An Interesting Look At Inflation

[barbarus]

Dude, if you're dreaming about goats we need to have a little chat...

Depends if they're nannies or rams.

 

[cute fuzzy bunny]

Hmm.

How about either way?

 

[Notmuchlonger]

Right over the plate.

 

[cute fuzzy bunny]

Got a big wood bat for you to swing with too.

 

[Alan]

Dude, if you're dreaming about goats we need to have a little chat...

DW and I went to an excellent play last night called The Goat or who is Sylvia


I didn't know goats could be so sexy until I'd seen the play

 

[Notmuchlonger]

DW and I went to an excellent play last night called The Goat or who is Sylvia


I didn't know goats could be so sexy until I'd seen the play

Oh my friend goats can be VERY sexy..

 

[REWahoo]

Oh my friend goats can be VERY sexy..

It would appear some people agree with you:

 

[ladelfina]

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.

nope, they just borrowed more.. as igsoy also points out.
Household debt is 138% of income (end of '06).
Americans aren't the only people who've been running up debt - The Curious Capitalist - Justin Fox - Economy - Markets - Business - TIME

People who look only at income (and are trying to interpolate CPI from "disposable income" as though that were a closed system) are missing the huge debt factor.


Originally Posted by cute fuzzy bunny

Well now, whose fault is THAT?!?

MOVE!

and then just buy a plasma TV for every room to offset it!

 

[cute fuzzy bunny]

And a car with antilock brakes? I hear they'll change your life for the better.

 

[Independent]

nope, they just borrowed more.. as igsoy also points out.
Household debt is 138% of income (end of '06).
Americans aren't the only people who've been running up debt - The Curious Capitalist - Justin Fox - Economy - Markets - Business - TIME

People who look only at income (and are trying to interpolate CPI from "disposable income" as though that were a closed system) are missing the huge debt factor.

I couldn't find a source for the 138% in the article, so I tried to find my own. I got debt numbers from http://www.federalreserve.gov/releases/z1/Current/z1.pdf and disposable income from http://www.bea.gov/bea/dn/nipaweb/TableView.asp#Mid

This allowed me to build this table for 1997 and 2007:

Outstanding household debt: $5.5 and $13.8 Trillion
Disposable Personal Income.: $6.1 and $10.3 trillion
Household debt vs. Disp PI..: 90% and 134%
Home Mortgage portion.......: 61% and 102%
Consumer Credit Portion......: 22% and 25%
"Other" ? ...........................: 7% and 7%

I also found a number of references to $1.1 trillion in outstanding HELOCs at the end of 2007, that would be about 10% of disposable income. I'll assume that the Fed puts the HELOCs in with mortgages.

If I add the entire 10% for HELOCs to the 3% growth in "consumer credit", I get a total growth in debt for the 10 years that's available to buy cars, clothes, Coke, etc. of "only" 13%. Frankly, I expected bigger numbers. Maybe you can spot an error here.

For this thread (which is about the accuracy of the CPI), I don't think 13% very big. My crude estimate was that real consumption would have gone down 40% if the claimed error in the CPI were correct. This might move the 40% to 37% or 38%, because the 40% is for only one year but the 13% grew over 10.

For other purposes, like how much margin families feel they have, this amount of growth can be pretty significant. It's especially significant if it's mostly concentrated in working families.

 

[RonBoyd]

The chart found in an article at http://www.frontlinethoughts.com/pdf/mwo041808.pdf is kind of related to this issue. (I find no attribution for it, however.)

It compares GDP growth from 1996 to 2006 with and without mortgage equity withdrawal.

(I tried to insert the image into this post but, apparently, that is technology beyond me.)

 

[ladelfina]

Independent, you said:

shadowstatistics is grossly wrong. He claims that a worker whose wage increases exactly matched the CPI for the 10 years ending in 2007 actually lost half his purchasing power. On average, wages have gone up a little faster than the CPI, so maybe average purchasing power would have dropped by 40%. But that would mean we're buying 40% fewer kwh of electricty, 40% fewer cars, 40% fewer pairs of shoes, 40% fewer cans of Coke, etc. That didn't happen.

[Just for the sake of this argument let's leave "hedonics" out of it.. since I don't think std.s of living and actual material consumption have changed radically since 1997 for the vast majority of Americans.]

You found:

Outstanding household debt: $5.5 and $13.8 Trillion
Disposable Personal Income.: $6.1 and $10.3 trillion

$13.8 trillion / $10.3 trillion is 135%, close to Time's 138% figure.
$5.5 t / $6.1 t = 90%
The difference between 90% and 135% is 45%. Take out the little bit over CPI for wages (shadowstats assumed exact match) and that 45% may get close to 50%.

In 1997 they used to spend less than their income in the aggregate, in 2007 they spend more. 100 =>145 over 10 years = +3.79%/year added to what people've been spending of their disposable income for whatever reason.

