Two Simple Price Inflation Indexes
Copyright © January 9, 2008 and January 2, 2017 by Robert Wayne Atkins, P.E.
and the Prime Interest Rate
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Price Inflation Index for Foods with a Long Shelf Life
Food and shelter are two of the major expense items of most normal families. Therefore it would be useful if there was an inflation index that was only based on the changes in food prices.
On January 9, 2008 the total cost of 60 different food items in a traditional one-year emergency food supply was recorded. The price data was gathered in the Southeastern United States.
Since 2008 the prices of the original 60 food items have been monitored and the change in the total cost of the one-year emergency food supply is shown in the following table.
Most of the foods in the one-year emergency food supply have shelf lives of at least one-year, and many of the foods have shelf lives that exceed five years.
|Year||Starting Prices||Ending Prices||Inflation for 1 Year||Inflation Since 2008|
Price Inflation Index for Fuel and Fresh Food
In addition to the change in the prices of food with long shelf lives, it would also be useful to determine how the price of fuel and fresh food was changing on a yearly basis. Therefore the following four items are being monitored in addition to the 60 food items in the above food inflation index:
The following inflation index is balanced with two fuel products (gasoline and diesel) and two fresh food products (meat and dairy).
- Gasoline: Most of us in the United States who still have jobs depend on gasoline in one way or another to get us to and from work. If gasoline begins to significantly increase then it will take a bigger bite out of our already very small paychecks, and that will mean that most of us will have less money available to pay our other bills. Those of us on fixed incomes will therefore be forced to figure out how we can either reduce those other bills or eliminate them, such as eating less each day or cancelling our cable TV service.
- Diesel Fuel: The things we buy are moved around the world and around our nation in vehicles that use diesel fuel. If the price of diesel fuel increases significantly then this will directly impact the delivered cost of almost everything we buy. All the major freight companies, including FedEx and UPS, already have a fuel surcharge as part of their published rate structures. This means that any and all increases in the price of diesel fuel will be immediately transferred to the delivered cost of the products we purchase. The impact of that increase will depend on the price of the product in relationship to its shipping cost. For example:
- Expensive Products: A product such as a refrigerator may cost $1,000. This total cost may be $900 for the refrigerator plus $100 for the total shipping cost. If the shipping cost increases 50% then the new shipping cost will be $150 and the new price of the refrigerator will then be $1,050. This represents a five percent increase in the price we would pay for the refrigerator.
- Inexpensive Products: A ten-pound bag of white rice may cost $6.00. This total cost may be $3.00 for the rice and $3.00 for the total shipping cost. If the shipping cost increases 50% then the new shipping cost will be $4.50 and the new price of the ten-pound bag of rice will then be $7.50. This represents a twenty-five percent increase in the price we would pay for the bag of rice.
- Fresh Hamburger and Fresh Milk: Some food products have a very long shelf life. This is true for almost all canned food products. Canned foods are usually processed during the harvest season and then stored in a warehouse for future sale. This means their cost was locked in at some time in the past. On the other hand, fresh food products need to be prepared and delivered fresh to the customer in a relatively short interval of time. Therefore a fresh food product will more rapidly respond to the total impact of hyperinflation when compared to a long shelf life food product that was prepared many months ago. That is why fresh hamburger and fresh milk were both included as products to watch for the true impact of inflation.
|Date||Gasoline||Diesel Fuel||Fresh Hamburger||Fresh Milk||Total All Four||Inflation for 1 Year||Inflation Since 2011|
Prime Interest Rate
|End of Year||Prime Interest Rate|
|2009 to 2015||3.25%|
|December 16, 2015||3.50%|
|December 15, 2015||3.75%|
For seven years, from December 16, 2008 until December 15, 2015 the prime interest rate was relatively low at 3.25%.
On December 16, 2015 the prime interest rate was increased by 1/4 percent to 3.50%.
On December 15, 2016 the prime interest rate was increased by 1/4 percent to 3.75%.
The prime interest rate is scheduled to be increased by another 1/4 percent or 1/2 percent during the year 2017.
This is important because the interest rate impacts the price of many things within our economy.
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