and … Read More
The American Institute for Economic Research (AIER), a not-for-profit research group, believes that the Consumer Price Index (CPI)—as measured by the government—does not reflect the true inflation rate in this country.
The AIER believes that the true cost of living should include everyday items that consumers must spend money on, which the CPI does not fully reflect. With this theme in mind, the institute went to great lengths to create its very own Everyday Price Index, which stands in contrast to the CPI.
The CPI includes many one-time big ticket item purchases in its inflation rate calculation. Computers, appliances and furniture are just some of the big purchase items that are part of the CPI.
The idea behind the Everyday Price Index is that the typical American family does not plan their budget on big-ticket items like the CPI assumes. The AIER contends that the things Americans must purchase at least once a month are what affect their budget.
The Everyday Price Index gives more weight in its calculation to food, gas prices, child care, prescription drugs, and Internet service than the CPI does. The CPI includes these items as well, but the CPI has less emphasis on these items, because the index makes room for the big-ticket items like furniture.
Over the last 12 months from February 2011 to February 2012, the Everyday Price Index claims that the true inflation rate in America was eight percent. The CPI during this same time period claims that the inflation rate was 3.1%.
The AIER claims that technology has helped bring down the prices of big-ticket items like cars and televisions. However, … Read More
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