consumers

What Is CPI and Why Should You Care?

March 13, 2018 By Jackie Cohen Leave a Comment

What is CPI? Read on to find out.

On days like today, the financial news media explodes with articles about changes in the overall cost of living, based on inflation (and deflation) in prices paid by consumers. That’s just the quick answer to the question, “What is CPI?”

Short for the consumer price index, CPI is one of the most watched federal economic indices to come out on a monthly basis.

The end result is a single figure but it represents the prices of 80,000 different consumer goods and services, showing the average rate of inflation in all of them over time.

What Is CPI?

The U.S. Bureau of Labor Statistics calculates these figures based on retail prices paid by consumers in 87 different greater metropolitan areas. Note that wholesale prices are part of another index altogether, and subsets of it comprise still other federal indices.

Also excluded from CPI: the sale price of homes. Instead, the index calculates the monthly equivalent of home dwelling costs based on rents. While some call this misleading, there are other federal economic indices that provide more detail on housing.

CPI data comes from 12,000 households that keep diaries about their spending. BLS also conducts quarterly interviews with them all to determine how to calibrate the relative importance of different items in the index.

Lots of Retailers

The agency rounds out this information with consumer-facing prices supplied by 23,000 retail and services companies.

All told, CPI provides a measurement of inflation that is one of the data points the U.S. Federal Reserve Bank uses to determine whether it needs to adjust interest rates.

CPI also feeds into calculations of the U.S. gross domestic product, the most widely used economic indicator and one that the Fed in turn also uses in its assessments for monetary policy.

Other Uses for CPI

What is CPI? Look at this chart for answer.

Other federal agencies use the CPI as the basis for inflation rate adjustments in the amount of money awarded for federal programs including Social Security, disability, welfare and even veterans benefits.

Recent CPI announcements have revealed that inflation is beginning to pick up speed, possibly crossing into unhealthy territory — and this is contributing to fluctuation in the stock market.

When the stock market fluctuates, certain types of commodities tend to capture more interest — especially precious metals.

Although at first it might seem like commodities have a wee bit of overlap with CPI, they’re actually more of a wholesale type of indicator.

But back to CPI showing that inflation is accelerating, it’s been moving faster in some parts of the economy than others. Energy prices have been going up more than twice as fast as all other types of consumer prices.

Although looking at the price of oil and gasoline might yield more detail on energy inflation, the view of it within CPI shows how consumers are shouldering it in the context of other expenditures.

In sum, CPI provides a national average for inflation across all consumer products — so when you see an increase in the price of something you buy regularly, compare the percent increase with CPI to determine going up at the same rate as everything else.

Readers, where are you seeing inflation the most right now?

Coupons Are Taxable – Why Do We Have To Pay Sales Tax on Them?

April 20, 2008 By Shannon Christman 18 Comments

It seems everything is taxable — even coupons! I never questioned the small print on the coupons I use, at least not the part about the customer paying sales tax. (I don’t understand why a manufacturer can say a coupon shouldn’t be doubled when it’s the retailer that makes a doubling offer, but that’s not my point here.) I never questioned the sales tax, but I know others have.

Recently, when we were about to pay for new car tires, I overheard the customer in front of us questioning the sales tax on his bill: “Why should I pay sales tax on this $40-off coupon? You don’t charge sales tax when the price is lower because of a store sale. Using a coupon is the same thing — I still pay $40 less.” He made a valid point: Why am I paying sales tax on money I’m not paying for goods or services?

If a manufacturer prices a car at $21,499 and I bargain with the dealer so that I’m paying only $17,399, I would certainly question the bill if I saw I was taxed on $21,499. Sometimes manufacturers suggest ridiculously inflated retail prices that I would never pay; the idea of being charged sales tax on those prices is absurd.

