It's time once again to revisit the Christmas Price Index compiled annually by Pittsburgh's PNC Financial Services Group. This whimsical price index adds a touch of mirth and merriment to the otherwise boring instruction on the formulation, interpretation, and use of more familiar indices such as the consumer price index and the producer price index.
A fundamental issue faced by economists constructing an index is the components to include. The Christmas Price Index solves this problem by including the twelve sets of gifts rendered by the generous True Love in the classic song, "The Twelve Days of Christmas."
Critics of Fed Chair Ben Bernanke have been warning of the ostensible consequences of his expansionary monetary policy - rampant inflation sooner or later. His critics are temporarily subdued by the modest 2.2 percent annual rise in the consumer price index. His critics might take solace in the heftier 4.8 jump in the Christmas Price Index - a harbinger of things to come? Lets look at the price performance of each gift.
At a measly fifteen dollars, the Partridge remains the lowest cost item in the disparate array of the song's gifts. Its price remains unchanged from 2011. The Pear Tree in which the Partridge resides was subject to an 11.8 percent price increase to $189.99. Can an increase in residential housing be far behind?
The price of the Two Turtle Doves and the Four Calling Birds remained unchanged at $125 and $520 respectively. However, the price of the Three French Hens rose by ten percent to $165. A major point of instruction for students of finance and economics is that the birds represent only a small portion of the twelve gifts. Therefore, even if their prices increase dramatically, they would have but minor effect on the index.
Let's move to the pricier items of the index, starting with the Five Golden Rings. Reflecting the dramatic increase in price of gold during 2011 - the price of gold moving inversely with value of the dollar - the golden rings are playing "catch up." The Five Golden Rings in 2012 will cost the generous True Love $750, an increase of 16.3 percent over 2011.
The price of the Six Geese-a-Laying increased by a hefty 29.6 percent to $210, no doubt reflecting dry weather, reduced feed supplies and higher costs, resulting in reduced supply.
The costliest item in the set of twelve gifts is the Seven Swans-a-Swimming. It is also the most volatile item, attributable, the experts tell us, to their uncertain breeding cycle affecting supply. Their price increased by slightly over eleven percent for a cost of seven thousand dollars.
As with many production, and especially service, enterprises, labor is a major cost. The Christmas Price Index includes an anomalous combination of agricultural labor and talented dancers and musicians. Mechanical, construction, and other manual skills are notably absent. The Eight Maids-a-Milking are, perhaps unjustly, considered unskilled labor and are billed at the minimum wage. As the federal minimum wage rate of $7.25 per hour remained unchanged during 2012, the Maids can be employed at a mere $58. Those of us with farm backgrounds are accustomed to low returns to agricultural labor.
The Eight Maids-a-Milking are among the most affordable of gifts, but only because of omitting the dairy cattle necessary for the maids to be usefully employed. Therefore, unless the object of True Love's affection is directly engaged in milk production, he is well advised to reconsider this gift, notwithstanding its modest cost.
The high cost of dancers and musicians lends greater weight to the index. The compensation of the dancers remained unchanged from 2011. Based on data provided by Philidanco and the Pennsylvania Ballet Company, the Nine Ladies Dancing and the Ten Lords-a-Leaping bill out at $6,294 and $4,766.70 respectively. (Critics of the index suggest that data be gathered from a wider array of sources. Economists can be a critical lot.)
The musicians enjoyed a 5.5 percent wage increase in 2012 over 2011. This increase brings the cost of the Eleven Pipers Piping to $2,562, and the Twelve Drummers Drumming to $2,775.50.
The total cost of the twelve sets of gifts comes to $25,431.16 for a 4.8 percent increase over 2011 - a hefty enough price tag. But recall that the generous - and well-heeled - True Love awards these gifts repetitively over the course of twelve days. This magnanimous process totals up to $107,300, or a 6.1 percent increase over 2011.
How come the 6.1 percent of repeating the process is greater than the increase of just 4.8 percent of just one set? The practical lesson for students is that repeating the process magnifies the increased prices of the most costly items that already bear a disproportionate weight in the index.
The familiar Consumer Price Index is sometimes cited with an accompanying number noted as the "core index," omitting the volatile food and energy components. In the same vein, the Christmas Price Index can be calculated as a "core index," omitting the Seven Swans-a-Swimming, the most volatile, and costly, of the gifts. By omitting the Swans, the "core index" falls from 4.8 percent to a more modest 2.6 percent for one set of each of the gifts. For the repetitive process, the core index falls from a 6.1 percent to a mere 2.2 percent increase.
These changes illustrate the importance of the components to be included in the index, and the weights attached to each. The modest "core index" could give Fed Chair Bernanke some comfort, and give his critics some pause, the 2.2 percent increase, coincidentally, identical to the 2012 rise in the consumer price index.
