It’s Cyber Monday which means that holiday shoppers are hitting the internet in search of gifts for the season. How much are you hoping to spend on holiday gifts this year? Chances are, you’re looking to spend about the same as last year. A number of economic indicators are giving shoppers the impression that inflation and consumer prices are holding fairly steady.
Each month, the U.S. Bureau of Labor Statistics reports on the consumer price index (CPI). The CPI measures the cost of goods and services. When the CPI doesn’t change much, it tends to signal that interest rates will stay put. This is important for taxpayers because the Tax Code provides for mandatory annual adjustments to certain tax items based on inflation – and sure enough, when the Internal Revenue Service announced the annual inflation adjustments for 2016 tax year, including tax rate schedules, tax tables and cost-of-living adjustments, the numbers reflected slight changes but didn’t vary wildly.
Of course, the numbers shoppers care most about this time of year tend to be the ones reflected in their wallets. PNC’s CPI – the Christmas Price Index® – has increased but only a bit. The PNC CPI is similar to the government’s CPI but instead, measures the cost of buying one set of each of the gifts given in the song, “The Twelve Days of Christmas.”
This year, PNC’s CPI values the cost of the items in the song only $198 more than last year’s cost. That’s in-line with the government’s CPI. By way of comparison, PNC’s CPI for 2015 is 184% higher than it was in 1984; that year, when the first index debuted, the annual rate of inflation was 4.3%.
To keep the comparison fair, PNC removes the cost of the swans – typically the most volatile item in the list – from its total index. The government does the same thing when figuring its core CPI: it excludes energy and food prices. By taking the swans out, PNC’s core CPI rose just 1.0%, similar to the 1.9% increase in the government’s core CPI. With energy and food prices included, the government’s CPI is just .2% (that takes into consideration that dip in gas prices you’ve been noticing).
It makes for a pretty accurate comparison. Last year, Jim Dunigan, PNC’s Asset Management Group Chief Investment Officer, explained, “While there are exceptions in given years, what’s most interesting about the index’s history is that since the beginning, year over year increases have averaged 2.8%, which is exactly the same number as the U.S. inflation index.”
So what do those numbers mean for consumers? According to Dunigan, “The ‘slow but steady’ growth should mean good things for 2016.” He adds that “[w]hile growth in this recovery has been slower than past recoveries, the recovery should persist for a while longer – we do not see a recession on the horizon.”
Dunigan also finds a silver lining in the data, saying, “While the economy continues to chug along on a sustainable path, low commodity prices are keeping consumer costs down. With only a few items in our index increasing in cost this year, True Loves should be thrilled that they can have their goose and better afford the gas to roast it too.”
If you add up the cost of giving your true love all of the gifts in the song this year, it would cost you $34,130.99. If, however, you really want to impress your true love by nabbing all 364 items – the number of the items as repeated throughout the song over and over (and over) – you’d have to cough up $155,407, nearly $900 more than last year.
Nine of the 12 items in the index cost the same as they did last year. That was true even for the five gold rings, which have remained the same for the past two years, despite the drop in gold commodity prices.
The most expensive bump is the cost of turtle doves: up 11.5% due to increased grain prices. Other increases include the cost of the partridge in a pear tree (up 3.5%) and the cost of Lords-a-Leaping; the Lords were up 3% due to an increase in salaries. In addition to the salary bump, there’s more good news for employment on the horizon according to Dunigan, who says, “The labor market continues to improve and we should see additional job growth again reported this Friday.”
While the cost of the Lords went up, the prices for the eight Maids-a-Milking, the only unskilled workers in the CPI, held steady for the sixth straight year: that’s because the federal minimum wage hasn’t risen since 2009.
If you want to impress your true love this Christmas, here’s the entire list:
1 Partridge in a Pear Tree: $214.99
2 Turtle Doves: $290.00
3 French Hens: $181.50
4 Calling Birds: $599.96
5 Gold Rings: $750.00
6 Geese-a-Laying: $360.00
7 Swans-a-Swimming: $13,125.00
8 Maids-a-Milking: $58.00
9 Ladies Dancing: $7,552.84
10 Lords-a-Leaping: $5,508.70
11 Pipers Piping: $2,635.20
12 Drummers Drumming: $2,854.80
Since 1986, Rebekah McCahan of PNC Wealth Management® has been in charge of tallying up those costs. McCahan gets most of her shopping information directly from the source: a national game bird supplier assisted with the cost of the partridge and turtle doves. A national pet chain provided the cost of the calling birds (you and I call them as canaries) while a national jewelry chain provided the cost of five 14-carat gold rings. The price of the pear tree price came from Cinnaminson Nurseries in New Jersey. The pricing for the ladies dancing was provided by PHILADANCO, a modern dance company in Philadelphia while the cost of those leaping lords was provided by the Pennsylvania Ballet Company.
The sources for the prices generally remain the same in order to promote consistency. They have, however, changed when necessary – along with economic trends.
The prices in the CPI reflect the cost of shopping the traditional way: actually going to jewelry stores, plant nurseries and the like. But that’s not how most of us shop anymore. If you bought all of these items on the internet, you’d pay more: $43,626.73 ($9,495.74 more than buying “in person”). That’s because, as Dunigan has explained previously, “In general, Internet prices are higher than their non-Internet counterparts because of premium shipping costs for birds and the convenience factor of shopping online.” This, despite those lower fuel costs overall.
Sales tax (or use tax, if you’re shopping online) might be payable on your Christmas gifts – but that would depend on where you live and where you shop. While most states impose some level of sales tax, there is dramatic variation between what goods and services are subject to tax. This is especially true when it comes to the costs of services. PNC is located in Pennsylvania where food (except for ready-to-eat), most clothing apparel, and medicines are nontaxable. But that pear tree? Taxable. Those gold rings? Taxable. Pets and most animals? Also taxable. Those milkmaids, however? Not taxable; as a farm and dairy state, most dairy-related services are exempt. Figuring the exemptions from state to state would be wildly time-consuming, so the CPI is tax neutral: interested consumers and tax geeks like me can figure those differences on our own.
So what do all of these numbers mean for you and me? Dunigan believes that consumers will continue to benefit from those lower energy prices. Combined with personal income growth, which, as he notes has been positive, that “should support consumer spending in 2016.” That’s good news for retailers. Dunigan adds that “[w]hile the Federal Reserve will likely raise interest rates at their December meeting – the slow but steady growth should keep them on a gradual and measured pace of additional increases in 2016.”
PNC has figured the CPI each year since 1984