For lower priced items, the difference in tax seems minor, even if I would scoff at the manufacturer’s inflated price. If I went to a toy store and paid a $15.00 sale price for a toy that’s usually $20.00, I might not notice if I were charged thirty cents in tax on the extra $5.00. If I did notice, I would complain about it if I had the time and was in a quarrelsome mood. But until I overheard that tire customer, I never questioned the sales tax I paid on coupons. In fact, I have done the opposite — I once blurted out, “Don’t I owe sales tax?” when coupons and sales brought my total bill to $0.00.

Once that tire customer planted the idea in my head, I had to find out why we do have to pay sales tax on coupons, but not advertised specials. The tire clerk had just responded, “The law says we have to.” That explanation wasn’t enough to satisfy my curiosity, so I turned to Goodsearch and found a reasonable explanation from the state of New Jersey: “When these [manufacturers’] coupons are used, sales tax is charged on the full regular price because that is the amount which the vendor ultimately receives — in part from the customer, the balance from the manufacturer.” The same site explained that sales tax should not be charged for vendor coupons because the vendor never receives that extra money. That made sense to me, but assuming the laws are the same in my state (an answer I couldn’t find online), the tire customer could have made another argument against paying sales tax: the coupon he used had been a vendor coupon.

Retailers seem to be as confused by the law as consumers are. Some retailers never charge sales tax on discounts, whether they are in-store sales or manufacturer’s coupons. Some charge sales tax on all coupons, even those they have issued themselves. I have learned to expect to be charged sales tax on coupons and am pleasantly surprised when I am not — I consider it a gift from the retailer. Either way, I see coupons as a blessing, so I have decided not to complain that I’m really only getting 94% of their value after I pay Pennsylvania’s 6% sales tax.

Image courtesy of BigFreaky

I Want the Toys and I Want Them Now

December 12, 2007 By Cortni Marrazzo 3 Comments

“I want the toys and I want them now.” It sounds like something a toddler would say, doesn’t it? Yet this is what I hear nowadays from many people in their 20s and 30s indirectly through their spending habits. “I want toys and conveniences and I don’t want to have to wait for them.”

When I was in high school I used to think that once I got a full time job I would be able to buy whatever I wanted and play with all my stuff on the weekend. But then I got older and realized that my financial future was more important than toys. Unfortunately, not everyone has learned this. I’m amazed at how many people will whittle away their money on trivial things with no regard to saving and investing for their future. The future may be out there a little ways, but it will be here before you know it and many people will be very unprepared. Let’s start with a few of the things that younger people want to splurge on instead of saving and investing more.

A Big House: Who really needs a 2,500 sq ft house for two people? Or even 2 people and a baby? Granted I wanted a big house when my husband and I were house hunting, but I quickly realized that by buying a bigger house than we needed we would be throwing more money towards mortgage payments, heating/cooling bills, furniture, taxes, etc. We won’t need a significantly bigger house until we have multiple kids and they need somewhere to run around, but for now we’ll save the extra money and put it towards our future.

The same goes for houses with all the extras like 6 car garages, hot tubs, pools, monster walk-in closets, 17 bathrooms, and whatever else people can add to houses in order to charge more for them.

Cars: I would love a brand new car. The new car smell, all the new features, and all the extra cost. There are many people who don’t seem to care that their new car will depreciate about 20% as soon as they drive it off the lot, thus costing them thousands more than if they had bought a slightly used newer car. And there are those who decide they need a gas guzzler SUV that costs them more money in price, gas, tires, etc. Maybe if you have 3 kids or more you might need an SUV, but even a station wagon could fit almost as much (granted they don’t look as nice I admit). What’s sad is that many families just starting off with only one child think they need an SUV – and all the extra expenses that come with it.

Clothes: Young people tend to care about fashion more than older people, so younger people tend to spend more on their clothes to get the right brand and/or the right look. There is nothing wrong with being fashionable, but if you are dressed to impress but have nothing to invest (hey that rhymed) then you need to re-evaluate your priorities.