With the end of 2012 drawing nigh, I welcome the continued encouragement and support of my readers, and appreciate your greeting me on the streets, restaurants, and, yes, in our fine local taverns.
Merry Christmas and a prosperous New Year to all.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
A fundamental issue faced by economists constructing an index is the components to include. The Christmas Price Index solves this problem by including the twelve sets of gifts rendered by the generous True Love in the classic song, "The Twelve Days of Christmas."
Critics of Fed Chair Ben Bernanke have been warning of the ostensible consequences of his expansionary monetary policy - rampant inflation sooner or later. His critics are temporarily subdued by the modest 2.2 percent annual rise in the consumer price index. His critics might take solace in the heftier 4.8 jump in the Christmas Price Index - a harbinger of things to come? Lets look at the price performance of each gift.
At a measly fifteen dollars, the Partridge remains the lowest cost item in the disparate array of the song's gifts. Its price remains unchanged from 2011. The Pear Tree in which the Partridge resides was subject to an 11.8 percent price increase to $189.99. Can an increase in residential housing be far behind?
The price of the Two Turtle Doves and the Four Calling Birds remained unchanged at $125 and $520 respectively. However, the price of the Three French Hens rose by ten percent to $165. A major point of instruction for students of finance and economics is that the birds represent only a small portion of the twelve gifts. Therefore, even if their prices increase dramatically, they would have but minor effect on the index.
Let's move to the pricier items of the index, starting with the Five Golden Rings. Reflecting the dramatic increase in price of gold during 2011 - the price of gold moving inversely with value of the dollar - the golden rings are playing "catch up." The Five Golden Rings in 2012 will cost the generous True Love $750, an increase of 16.3 percent over 2011.
The price of the Six Geese-a-Laying increased by a hefty 29.6 percent to $210, no doubt reflecting dry weather, reduced feed supplies and higher costs, resulting in reduced supply.
The costliest item in the set of twelve gifts is the Seven Swans-a-Swimming. It is also the most volatile item, attributable, the experts tell us, to their uncertain breeding cycle affecting supply. Their price increased by slightly over eleven percent for a cost of seven thousand dollars.
As with many production, and especially service, enterprises, labor is a major cost. The Christmas Price Index includes an anomalous combination of agricultural labor and talented dancers and musicians. Mechanical, construction, and other manual skills are notably absent. The Eight Maids-a-Milking are, perhaps unjustly, considered unskilled labor and are billed at the minimum wage. As the federal minimum wage rate of $7.25 per hour remained unchanged during 2012, the Maids can be employed at a mere $58. Those of us with farm backgrounds are accustomed to low returns to agricultural labor.
The Eight Maids-a-Milking are among the most affordable of gifts, but only because of omitting the dairy cattle necessary for the maids to be usefully employed. Therefore, unless the object of True Love's affection is directly engaged in milk production, he is well advised to reconsider this gift, notwithstanding its modest cost.
The high cost of dancers and musicians lends greater weight to the index. The compensation of the dancers remained unchanged from 2011. Based on data provided by Philidanco and the Pennsylvania Ballet Company, the Nine Ladies Dancing and the Ten Lords-a-Leaping bill out at $6,294 and $4,766.70 respectively. (Critics of the index suggest that data be gathered from a wider array of sources. Economists can be a critical lot.)
The musicians enjoyed a 5.5 percent wage increase in 2012 over 2011. This increase brings the cost of the Eleven Pipers Piping to $2,562, and the Twelve Drummers Drumming to $2,775.50.
The total cost of the twelve sets of gifts comes to $25,431.16 for a 4.8 percent increase over 2011 - a hefty enough price tag. But recall that the generous - and well-heeled - True Love awards these gifts repetitively over the course of twelve days. This magnanimous process totals up to $107,300, or a 6.1 percent increase over 2011.
How come the 6.1 percent of repeating the process is greater than the increase of just 4.8 percent of just one set? The practical lesson for students is that repeating the process magnifies the increased prices of the most costly items that already bear a disproportionate weight in the index.
The familiar Consumer Price Index is sometimes cited with an accompanying number noted as the "core index," omitting the volatile food and energy components. In the same vein, the Christmas Price Index can be calculated as a "core index," omitting the Seven Swans-a-Swimming, the most volatile, and costly, of the gifts. By omitting the Swans, the "core index" falls from 4.8 percent to a more modest 2.6 percent for one set of each of the gifts. For the repetitive process, the core index falls from a 6.1 percent to a mere 2.2 percent increase.
These changes illustrate the importance of the components to be included in the index, and the weights attached to each. The modest "core index" could give Fed Chair Bernanke some comfort, and give his critics some pause, the 2.2 percent increase, coincidentally, identical to the 2012 rise in the consumer price index.
With the end of 2012 drawing nigh, I welcome the continued encouragement and support of my readers, and appreciate your greeting me on the streets, restaurants, and, yes, in our fine local taverns.
Merry Christmas and a prosperous New Year to all.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
