In Black Friday's Aftermath

November 28th, 2012

by Eric Schaefer

If you are like most Americans, you spent the Friday after Thanksgiving hunting down incredible deals all over the mall. With luck, the trunk of your car and the back seat as well, were loaded with shopping bags and electronics boxes. Some are destined to be gifts for the holidays; other items are impulse purchases to enjoy commencing today.

As you exit the parking lot, you have only begun to bear the full cost of your new acquisitions. No, we do not mean paying off your credit card bill next month when it comes due. We mean paying for the ongoing maintenance, operation and upkeep of your swag. A dirty little secret of America's consumer culture is, while stuff gets progressively cheaper the expenses associated with ownership spiral higher.

For example, take that new flat screen 42 inch high definition LCD television straddling the backseat. According to the economists at the Bureau of Labor Statistics (BLS) a TV today costs less than seven percent of a television's price 25 years ago. Of course this calculation takes into account the improvements wrought over a generation. Probably the nominal cost — the price printed on your store receipt — is roughly the same today as 25 years ago. But a TV today bears only a passing resemblance to the faux wood box empanelled cathode ray tube you remember when you were a teenager. Since then the real cost of buying a TV — or most other consumer electronics for that matter — has plummeted.

A generation ago the cost of putting a picture on a TV's screen was less than a third of the price today. Cable and satellite TV charges have risen by 4.7% per annum over the last 25 years; in the twelve months ending October 2012 the increase is a more modest 4.0%. But even this comparatively tame rise is almost double the rate for all items measured in the Consumer Price Index (CPI-U). This measure also understates the increase many households fork out for premium television services. The BLS only measures the cost of the expanded basic service package — the 99 or so channels you flip through before determining there is nothing on worth watching. Premium movie and sports channels, not to mention digital video recording, are not part of the market basket behind the CPI-U. Associated charges are over and above the expanded basic service cost. The combination of bundled channel (for expanded basic service) and a la carte premium service pricing is a key reason why the average American household with cable is spending almost $100 dollars per month.

The TV and cable pairing is by no means unique. Cars and their related operating costs are yet another example of stuff getting cheaper but the related expenses busting consumers' budgets. The BLS estimates a new automobile today is only 25.2% or so more expensive than a new car purchased 25 years ago. Yes, the BLS is assuming you are buying a car for transportation not to use as a mobile living room. Many of the luxuries we feel compelled to have are not included in the sticker price used in the BLS calculations. Economists are interested in measuring changes in the cost of bare bones transportation over time. The cost of a basic car has increased at rate lower than the overall pace of inflation.

Besides the gasoline (up 5.6% per annum) needed to make your car go, all of the other ancillary expenses incurred with a car have also increased significantly faster than new car costs over the last 25 years. Insurance (up 4.1%) and maintenance (up 3.0%) related items are just the start. Parking (up 3.9%) and license and registration (up 3.7%) fees have also risen faster — at least over the last 14 years for which separate data has been tabulated — than sticker prices. All-in-all, the AAA estimates the average sedan costs just under $9,000 to own in 2012, with depreciation and finance comprising less than one-half of the total.

So as you venture out shopping in the weeks between now and the winter holidays, do not be beguiled by the low price tags. For most items you have only really begun to pay once you put it to use.

Notes on Sources and Methods:

The Consumer Price Index for All Urban Consumers (CPI-U) is an index compiled by the Bureau of Labor Statistics (BLS) designed to track the aggregate cost of a basket of goods and services consumed by the average American household. The CPI-U is a widely quoted barometer of changes in the cost-of-living in the United States. The seasonally adjusted series incorporates smoothing of price movements arising from seasonal demand and supply considerations. The non-seasonally adjusted series is as the name suggests; not adjusted for such factors. All rates of change cited reflect the non-seasonally adjusted series.

The television component reflects estimated changes in the cost of TVs adjusted for quality improvements and feature enhancements. The cable television series reflects changes in the cost to consumers for cable and satellite television as well as subscription radio services.

(Sources: BLS; AAA; AIFS estimates.)

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American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.

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