The Week Ahead – CLEWI

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

I recently received a notice from Arrowhead Water declaring that starting November 2^nd, the price of a five gallon bottle of water will be going from $8 to $10. This represents an eye-popping 25% price increase! Inflation is a natural part of a healthy modern economy. As long as inflation stays contained, it’s not much of an issue. Of course when it gets out of control as in Argentina where inflation is expected to top 44% this year, things get problematic to say the least.

Most of the time when an economist discusses inflation they are referring to the most famous measure of purchasing power erosion: the Consumer Price Index (CPI). While the CPI has historically averaged 3% per year, due to the great recession of ‘08, the rate of inflation has significantly slowed over the past decade, averaging just 1.8% on an annual basis. Fun fact: assuming 3% inflation per year, purchasing power will be cut in half in 24 years. While inflation has been low in recent times, there are signs that the tight labor market and rising wages are starting to result in higher prices. Beyond the CPI, there are several metrics that are also relevant and arguably even more germane. For example, the Federal Reserve prefers the Personal Consumption Expenditure (PCE) indicator, which tends to be less volatile and more representative of the cost of living. The biggest differences being that PCE is much less weighted towards housing, and more highly weighted in the health care category. A lesser known inflation metric, maintained by Forbes, is the Cost of Living Extremely Well Index, or the CLEWI. The CLEWI is an eclectic index that tracks the prices of 40 items including such posh items as:

• Motor Yacht: Hatteras 75
• Cigars: 25 Davidoff Dominican Aniversario Double "R"
• Handbag: Hermès Clemence Jypsière, bull-calf leather
• School: Year's tuition, room and board at Groton
• University: Year's tuition, room and board, plus insurance, at Harvard
• Face-lift: Experienced surgeon
• Psychiatrist: 45 minutes at Upper East Side shrink
• Hotel: Four Seasons one-bedroom suite, off-peak
• Car: 2018 Rolls-Royce Phantom
• Travel Bag: Louis Vuitton Keepall Bandoulière 55
• Airplane: Learjet 70, Bombardier
• Chateaubriand: Seven pounds of tenderloin
• Champagne: Case of 750ml Dom Pérignon 2006
• Shirts: 12 cotton bespoke, Turnbull & Asser 

Interestingly, the CLEWI has averaged 5% per year over the last 40 years, an inflation rate about two-thirds higher than the CPI. However, with the U.S. dollar having strengthened over the last several years, it’s had a significant dampening effect on the CLEWI, which has risen at a 1.7% annual rate over the last few years. But, if you’re able to afford a $5.6MM yacht, you’re probably not too worried about it.

Along with several important statistics, the CPI will be announced on Wednesday. It will be very interesting to see if the recent wage pressures we have seen start to translate in to higher prices.

Data deck for November 12 - 16: