Understanding the impact of inflation

SALT LAKE CITY -- Watching the upwardly ticking digits on a gas pump, I can't help but visualize dollars draining from my bank account as my tank fills with gas. And almost as mesmerizing, are the ever-changing prices on gas station signs.

As consumers, we're particularly attuned to gas prices (which, thankfully, have been down this winter), in part because they are always in flux. But, in fact, similar price fluctuations are happening with hundreds of other products and services we purchase each month.

From milk to movie tickets to gym memberships, prices are constantly being adjusted according to prior inflation, consumer demand, raw material costs and other factors. Collectively, these price changes — even the seemingly insignificant ones — serve as an important economic indicator and a measure of inflation.

As the writer and humorist Sam Ewing put it, "Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair."

However, a moderate amount of inflation, ideally between 2 and 3 percent, is actually a good thing. Inflation is a sign that the economy is growing. A lack of inflation can indicate a weakening economy. Conversely, rapid or erratic inflation may lead to uncertainty — discourage savings and investment.

Both the Wasatch Front Consumer Price Index and the national Consumer Price Index track and report valuable data on price changes that is used by local businesses, government entities and consumers. The Wasatch Front index, reported by Zions Bank, trends average prices of the most frequently purchased items by Utahns.

The "basket" of tracked goods includes close to 1,000 items ranging from electricity and alcohol to the cost of funerals. Price changes are aggregated into categories such as food at home, utilities, transportation and apparel, and then combined to determine overall price changes over the past month. Each month, price trends are reported, comparing the local data to the national Consumer Price Index, trended by the U.S. Bureau of Labor of Statistics.

The latest Wasatch Front Consumer Price Index, released on Feb. 17, shows that prices along the Wasatch Front edged up slightly in January, likely the result of annual price adjustments. The index increased 0.2 percent, while the national index rose 0.4 percent. But what does that mean to the average consumer?

The consumer price index is an indicator of how much you can buy with your money, both in terms of specific goods and services and your overall purchasing power. So while you likely noticed the falling gasoline prices, the index report helps you know what is happening with the hundreds of other products and services you purchase each month.

In January, for example, the Wasatch Front saw rising costs in categories including food at home (1.4 percent), housing (0.7 percent), clothing (0.7 percent) and utilities (0.3 percent). These increases were offset by the declining price of gas, which caused transportation costs to drop 1.3 percent in January.

Over time, the index can be used to calculate the real wage, meaning average wage increases minus inflation. For example, you may feel slighted when your boss gives you a 3 percent raise. However, if prices only increased 1 percent, you actually have more money. On the other hand, if you received a 5 percent raise but because of inflation the goods you purchase went up by 5 percent, you would be no better off.

By the way, over the last year, the real wage in Utah has gone up by 2.5 percent. Annual pay is projected to increase 3.2 percent to an average of $41,070 in 2012.

The consumer price index is also an important tool for local businesses and government entities to make decisions that impact us all, including setting local rents, salary increases and wage garnishments. The Social Security Administration relies on the national index to make annual cost of living adjustments; if inflation increases, Social Security payouts respond accordingly. The index also helps the Federal Reserve Board monitor inflation. If unemployment is high, the Fed can inject more money into the economy and spur business investment and consumer spending with hopes of impacting employment. If inflation seems imminent, however, they can't do a lot to change employment.

In the coming months, gasoline prices are expected to rise, putting upward pressure on the index and reminding us that when it comes to consumer prices, the only certainty is uncertainty. However, such price pressure is not indicative of general inflation. In the past 12 months, inflationary trends along the Wasatch Front have grown at a healthy pace, helping facilitate the state's economic recovery.

Total inflation along the Wasatch Front for 2011 was 2.8 percent, which is within the Federal Reserve's optimal inflation rate of 2 to 3 percent. Economists project these trends to continue throughout the year, though it remains to be seen how they will unfold in future index reports.

Here are a few tips for understanding the Wasatch Front Consumer Price Index:

• Data is reported on a non-seasonally adjusted basis. That means the effects of regular patterns have not been removed from the data.
• Prices for each good and service are weighted to reflect local consumption. For example, Utahns generally purchase less alcohol and tobacco products than other states, so those items are weighted accordingly.
• The index is calculated by comparing the cost of the market-basket at a fixed time with its cost at subsequent and prior intervals.
• A rise in the general level of prices for goods and services indicates inflation. However, a moderate amount of inflation is actually a good thing, as it is an indicator that the economy is growing.
• Generally, the central banks that control the size of the money supply aim to keep the rate of inflation low and stable, between two and three percent.

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