As of this writing, financial markets are flirting with record highs. Macroeconomic stats are favorable; rising GNP, low unemployment, rising wage growth even at the low end, and robust consumer spending. But even though inflation rates are falling more than anticipated, the mood of voters remains gloomy. Pollsters tell us it is because people are “anxious” about the future. Even though prices for gas, eggs, milk, and butter are substantially off their highs, prices of some items remain above their pre-pandemic levels.

Falling inflation rates do not mean that prices are falling; it means that prices are rising at a slower rate. The Fed’s target rate of two percent is better for the economy than deflation, generally falling prices.

The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) compiles data to track the economy, such as the consumer price index.  

As important as index numbers are, the construction and use of these indices can be as exciting as watching paint dry. For some forty years Pennsylvania’s PNC Bank has constructed a whimsical Christmas Price Index tracking the prices of the gifts rendered by “True Love” in the song, “The Twelve Days of Christmas.” In addition to relieving the tedium of index numbers, it can be a useful instructional device to illustrate features of indices, such as items to include and the weights attached to them.

Let’s take a look at the prices of items rendered by the song’s “True Love.”

The cost of the Partridge in a Pear Tree in 2023 rose to $319 and change over 2022 for a 13.9 percent increase. While the cost of the Partridge remained unchanged at $20.18, the Pear Tree rose from $260 in 2022 to $299 in 2023 for a 15 percent increase.

The price of the Two Turtle Doves rose from $600 to $750 for a 25 percent increase. PNC economists attribute this to supply factors, the rarity of these birds. 

The Three French Hens set True Love back by $330 for a 3.5 percent increase over the $318.75 in 2022. Higher labor and feed costs no doubt have some influence here as, ceterus paribus, higher input costs reduce supply, resulting in higher prices.

The price of the Four Calling Birds remained stable, at $600 for the last several years — no contribution to inflation here. 

The price of the Five Golden Rings has for the first time in five years remained flat, same as 2022 at $1,245.

The price of the Six Geese-A-Laying has steadily increased for several years. The $780 represents a $500 increase since 2018 and an 8.3 percent increase over the $720 of 2022, higher input costs once again.

The Seven Swans-A-Swimming, a costly item of the gifts, has also been the most volatile. However, fortunately for True Love, the cost remains stable this year, but a hefty $13,125, neither contributing to inflation nor increasing costs to generous True Love.

The long-suffering Eight Maids-A-Milking have received a paltry $58 for many years, clearly not contributing to inflation. Apparently the object of True Love’s affection has a small herd, not having achieved economies of scale necessary for mechanized assistance.

After the Nine Ladies Dancing received a 10 percent increase in 2022, their price remains at $8,308 for 2023, contributing nothing to inflation.

Some performers fared better. The Ten Lords-A-Leaping in 2023 enjoyed a 4 percent increase over 2022, receiving $14,539 and change, replacing the Seven Swans-A-Swimming, as once the most costly of the entire package.

The Eleven Pipers Piping enjoyed a 6.2 percent increase over 2022, receiving $3,207 and change for their performance.

Similarly, the Twelve Drummers Drumming received a 6.2 percent increase over 2022, for a total of $3,468 and change.

The total cost of the items comes to a few cents under $46,730, for a 2.7 percent increase over 2022, this 2.7 percent compared to the BLS year-over-year CPI figure of 3.1 percent.

Recall that the gifts are given not once, but repetitively over the twelve days, greatly increasing True Love’s cost to a hefty $201,972 and change, referred by PNC economists as the “true cost.” This amounts to a 2.5 percent increase over 2023.

To eliminate the normally most volatile item, the Seven Swans-A-Swimming, PNC economists compute a “core index.” For this operation, the single package of the gifts comes to $33,605 compared to $32,398 for 2022, a 3.7 percent increase over 2022 compared to the 2.7 percent increase for a one-time gift of the total package.

If this were a class for students, a couple of questions would test their understanding of an index. Question one: Why is the Christmas Price Index lower when we calculate the index using repetitive gifting, the “true cost,” than using just one set of gifts?

Question two: Why is the core index higher than the index using the total package?

The answer to both questions involves the weighting of the index, in this case, the heavy influence of the costly Seven-Swans-A-Swimming. Recall that the price of that costly item remained unchanged for 2023, contributing nothing to increase cost of the total package. By repeating the package over twelve days, this costly item, with no cost increase, acts as a drag on total costs, thereby lowering the index. Similarly, by eliminating this item experiencing no cost increase from the core index, the core index is raised by the other items having experienced actual cost increases.

The real-life implications of this hypothetical classroom exercise is that the usefulness of a price index depends on the selection of what goes into the index to make it realistic to its target audience. This is the challenge for statisticians and economists of the BLS, to select and weight the items used to construct their various indices. The commonly used CPI is the CPI-U based on a representative basket of goods and services for urban consumers.

Depending on the consumer pattern of an individual, the CPI may appear either understated or overstated.

Considering the unique items of the Christmas Price Index, it comes remarkably close to the BLS CPI, specifically, the CPI-U.   

— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.