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Re: Change in CPI Calculation
Old 07-08-2005, 09:36 AM   #21
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Re: Change in CPI Calculation

I guess my point is that if you're living partially to largely on a CPI adjusted income source, you're going to lose 1-2% of buying power a year. Not so bad if you've got a 10-15 year time window, but pretty losuy if you've got a 30-40 year time period. I see a lot of people committing big pieces of their portfolios to tips and/or ibonds or counting on a CPI indexed pension or SS to cover their bills.

My dad and his neighbors, all retired, are seeing that 1-2% a year loss of buying power. So at least in this neck of the woods that figure bears out. While you may enjoy your 'better' cars, electronics and whatnot, eating pasta every night for the last 10 years of my life because thats all I can afford after purchasing the rest of my 'better' stuff that I cant control spending on doesnt sound like fun to me. I mean, I like pasta but....

Maybe I just have the wrong idea of inflation and its measurement. I always though inflation was how much more expensive stuff got over time, and measuring it was to show the percentage of that increase in spending. I missed all that stuff about fiddling around with quality levels having anything to do with price increases.
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Re: Change in CPI Calculation
Old 07-08-2005, 09:57 AM   #22
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Re: Change in CPI Calculation

Quote:
Originally Posted by VoyT
I do the grocery shopping at my house, and believe me, I'm well versed in substitution. But guess what, inflation hits those items too. Example, I seldom biought cuts of beef -- bought ground beef instead. But that 99-cent per lb ground beef is now $1.29 per lb. OK, so I buy ground turkey. But the 88-cent per lb stuff is now 98 cents per pound.
Same with chicken ... when whole chicken prices rose, the quarters were a better buy. But instead of 39 cent and 49 cent per lb quarters, it's 59 and 69 cents per lb. So what do I do, subsist on rice and beans?
You might say, "but your grocery bill is still cheaper because you substituted." Maybe so, but the baseline costs are going up -- and there comes a time when you can't substitute any more. (BTW, go back and check the price of that bare bones focus a year or two from now.)
I think in general everything gets more expensive over time. The point of substitution is not to continually downgrade your consumption to cheaper and cheaper products, but rather to choose between comparable (but different) goods based on the lowest price. In your example, let's say the turkey went up to $1.59/lb and the ground beef held constant at $1.29/lb. Then you'll switch back to ground beef because it is cheaper. Even if the ground beef goes up to $1.39/lb, you would still switch to ground beef since it is cheaper. Rice and beans would not be a very good substitution for many people since they are very different in nature from ground beef or turkey. Theoretically speaking, at some point there may be some substitution from ground meat to rice and beans if the price of meat skyrocketed and the price of rice and beans stayed the same.

On a different note, I posted something about buying a ford focus earlier in this thread as a bare bones car. That got me searching on the net for historical new car prices - ie - what was the MSRP or average sale price for a new 1990 ford escort in 1990? It would be interesting to see how much "inflation" that same car has seen. Does anyone have any ideas on where to find historical new car prices (what the new car price for a particular make was in XXXX year)?
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Re: Change in CPI Calculation
Old 07-08-2005, 10:21 AM   #23
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Re: Change in CPI Calculation

My understanding of basket substitution is not that it looks for similar items of more reasonable price, but that it downgrades the product to a cheaper one.

I heard it explained by one of the folks that installed basket substitution that "If steak gets too expensive, people buy hamburger, so in the CPI calculation, if steak gets too expensive we do what the consumer would do and replace steak with hamburger in the basket".

To which my response is that if I'm supposed to be getting compensated for inflation, and steak gets more expensive, my inflation adjusted income better accommodate that.

As far as regionalization goes, yes I realize you can see some regional stats. But you arent paid that way. You get paid as a national CPI average figure, not your 'true' local inflation rate. So if you live in a cheapo area, CPI is good to you. You live in a more expensive area where prices rise faster, you're getting screwed.

Yeah, I know you can always choose to buy a cheaper car, live in a cheaper area, eat cheaper food. I'm of the expectation that an inflation adjusted instrument thats allegedly delivering 'true' returns should mean that I dont have to make those decisions...at least not often.

