By Pater Tennebrarum at Acting Man blog
A recent AP article published by ABC piqued our curiosity. It is entitled “Why Airfare Keeps Rising Despite Lower Oil Prices.” Evidently, the authors felt an explanation was in order – maybe people have complained that air fares keep going up in spite of declining fuel prices? We can’t be sure what motivated them to write the article, but here are a few excerpts:
U.S. airlines are saving tens of millions of dollars every week because of lower prices for jet fuel, their largest expense. So why don’t they share some of the savings with passengers?
Simply put: Airlines have no compelling reason to offer any breaks. Planes are full. Investors want a payout. And new planes are on order.
In the past six years, airlines have done a great job of adjusting the number of flights to fall just short of demand. As a result, those who want to fly will pay a premium to do so. Airlines are selling a record 85.1 percent of their domestic seats. Thanks to several mega-mergers, four big airlines control the vast majority of flights, leaving very little room for another airline to undercut fares. With that in mind, here’s a closer look at what’s going on with airfare and the price of jet fuel:
— The average domestic airline ticket during the 12-month period ending in September rose 3.5 percent to $372.21, according to an Associated Press analysis of data from the Airlines Reporting Corp., which processes ticket transactions for airlines and travel agencies. That figure doesn’t include another $56 in taxes and fees that passengers pay.
.......If airline fares rose 3.5% over the past twelve months (excluding tax surcharges), we should expect this to show up in the consumer price index. In fact, consumer price indexes are calculated separately for the various components making up the basket. So what does the airline fares price index published by the Bureau of Labor Statistics show? See for yourself:
Airline fares according to the government’s CPI statistics. Something seems not right with this … the BLS says they have declined by more than 3% year-on-year, not risen by 3.5% – via St. Louis Fed – click to enlarge..
We can only surmise that the quality of air travel must have increased so tremendously over the past year that a rise in airline fares in nominal terms became a decline in “hedonically indexed” terms.
It is actually not really possible to calculate a “general price level”, since there is no constant against which prices could be compared. The reason is that the supply of and demand for both goods and services and money continually changes. However, it is certainly possible for people to notice whether their incomes buy more or fewer goods and services over time – the fact that the purchasing power of fiat money declines over time is not exactly a big secret.
People often complain that the calculation of CPI has become deeply flawed (leaving the deliberations above aside for the moment). Partly this is due to the bias of observers, as everyone buys a slightly different basket of goods, and partly it is due to the fact that the methodologies employed have over time been redesigned so as to show as little “price inflation” as possible. Although this was never presented as the reasoning behind the methodological changes, one major effect is that it cuts down on government spending on social security and other expenses tied to cost of living adjustments.
Among the flaws are the very subjective interpretations of how the changing quality of goods should be reflected (which is of course assumed to always improve) and the regular change of the weightings of goods in the basket based on the idea that people will buy less of what becomes more expensive. This of course also means that the index reflects something slightly different every time.
We’re not sure what has created the discrepancy between the change in airline fares as reported by the ARC (which actually provides data on millions of tickets every year) and that reported by the BLS. It is certainly interesting though – there is after all a vast difference between prices rising by 3.5% or falling by slightly over 3% in the space of one year.