Introducing the Guild Basic Needs IndexTM
Guild Investment Management has long believed that the existing indices used to measure cost of living changes in the United States are inadequate and misleading.
For instance, the widely quoted inflation index — the Consumer Price Index (CPI) — is currently based on data collected from spending surveys given by the U.S. Bureau of Labor Statistics from approximately 14,000 urban families. In addition to basic needs, the CPI includes other expenditures, such as insurance and taxes. However, it also includes discretionary spending items such as personal care services and entertainment purchases such as the latest flat screen televisions and consumer electronics.
Another point about the CPI is that the Bureau of Labor Statistics periodically alters its content, making adjustments to the weighting of the components, and smoothing seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost of living index.
We believe a simpler index is necessary for tracking the price changes of basic needs. No such index exists. So, we are creating one: the Guild Basic Needs IndexTM. It will not reflect spending patterns of one segment of the population. Rather, it will measure the changing prices of essential living expenditures.
Design of the Guild Basic Needs IndexTM
The Guild Basic Needs IndexTM concentrates on four categories of primary and essential living needs. Each category is assigned a specific percentage of the overall index:
1. Food 30%
2. Clothing 10%
3. Shelter 30%
4. Energy 30%
Food, clothing, and shelter are self-explanatory and energy is needed for basic heating, electricity, cooking, and transportation.
The categories and their values within the Guild Basic Needs IndexTM are fixed. There is no seasonal adjusting, smoothing, or replacing of components. Due to the established and essential nature of the four Guild Basic Needs IndexTM categories, they are consistent and not subject to passing fancy.
Life is Getting More Expensive, According to The Guild Basic Needs IndexTM
We compared the CPI data to the Guild Basic Needs IndexTM beginning at the start of this millennium. For the period from January 1, 2000 to April 30, 2011, the U.S. Consumer Price Index is up about 35 percent (2.7 percent per year). Meanwhile, our index shows a rise of about 113 percent (6.9 percent per year) over the same 11 years and four months.
Looking at just the five year period ending April 30, 2011, while the U.S. economy has struggled to grow, the price of basic needs have continued to climb higher. During this time, the cost of shelter has declined — yet the cost of living according to the Guild Basic Needs IndexTM still increased over 28 percent. The CPI over the same time period is up less than 12%. As the prices of the items in the Guild Basic Needs IndexTM change, spending patterns will also have to change—and perhaps someday the CPI data will reflect it.
The comparisons above illustrate dramatically why we believe the current government-provided inflation data does a poor job of reflecting real cost of living changes.
We will utilize the Guild Basic Needs IndexTM in future newsletters. Sadly, one of the realities the index will document is the declining standard of living in the U.S. as economic growth and wages struggle to keep pace with the rising costs of subsistence living. The Guild Basic Needs IndexTM is uniquely designed to track the changes in price of basic necessities that people must be able to afford; it is not meant to represent spending patterns.
Our future letters will provide updates on the Guild Basic Needs IndexTM and how the cost of living in the U.S. responds to global change.