Quarterly Research: Tracking Inflation

Quarterly Research: Tracking Inflation

After many years of staying out of the headlines, inflation has returned as a hot topic.

We won’t try to explain why inflation has returned or what’s triggered it. That would take a book, not an article in aftermarketNews, especially if we wanted to look at all the contrasting reasons put forward from different ends of the political spectrum. What we will look at in this article is how we can track the overall level of prices, as well as prices in the aftermarket.

How It Is Measured

The Federal Reserve Board, or Fed, is the part of the government most responsible for combatting inflation. However, they are not the part of the government responsible for measuring it. That is the job of the Bureau of Labor Statistics (BLS), which is part of the U.S. Department of Labor. What the BLS does is define a market basket of goods and services that the average U.S. consumer buys, and then tracks those prices over time in the Consumer Price Index, or CPI. They set the index at 100 to reflect what the average prices were for that market basket in 1982-1984. Then, the level of the CPI in the future shows how much prices have changed since that base period. 

In October 2022, the CPI stood at 298.1. A basket of goods that cost $100 back then costs $298 now. Of course, there are lots of complications when it comes to that market basket. For instance, the composition of the basket of goods and services changes over time. Neither were we buying smartphones in 1982, nor Internet access. They also attempt to factor in changes in quality. For instance, personal computers today are spectacularly better than PCs back then. Cars cost a lot more now, but they are much better quality, too. If anyone is interested in the nuts and bolts of the CPI, possibly as a cure for insomnia, you can always find out more about the mechanics of measuring inflation by diving in at https://www.bls.gov/cpi/ and read about the BLS methodology. 

There are a number of ways to graphically depict inflation. One way is just to plot the CPI over time. That’s what is shown in Chart 1. However, this may not be a particularly useful picture. It shows a line that goes up steadily over time, with only an occasional dip. We know the CPI is going up, but it is somewhat difficult to see whether it is climbing faster or slower. (All data in these charts comes from the Federal Reserve Economic Database at the Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/).

Chart 1

A better way to chart changes in the inflation rate is to look at the changes in the Consumer Price Index. In Chart 2, we look at the percentage change in the CPI from 12 months earlier. In other words, how much have prices gone up in the past 12 months? Plotting the CPI in this way makes it easier to see if inflation is speeding up or slowing down. With Chart 2, it is easy to see how inflation has been accelerating over the past two years. After almost 20 years of bouncing around at around the 2% level, we now have increases of 8% or more.

Chart 2

 Inflation in the Aftermarket

 The BLS does not stop with only one measure of inflation. They try to measure core inflation by taking out prices that are considered volatile – such as food and energy. (Of course, households never need to worry about rising prices in food and energy.) They measure inflation in multistate regions and in major metropolitan areas. And, importantly for the aftermarket, they also publish Consumer Price Indices for certain goods and services. One of those series is “Motor Vehicle Maintenance and Repair.”

 Chart 3 shows the CPI for motor vehicle maintenance and repair (the blue line) plotted alongside the main CPI (orange line) that we looked at earlier in Figure 1. Both of these are an index, so they are showing what has happened to prices compared to what they were in our base period of 1982-1984. What Chart 3 shows is that, on average, prices for motor vehicle maintenance and repair have risen faster than the overall inflation rate. The vehicle repair CPI stood at 358.6 in October, compared to 298.1 for the overall CPI.

 Just like we did with the overall CPI, we can take the motor vehicle maintenance and repair CPI and look at the 12-month change, rather than the overall level. That’s what is shown in Chart 4. While the accelerating inflation of 2022 is as obvious here as it is in the chart for overall CPI,  here we can see that the price increases are even higher, getting into double-digit territory over the last couple of months, with an 11.1% increase in September and 10.3% in October.

Chart 3

Chart 4

Much of the increase in maintenance and repair prices can be blamed on cost pressures that are being passed along by the shops. A general labor shortage in the economy exacerbated long-standing technician shortages in the aftermarket, which have caused wage increases. Another source of cost increases is in parts. There is also a CPI for Motor Vehicle Parts and Equipment tracked by the BLS. Chart 5 shows the 12-month change in this portion of the CPI, and there are a couple of interesting patterns in this chart. First, we had a prolonged period, from 2013 through 2019, when parts prices were either stable or declining. Second, the upward spike in prices since 2021 has been even higher than that of the overall CPI or the CPI for MV service, with changes consistently higher than 12% and climbing as high as a 15% increase this past spring.

Chart 5

What Does This Mean?

So, what does this data show? For now, it looks like auto parts price increases are more than keeping up with inflation, as are the prices for auto service. That’s good for both parts manufacturers and auto service centers. What this data doesn’t show (and isn’t designed to show) is whether the higher prices are causing consumers to delay non-essential repairs. Anecdotally, at least, that isn’t the case. AMN

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