My 2000 ford expedition had a base MSRP of 28,000 and change in December of 1999 when I bought it. The same vehicle today has a base MSRP of 36,000 and change. Thats a little bit more than 2-3% a year. If gas, food, clothing or the prices of homes had withdrawn a little bit to accommodate that, that would be good. Except all of those are also up substantially.
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Re: Change in CPI Calculation
Old 07-08-2005, 10:55 AM   #24
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Re: Change in CPI Calculation

Quote:
Originally Posted by Just not
My understanding of basket substitution is not that it looks for similar items of more reasonable price, but that it downgrades the product to a cheaper one.

I heard it explained by one of the folks that installed basket substitution that "If steak gets too expensive, people buy hamburger, so in the CPI calculation, if steak gets too expensive we do what the consumer would do and replace steak with hamburger in the basket".

To which my response is that if I'm supposed to be getting compensated for inflation, and steak gets more expensive, my inflation adjusted income better accommodate that.

As far as regionalization goes, yes I realize you can see some regional stats. But you arent paid that way. You get paid as a national CPI average figure, not your 'true' local inflation rate. So if you live in a cheapo area, CPI is good to you. You live in a more expensive area where prices rise faster, you're getting screwed.

My 2000 ford expedition had a base MSRP of 28,000 and change in December of 1999 when I bought it. The same vehicle today has a base MSRP of 36,000 and change. Thats a little bit more than 2-3% a year. If gas, food, clothing or the prices of homes had withdrawn a little bit to accommodate that, that would be good. Except all of those are also up substantially.
I couldn't find much about how the BLS deals with substitution in the CPI. What I did find said that they don't do substitution at all. I wish I had better sources about the CPI, but I think my 7 year old nephew did their website design.

As for regional differences in CPI are concerned, you can always have whoever you are contracting with include the local CPI index instead of the national one. That is, if you are in a position to bargain. It may not be realistic to expect the US Treasury to issue 87 different TIPS, one for each region with a different regional CPI. You may be on to something where a state pension plan in a high inflation area uses the national CPI instead of the local region's CPI. The state could give pensioners the higher CPI, but that would probably cost the state or the pension plan contributors more.

I looked at your ford expedition example. I couldn't find what the MSRP for 2000 expeditions was, but I found the 2004-2006 MSRP values. I looked at the entry level expedition for simplicity's sake, and found that between '04 and '06, the expedition had an annual inflation rate of 1.46%. The '06 also includes a 5.4l engine versus the smaller 4.6l engine for the '04. Adjusted for hedonics... just kidding. Point is, the expedition lately has been lagging inflation and has improved (if you consider a bigger engine to be better). I'm still looking for historical MSRP's to see more general trends from further back than '04 (which is all I have now).


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Re: Change in CPI Calculation
Old 07-08-2005, 11:07 AM   #25
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Re: Change in CPI Calculation

Honestly, I wouldnt expect the govt to issue 87 different tips, but I dont see any problem with paying the CPI adjustment based on the primary residence address. Same with social security. If they have the numbers, its just a matter of a computer doing 2 milliseconds worth of work to figure it out.

Really not my biggest concern though. I got hot about this when I read their paperwork on the hedonic adjustment for computers. My last job was all about explaining to people why they needed faster computers and why they would be better for them. The white paper on hedonic adjustments for computers is 110% hogwash and not one of my former customers, industry pundits or analysts would have bought the arguments used. If I had presented it, I would have been laughed out of the room.

While little hedonic and basket adjustment is being done, that the mechanism has been put in place and used sparingly is of concern. Slow boiled frogs anyone?

What makes me more jittery is that greenspan keeps saying he thinks inflation is OVERSTATED by a percent or so.

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Re: Change in CPI Calculation
Old 07-08-2005, 11:10 AM   #26
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Re: Change in CPI Calculation

Honestly, I wouldnt expect the govt to issue 87 different tips, but I dont see any problem with paying the CPI adjustment based on the primary residence address. Same with social security. If they have the numbers, its just a matter of a computer doing 2 milliseconds worth of work to figure it out.

Really not my biggest concern though. I got hot about this when I read their paperwork on the hedonic adjustment for computers. My last job was all about explaining to people why they needed faster computers and why they would be better for them. The white paper on hedonic adjustments for computers is 110% hogwash and not one of my former customers, industry pundits or analysts would have bought the arguments used. If I had presented it, I would have been laughed out of the room.

While little hedonic and basket adjustment is being done, that the mechanism has been put in place and used sparingly is of concern. Slow boiled frogs anyone?

What makes me more jittery is that greenspan keeps saying he thinks inflation is OVERSTATED by a percent or so.

My expedition includes the 5.4l engine and all of the extras included in the current models base. So the 28k/36k is apples and apples. I'm quite familiar with the product and unless they've incorporated build quality changes to make it less of a piece of #@$% my truck is (excepting some cosmetics) identical. That comes to about a 5% a year cost increase. During a period of lower or no inflation...

Even the explorer similarly equipped would cost a bit more. But I could buy an escape for that money. Now thats sure equal.

You heard about ford dropping the bronco because they felt it was too cemented in peoples minds with the OJ simpson white bronco slow police chase? So they replaced it with the Escape. Make your own joke...
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Re: Change in CPI Calculation
Old 07-08-2005, 11:21 AM   #27
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Re: Change in CPI Calculation

Quote:
Originally Posted by justin
I couldn't find much about how the BLS deals with substitution in the CPI.* What I did find said that they don't do substitution at all.
That's what I remember reading too. *A lot of the concerns expressed about CPI seem inconsistent with the information on their web site. *And a lot of the concerns are addressed and well-explained on that site. *

Quote:
Originally Posted by justin
I wish I had better sources about the CPI, but I think my 7 year old nephew did their website design.*
*I think you are selling your 7 year old nephew short.

I am interested in how those of you who have calculated a personal inflation rate managed to do it. *I keep pretty thorough records of my expenditures, but I am not nearly enough a creature of habit that I can compare my grocery bills from year to year and come up with an overall personal grocery inflation rate. *Other expenditure categories are even worse. *I ended up dividing my expenditures into the categories used for CPI but in my own ratios and for Phoenix instead of the national average. *I ended up with a slightly higher than CPI personal inflation rate, but the difference was less than 1%.

I do agree with TH that people who depend on TIPS or I-bonds to keep up with inflation are being naive. *The personal spending habits and geographical differences between any individual's case and the national average can be significant. *
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Re: Change in CPI Calculation
Old 07-08-2005, 11:24 AM   #28
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Re: Change in CPI Calculation

Quote:
Originally Posted by - SG
I ended up with a slightly higher than CPI personal inflation rate, but the difference was less than 1%.
Multiply by 20 years.
Quote:
I do agree with TH
WHAAAAAAAAAAAAAAAAA?!!!!??! (Rubbing eyes)

Good thing wife made me an eye doctors appointment yesterday...
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Re: Change in CPI Calculation
Old 07-08-2005, 11:51 AM   #29
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Re: Change in CPI Calculation

I just did a little personal inflation analysis on my car. 2000 honda civic lx 4 door sedan (it's birthday is Monday - what a sweet car). I can't remember the exact MSRP when I bought it, but based on what I know about it, the price has gone up at around 1% on an annual basis. Half of what CPI inflation was. And in the meantime, there is a new body design. When comparing the 2005 Civic LX to my 2000 Civic LX, I was shocked to find that it now comes standard with keyless entry, CD player, bigger engine, bigger gas tank, and better fuel economy.

th, maybe you are buying the wrong kind of car. At least some cars keep getting better and cheaper* over time. I wonder if Honda sets their MSRP's close to the sale price, while Ford keeps inflating their MSRP while lowering the actual sale price. I know around here, you can get new expeditions for 8-12 thousand off MSRP pretty easy.

* adjusted for inflation
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Re: Change in CPI Calculation
Old 07-08-2005, 12:47 PM   #30
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Re: Change in CPI Calculation

Sure...but I got my expedition for ~8k off.

The honda civic lx 4 door sedan's MSRP has gone up 15% between 2000 and 2005 based on what I can see, but there are so many models...who really knows?
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Re: Change in CPI Calculation
Old 07-08-2005, 01:03 PM   #31
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Re: Change in CPI Calculation

Quote:
Originally Posted by Just not
Multiply by 20 years.
WHAAAAAAAAAAAAAAAAA?!!!!??! (Rubbing eyes)

Good thing wife made me an eye doctors appointment yesterday...
So you going to be a presbyoterian after all?
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Re: Change in CPI Calculation
Old 07-08-2005, 01:04 PM   #32
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Re: Change in CPI Calculation

Jury's still out on the change of religion Martha
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Re: Change in CPI Calculation
Old 07-08-2005, 01:49 PM   #33
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Re: Change in CPI Calculation

Quote:
Originally Posted by Just not
Sure...but I got my expedition for ~8k off.