Designer Purses and Shoes: This is similar to the clothing issue above. Some women have to have the Coach purse or the Dooney and Burke one because “they are so cute.” And don’t forget $70 pairs of heels.

Eating Out: Younger people, especially single young people working full time, tend to eat out a lot. They tend to figure that they don’t have a family to cook for and they are making good money, so why not? Without realizing it, many young people spend more than $200-300 a month just on eating out.

Coffee: Similar to eating out above, the coffee craze is deep, especially where I live in the Northwest. Starbucks isn’t just a good cup of coffee any more, it’s status symbol. Many people like to meet others at Starbucks or stop there at the beginning of an outing and who can go without getting something? And arriving at an event with a hot Starbucks drink in your hand during cold weather or an iced latte in the hot weather is almost like a designer accessory these days.

Hair & Nails: My, how women, especially young women, like to get their hair and nails done. A haircut can cost anywhere from $20-$50 while a foil can cost upwards of $50-$100+. Not to mention the upkeep on highlights since you can’t let your grow-out show. Even at a conservative $50 a month every other month, you’re still looking at $600 a year. Plus there is the cost of fake nails and manicures costing up to $40 every 2 weeks!

Boats/Motorcycles/Other Big Toys: These are the ones that can get really expensive. Young people today want vacation homes, RVs, boats, motorcyles, snowmobiles, whatever can help them have fun when they are not working. Since these are rather expensive items, who wants to wait to save up for them? “Just make monthly payments” is how the thinking goes.

Stuff: This incorporates anything else that does not fit into the above categories. Many young people just want to have stuff. Big TVs, nice furniture, ipods, you name it. “The more stuff the better” tends to be the current mantra.

So what if people want to spend their hard earned money on stuff they enjoy? Is that so bad? Well, it can be if it’s not controlled. Especially for young people who are in the early stages of their financial journey, this kind of spending can ruin their financial future. How?

It Creates Debt: Most people can’t afford all the toys and conveniences they want at the time they want it, but they do have credit available to them. The more money young undisciplined people make, the more they tend to get into debt. I saw a couple on tv the other day that made $250,000 year, yet were $300,000 in credit card debt. How does that happen? You’d think they’d be sitting pretty making $250,000 a year, yet they are majorly in debt with minimum credit card payments reaching above $10,000 a month. Debt doesn’t just lower your credit score, but it keeps you in bondage as your continue paying for things that you probably aren’t even enjoying as much anymore. It puts you behind in your financial journey.

It Leaves Them Vulnerable for Emergencies: When young people have very large monthly credit card payments, or even if they can afford to pay for these toys outright, there’s a good chance they are spending most of what they are making, leaving little or no room for saving for an emergency fund. If they were to lose their job, it wouldn’t matter how many toys they have – they could still lose their house or go into bankruptcy and ruin their credit. It’s so important to have an emergency fund in place for things that could go wrong (and probably will at some point), yet I see so many people spending this money away, never giving it a chance to see their savings account. Hey, but at least they look good, right?

It Causes Them to Lose Valuable Compounding Interest: This is one of my biggest pet peeves about young people spending so much so early in their lifetime – they are losing valuable compounding interest on potential investments. Saving a few dollars today by skipping a new toy or convenience could be worth hundreds of thousands in the future when you retire. And the best part is that you will probably hardly miss the money today, but you will greatly appreciate it in the future. The advantage that young people have is more time until retirement, meaning that their saved dollars now will go farther than if they were older.

It Prevents Patience and Discipline Building: The above listed things are great to have and I agree that life should be enjoyed, but sometimes you have to wait for things and in turn you end up enjoying them a lot more because you are more mature since you had to wait. If you don’t go through the process of waiting and saving until you are on good financial ground, then you lack the character and maturity you would have built in the meantime. People who wait to buy things until the time is right tend to be less selfish and controlling about what they own because they realize life isn’t about all that stuff, but it’s about being smart and making the right decisions to take you to your desired future.

Image courtesy of David Zellaby