Friday, April 13, 2012

The CPI for Energy Primer

From Stone & McCarthy Research via ZeroHedge: is a great primer on breaking down the all critical CPI for Energy courtesy of Stone & McCarthy:
The CPI for Energy accounts for roughly 10% of the composition of the All Items CPI for Urban Consumers. It receives high focus by the media, market players, and economists because it is a topic of controversy since it is excluded from 'Core' measures of inflation. It also represents the prices of a package of goods that are vital to consumers. This Chart of the Day examines how Energy Prices are organized in the CPI.

The CPI for Energy is a "Special Aggregate" in the BLS's database. In other words, it is a separate aggregation for informational purposes rather than an integral one within the main All Items CPI organization scheme. It is not one of the Eight Major Groups that compose the All Items CPI: parts of the CPI for Energy can be found separately in two of the Eight Major Groups.

Specifically, the CPI for Motor Fuel category can be found in the Transportation grouping, and the CPI for Household Energy can be found in under the Housing category.

Each component of the CPI has its own Aggregation Weight, derived from a calculation based on the Consumer Expenditure Survey conducted by the BLS. Items that are more heavily purchased by consumers get a larger weight in the CPI aggregation. For example, the component indices are multiplied by their Aggregation Weights and summed to generate the CPI for Energy. An Index times its Aggregation Weight is called a Cost Weight, and all of the Cost Weights within a category sum together to form the category's index. We can look to the Cost Weights to measure the size of each component within a category.

Another transformation of the data is the Contribution to the Percent Change of the Category Index. This is noteworthy because a large change of a small component might have less of an impact on the overall index compared to a small change of a large component. The following graph displays the Contributions of each component of the CPI for Energy to the month-over-month change in the Energy Index, in Percentage Points. The contributions sum to the month-over-month percent change of the category. In other words, if the contribution of a component is one percentage point, than the category would have increased one percentage point less if the component had remained unchanged in the month.

We can perform the same operation to learn about each component's impact on the CPI for Energy over the past year.