Chained-CPI: How the Government Plans to Hammer Consumer Stocks

Nate is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It now appears clear that, whatever solutions come out of the fiscal cliff talks, chained consumer price index will be a part of the upcoming deal.

Chained CPI is a means of calculating cost-of-living adjustments for those who get some form of federal benefits. It assumes that people will choose cheaper alternatives if they don't have enough money. So if someone can't afford steak, they'll get chicken instead. It makes the assumption that all things are equal in quality, if not equal in price. Why should people pay for a new home when they could, after all, live in a trailer? In both cases, the negotiators assume, people have a roof over their heads. Who cares about the quality?

Using chain CPI, instead of  standard CPI, allows the government to help balance its books on the backs of those with the most to lose. Retirees, veterans, those receiving disability or social security, and so forth all rely on the CPI to keep themselves ahead of inflation. These people will lose ground every year under chain CPI.

But what's really happening is that the negotiators in Washington want to cut entitlements without appearing to cut entitlements. By doing that they're also going to impact the ability of people to buy all sorts of goods. If chained CPI is enacted as a part of the fiscal cliff deal (and something will be enacted, there's too much political pressure for it not to happen) we'll see a large decline in American's disposable income.

In short, chained CPI is a way for the federal government to shrink the income of Americans. And less available money for consumers is bad for consumer stocks. Here are my thoughts on a few companies who's sales, and therefore share prices, might have a rough time with Chained-CPI:

Macy's (NYSE: M) won't enjoy a cut in discretionary spending. Already a store with an older demographic (a BIG percentage of the stores customers fit into the 45-99 year old demo (as do I, sadly).  Younger shoppers are already moving to other stores and the reduction in spending that could come would move those remaining in Macy's sweet spot towards other, cheaper retailers.

Petsmart (NASDAQ: PETM) will feel the pinch.  People love their pets.  But an easy place for them to cut when times get tight is on pet spending.  Petsmart focuses on providing good quality pet supplies in one location, true.  That won't do any good when people stop spending on their pets except for cheap food and such.  No more $80 dog beds for Fido and Fluffy and suddenly Petsmart is on the outside looking in at a whole generation of shoppers.

Even mighty Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) might find that, despite their high-flying ways, if fewer people can afford to buy, it won't matter what your 'cool factor' happens to be.  Apple, in particular, has relied on a high price point and its ineffable 'cool factor' to bring it through difficult times.  The company has an enormous cash reserve ($117 billion per recent reports) but that is the sort of thing that helps a company survive hard times, not recover from them.  It'll be an easy switch for people to go from an iPhone 5 to a cheaper Droid-based system if it saves them $200 or more.

For Amazon, the company is better positioned than Apple to get through declining consumer spending.  CEO Jeff Bezos has made sure that the company's products and prices can adjust to changing demand.  By spreading its sales out over a god-awful number of different markets, and sellers, even if the high-end stuff tanks a consumer can still get a cheaper alternative and still spend their money through Amazon.  It might shrink Amazon's margin even further than it is (and the firm maintains very thin margins, typically) but it can come through.

Honestly, let's look at the figures. At the beginning of 2012 the average social security recipient received $1230. With a 3% current CPI in 10 years that person receives a monthly check for $1653.02. If chain CPI is used then that person only sees an annual adjustment of 1% less each year. So at the end of 10 years that $1230 monthly check is now only $1499.36. That's $150/month less for each recipient to spend. Multiply that by the growing number of social security recipients and suddenly we're looking at a massive reduction in disposable income for consumers.

All that brought about by what's being innocuously called an accounting adjustment.

On the other hand, true discounters like Walmart (NYSE: WMT) and Target will be well poised to take an influx of new shoppers who can no longer afford even moderate upscale shopping. Don't think these retailers don't know it it, too. Every down-tick in CPI is another customer in their doors each week. After all, why buy pet food, jewelry, electronics and what-have-you from a more expensive shop when it's available for less at your local Walmart?  You can see both firm's confidence in their experimentation.  Walmart is rolling out same-day delivery in select markets, as well as a new process where it will ship consumers test-marketed items.  Target remains focused on having a Walmart-like price structure while avoiding the discount look.

So that's the plan, balance the books on the backs of the people who can afford it least, those living on entitlements, and undercut the balance sheets of firms that sell to the public. It's one more sign of the death of American affluence. And this time the federal government, both parties and two of the three branches, are actively conspiring to do so. That's why there's so little pushback against the proposal from either side.

From an investment standpoint, watch the talks, if no one begins to protest the use of chain CPI soon, assume it's going to be a part of the deal and invest accordingly. Stick with low-end retailers and begin moving away from the more luxury-oriented consumer stocks.  It's a long-term concern, yes, but I'm a fan of buy-and-hold.  But I don't plan to hold onto something that the federal government has decided to punish.

Nate Wooley has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Motley Fool newsletter services recommend Apple,, and PetSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus