An Interesting Look At Inflation

[RonBoyd]

Originally Posted by ladelfina

1.) ... the now familiar construct "me + Warren Buffett in a room have a per capita income of $23 million!!".

This is becoming a very popular metaphor.

From the Introduction to William J. Bernsteins book, A Splendid Exchange: How Trade Shaped The World http://www.efficientfrontier.com/fil.../ASE-Intro.pdf:

"And as long as we’re throwing statistical terms around, the synonymous terms “mean” and “average” have of late begun to carry their own ideological freight. The political right embraces the mean, but rarely uses a different bit of jargon, the median—that is, the income or wealth at the fiftieth percentile, the “person in the middle.” When Bill Gates walks into a roomful of people, their mean income skyrockets while their median income changes hardly at all—a concept usually ignored by pro-market conservatives."

[d]

the data show a clear increase in the "standard of living". (there is, of course, no data which would convince those who disbelieve any data which conflicts with their own opinion.)

[Independent]

Originally Posted by cute fuzzy bunny

Which wages have improved faster than CPI and for what time period? I'm not seeing anyone getting big raises in recent times, say the last 8 years.

Median, CPI-adjusted wage for males has been about flat. The same number for females has been going up slowly. See:
Historical Income Tables - People

If we want to agree that wages have gone up exactly as fast as the CPI, then the point I'm trying to make in post 13 is even stronger.

Shadowstatistics claims that the CPI understates real inflation by approximately a compound 7%. That means that someone who's income went up as fast as the CPI over the last 10 years lost 50% of his/her buying power. If that's the "average" for our population, than in total we're consuming about half of what we consumed 10 years ago. That obviously isn't anywhere close to true. Therefore, whatever method shadowstatistics is using to get his numbers is wrong.

[Independent]

Originally Posted by ladelfina

Americans may well be buying (let's say..) the same number of kWh -- but they cost 40% more. And what DID happen is that to maintain a roughly equivalent std. of living they are relying on second familiy incomes and (especially recently) going ever more heavily into debt.

See the video I linked to, of a lecture by Elizabeth Warren:
http://www.early-retirement.org/foru...hlight=lecture

It's true that the percentage of women who work outside the home has increased dramatically since 1960. Warren is doing a comparison between 1970 and 2003, and there was an increase for those years.

But, I'm talking about the period 1997-2007. During that period, there wasn't any change. See Table 1 in: http://www.bls.gov/opub/mlr/2006/10/art3full.pdf

So I'm right back to the same argument, if shadowstatistics is correct, we're buying 40% less real stuff (like 40% fewer cars) than 10 years ago. He's wrong.

[cute fuzzy bunny]

Originally Posted by Independent

Median, CPI-adjusted wage for males has been about flat. The same number for females has been going up slowly. See:
Historical Income Tables - People

If we want to agree that wages have gone up exactly as fast as the CPI, then the point I'm trying to make in post 13 is even stronger.

Maybe I'm reading something wrong on that chart. Looks to me like the male inflation adjusted earnings in 2000 were 45,443 and dropped to 43,317 by 2008, while womens earnings gained just a few dollars in the same time period.

Seems like a 5% loss to inflation over that 8 year period for men, no change for women.

Not exactly "wages staying ahead of the CPI" from what I can see.

If wages (for men at least) are losing ground at a little under 1% a year, and theres a variance between CPI as measured for an urban worker and a particular person of another .5%-1%, then workers in the last decade are seing a 7-10% loss to inflation in their spending power, yes?

Seems to me that some hedging or investments with excess return (and risk) might be prudent.

I remember Ted used to buy oil futures as a way to mute this, as he expected oil prices to continue to rise and drive up a lot of other costs with them.

[ladelfina]

1997-2007.. that's the period of the big housing price run up. CPI uses owner-equivalent rents, not actual housing cost; rent inflation has been more normal. People have been spending way more for houses in dollars (biggest household expense, usually) compared to cars (modest expense).

[cute fuzzy bunny]

Isnt that whole rent thing sort of a self fulfilling prophecy?

Rents are more tied to wages than home prices. Renters are cash flow dependent and simply cant pay more than a fair housing slice of their paycheck. Raising rents to index home prices results in empty rental units. Eventually though a homeowner who cant rent the property at a fair enough price will sell it. Eventually the pool of available rental units will dry up forcing more renters to buy and rents to rise.

It just takes 5-6 years for all of that to happen.

[Independent]

Originally Posted by cute fuzzy bunny

Maybe I'm reading something wrong on that chart. Looks to me like the male inflation adjusted earnings in 2000 were 45,443 and dropped to 43,317 by 2008, while womens earnings gained just a few dollars in the same time period.

Seems like a 5% loss to inflation over that 8 year period for men, no change for women.

Not exactly "wages staying ahead of the CPI" from what I can see.

If wages (for men at least) are losing ground at a little under 1% a year, and theres a variance between CPI as measured for an urban worker and a particular person of another .5%-1%, then workers in the last decade are seing a 7-10% loss to inflation in their spending power, yes?

Seems to me that some hedging or investments with excess return (and risk) might be prudent.

I remember Ted used to buy oil futures as a way to mute this, as he expected oil prices to continue to rise and drive up a lot of other costs with them.

Yes, the chart shows falling male incomes from 2000. In fact, you'll note that 2000 was the highest year of all. And also note that the last year in the table is 2005, I don't know of a source for 2007 (though you can get 2006 here: PINC-03--Part 136)

I wanted to use a 10 year period because the longer period highlights the problems with shadowstatistics.

If you're saying that workers have been losing real income at the rate of 1% or 2% per year since 2000, I'm not going to disagree. You can get that result by looking at the gov't numbers and assuming there is a slight error in the CPI.

However, shadowstatistics says they were losing 7% or 8% per year, compound, for at least a decade. That's way out of the ballpark.

[Independent]

Originally Posted by ladelfina

1997-2007.. that's the period of the big housing price run up. CPI uses owner-equivalent rents, not actual housing cost; rent inflation has been more normal. People have been spending way more for houses in dollars (biggest household expense, usually) compared to cars (modest expense).

Yes, it's possible that families were spending a higher percent of their incomes on mortgage payments in 2007 than in 1997. If so, they had to spend a lower percent on something else.

The article that started this thread states that the CPI grossly understates the real inflation rate, and has been for a long time. It quotes shadowstatistics as an authority for this claim.

I'm not sure how your statement about spending patterns connects to the CPI claims in the article.

[cute fuzzy bunny]

I have no particular interest in shadowstatistics. I think its fine if they want to show different ways of measuring inflation. Its just another perspective.

What gets my ER panties in a bunch is getting a good handle on how price changes are effecting my cost/quality of life.

Nobody's web site or government chart is going to be a lot of help with that, nor are any investment products indexed to a figure generated from a group of people that have very little in common with me.

I hadnt seen numbers from the reagan era set of calculations, but I know the clinton changes produces some profound differences...right or wrong...in measured CPI.

Probably not enough to make a problem if you're 70 and just hanging in there for another 12-15 years. Big problem if you're 40 and looking at another 40.

[RonBoyd]

Originally Posted by cute fuzzy bunny

... getting a good handle on how price changes are effecting my cost/quality of life.

Nobody's web site or government chart is going to be a lot of help with that,...

Is this close to what you mean?

Personal CPI Calculator

Do You Know Your "Personal" Inflation Rate? - InvestorGuide University

Calculate your own personal inflation index with this formula: Financial News - Yahoo! Finance

Or am I way off track?

[cute fuzzy bunny]

Just like that.

That last one is really good stuff.

[Notmuchlonger]

We were at 3.47% last year.

[igsoy]

Originally Posted by Independent

So I'm right back to the same argument, if shadowstatistics is correct, we're buying 40% less real stuff (like 40% fewer cars) than 10 years ago. He's wrong.

You've said this several times, but isn't it true that there has been an unprecedented cash-out refi upswing over the last 10 years of the housing boom? Isn't it possible that these people aren't buying any less due to loss of buying power from their salaries because they are just making up for it by consuming their equity? Now that the equity ride is over, maybe they can maintain their high life for another couple of years via credit cards, but after that the party will have to end, and the economy is really gonna tank when people finally are forced to buy 40% less stuff...

[bots2019]

Originally Posted by cute fuzzy bunny

Well lets see...gas more than doubled, so did electricity. My cable bill (if I were still on cable) has close to doubled. My high speed internet has doubled. Milk, meat, eggs and a number of other food products have more than doubled in just the last few years, you know...because we converted all our feed corn into fuel and eliminated our dependence on foreign oil?

Homes in my area even after the recent haircut are still about twice what they were a little over 10 years ago.

So theres some precedence to say that in many areas like utilities, food, transportation costs, housing costs and others...a doubling has certainly occurred.

Of course, many electronic items we dont really need are cheaper or about the same.

Sure some items have doubled, but overall Certainly hasn't been the case for me. FWIW, I bought my house in 2001 and it's currenly worth about 20-25% more, not everybody lives in SoCal or the NE! Other significant items, such as automobiles have increased at a reasonably slow rate.

As Independent has pointed out, any method that shows 10% average over the last 7 years seems a little off. CPI is obviously too low. Seems clear the truth lies somewhere in the middle.

[mathjak107]

the items we buy every day namely fuel food and heat are out of sight.

even houses as much as they have fallen demand a larger percentage of ones income to buy.

the cheap imports in clothes and other low cost crap from china are horrible. good stuff still costs more then it ever did.

my true cost of inflation is the pizza index, i dont know why it works but for the last 30 years it seems to be the most accurate indicator...

[RonBoyd]

Originally Posted by cute fuzzy bunny

Just like that.

That last one is really good stuff.

I noticed that the "last one" was originally located at MarketWatch:

Calculate your own personal inflation index with this formula - MarketWatch

That is where I originally started my investigation of this subject back in February. You should take a look at it because of the comments, not all of which are positive. (I have not looked at the Yahoo comments.)

Anyway, among my notes is this valuable data:

http://www.bls.gov/cpi/cpiri2006.pdf

(from this page - Consumer Price Index Home Page)

You need that to fine-tune your calculations

[cute fuzzy bunny]

Originally Posted by bots2019

not everybody lives in SoCal or the NE! Other significant items, such as automobiles have increased at a reasonably slow rate.

Well now, whose fault is THAT?!?

MOVE!

[cute fuzzy bunny]

Originally Posted by RonBoyd

You should take a look at it because of the comments, not all of which are positive.

I think its at least good enough to get people started on seeing how inflation is measured, what things go into it, and what the weightings are. Anyone with a good budget and some historic spending numbers can poke a few things in there and see what they get.

At least they're engaged in getting a ballpark on what inflation is doing to them and how they can reduce its effects.

Which beats the pudding out of saying you dont need to know, cant find out, or shouldnt even think about it. Definitely an improvement over saying the CPI is "good