The honda civic lx 4 door sedan's MSRP has gone up 15% between 2000 and 2005 based on what I can see, but there are so many models...who really knows?
More like a 7% increase. I think when I bought my new 2000 civic LX sedan 4 door in 2000, the MSRP was $15,800 (maybe higher, not sure). Now it is $16,925 for the exact same make model and trim. Except the 2005 has a lot more features and is better. The 7% increase is 1.4% annualized. Half of CPI inflation. Of course, who pays MSRP anyway?!
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Re: Change in CPI Calculation
Old 07-08-2005, 05:26 PM   #34
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Re: Change in CPI Calculation

Ok, we have different numbers. I have the 2000 MSRP data from edmunds site and its ~12,900 from memory (I aint looking it up again). The 16925 number sounds right. I used the same site to give me the numbers for the same model for both years, so maybe you've got an apple and an orange. Not that it matters, we're picking nits. Nobody pays MSRP but you have to pick a point to measure, and what someone can negotiate isnt a measurable. Note also that Toyota plans to raise prices substantially in the near term to "help american car makers" (you cant make this stuff up), and honda is expected to follow suit.

What I care about is that MY inflation is a lot higher than CPI.

As a result, I wont buy any CPI adjusted financial instruments with the thought that they'll produce 'real' returns. I dont agree that CPI calculations that I see posted are truly representative of many peoples/areas actual realized inflation rates. Many of the items many people buy have gone up substantially in the last 5 years. The hedonic adjustments I've looked at are hogwash.

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Re: Change in CPI Calculation
Old 07-11-2005, 01:10 PM   #35
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Re: Change in CPI Calculation

I just came across this from a Yahoo! finance poll question:

"Apparently being super wealthy isn't all champagne wishes and caviar dreams... [T]he price index for luxury items marketed exclusively to the Ultra High Net Worth Individuals (net worth >$30 million) increased 11.3% in 2004 compared to 6.4% for "High Net Worth" individuals (net worth >$1 million) and only 3% for the average citizen. The UHNW index includes exotic items like private jets, Rolls Royces and luxury yachts. The high net worth index includes items like first class airfare, Mercedes Benzes and smaller yachts. The index used to measure the cost of living for the average citizen, known as the Consumer Price Index (CPI), includes everyday items like breakfast cereal, milk, gas, eyeglasses and clothing."

The original report that this data comes from is at: http://www.us.capgemini.com/Download...ile.asp?ID=468
Use the email address "sfhffsh@jaja.com" to log in.

Th, maybe you and the rest that are seeing 1-2% inflation over the CPI each year are experiencing the High Net Worth inflation rate for luxury goods!

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Re: Change in CPI Calculation
Old 07-11-2005, 02:54 PM   #36
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Re: Change in CPI Calculation

When I was getting my Econ degree in the mid 90's the professors were explaining that the government was going to input a "chain-weighted" price index policy for inflation instead of pure CPI. You all covered the meat of that in your previous posts - substitution, turkey for hamburger etc. We (professors and students) guessed at that time that it was another way for the government to manipulate the numbers to lowere their costs by shifting the burden on us, namely, depress bond rates tips etc.


I love the core rate of inflation, cracks me up every time they say, "one you remove the 'volitile' food, energy, and housing prices" and then tell you a rosy number. EXCUSE ME! So once you remove where 90% of my expenditures are, inflation ain't bad? Huh? And does 'volatile' mean "go up really fast" in swahili?
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Re: Change in CPI Calculation
Old 07-11-2005, 04:34 PM   #37
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Re: Change in CPI Calculation

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'volitile' food
I think they mean hard alcohol... some of it is pretty volatile It will ease the pain at the very least.
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Re: Change in CPI Calculation
Old 07-12-2005, 01:40 AM   #38
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Re: Change in CPI Calculation

The UHNW index includes exotic items like private jets, Rolls Royces and luxury yachts

Ah! THAT explains... gotta cut down on those one of these days...
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