If, in the aggregate, people have been spending that much over the reported CPI for roughly the same stuff.. then that's your "shadow inflation." At least that's how I see it for now.

 

[chinaco]

...

When people will jump through hoops to get an extra .25% off their expenses or on their money markets, maybe its a good idea to find out whether your budget is inflating at 2%, 4% or 6%.

Thanks CFB. Thought provoking statement for thrifty spenders.

 

[Independent]

Independent, you said:


[Just for the sake of this argument let's leave "hedonics" out of it.. since I don't think std.s of living and actual material consumption have changed radically since 1997 for the vast majority of Americans.]

You found:


$13.8 trillion / $10.3 trillion is 135%, close to Time's 138% figure.
$5.5 t / $6.1 t = 90%
The difference between 90% and 135% is 45%. Take out the little bit over CPI for wages (shadowstats assumed exact match) and that 45% may get close to 50%.

In 1997 they used to spend less than their income in the aggregate, in 2007 they spend more. 100 =>145 over 10 years = +3.79%/year added to what people've been spending of their disposable income for whatever reason.

If, in the aggregate, people have been spending that much over the reported CPI for roughly the same stuff.. then that's your "shadow inflation." At least that's how I see it for now.

I think the issue here is borrowing for homes vs. other borrowing. Notice that the Fed numbers break out mortgages, I was a generous as I could be and assumed that all the HELOCs were in the "mortage" side and they were zero in 1997. Even that resulted in 31% of the 44% going into houses. Only 13% went to other spending.

That's why I said that the annual gap between a 40% drop in real consumption (my inference from shadowstatistics numbers) and no drop in real consumption (which I get when I look at consumption around me) is too big to be explained by that much borrowing.

If shadowstatistics provided detail (which they might if you're willing to spend $175 per year on a subscription), it might turn out that they have the same numbers as (or within a percent or so of) the CPI for everything except owner-occupied houses. That would mean that the discussion of "substitution" and "hedonomics" is a red herring, it's just rental equivalents vs. new home prices. And that gets into complexities of how many people buy new homes, and how to offset sellers and purchasers, how to separate housing into "investment" vs. "consumption", etc.

* You mentioned cars in another thread. Note that new car sales were higher in 2007 than they were in 1997. Both years are below the peak we hit in 2000. Vehicles on the street went up from 130 million to 136 million over that period. BTS | Table 1-11: Number of U.S. Aircraft, Vehicles, Vessels, and Other Conveyances

 

[kcowan]

What I want to know is:
Why is the government lying to us about inflation?

Especially when smart people know they are doing it

 

[Notmuchlonger]

What I want to know is:
Why is the government lying to us about inflation?

Especially when smart people know they are doing it

So they can screw everyone out of CPI adjusted paychecks!

YA down with the man!

 

[ladelfina]

I mentioned cars because someone else did.. (?)
Number of car sales isn't the point; population goes up so car sales mostly will, too.

Jan. 1997 US pop. est. = 266,490,000
now about 300 million

Actually, I'm surprised that 33 million more people "only" translated into 6 million more cars on the road.. since a 2005 figure put US cars at 776/1000 people.
UNECE Trends 2005 - Transport

Then there are peaks in sales due to easy credit and other promotions: 2000 is at the cusp of another bubble.. just like number of home sales peaked last year.

I'm not 'invested' in proving the shadowstats guy right or wrong.. I don't really follow him. I just generally agree that the dollar's purchasing value has declined more than most people/media/politicians choose to notice. To me, 40% (or whatever) divergence has largely been bridged in recent years via debt. That level of debt being unsustainable will create instability.. whether the debt is made to seem to go away artificially for some players at some level or not.

 

[RockOn]

So they can screw everyone out of CPI adjusted paychecks!

You hit the nail on the head! Finally getting aboard? Better late than never.

 

[barbarus]

The government is scared to death that the economy will crumble.

The only solution to the housing mess is to inflate our way out. Pay off the debt with degraded dollars.

Inflation is only bad for savers.

You're not one of THOSE, are you?

 

[ladelfina]

Asia Times Online :: Asian news and current affairs

 

[RonBoyd]

This is the chart I referred to earlier

 

[RockOn]

This is the chart I referred to earlier

I don't know how to modify the chart but if you had "real" GDP, which is GDP minus actual (not fudged) inflation things would look much worse.

Another way to say this is to subtract about 3% from GDP for the last five years and see how it looks.

(Remember GDP=Nominal GDP minus inflation) Fudging how CPI is calculated affects many, many, things! Not picking on Bush, but in the last 8 years, GDP has sucked. The politicians are making things look better than they are by fudging the CPI. Since the tech bubble, growth has been minimal or even negative at times.

 

[RonBoyd]

I don't know how to modify the chart but...

I said earlier that I didn't know where this chart originated. I now believe it was developed here:

Calculated Risk: GDP Growth: With and Without Mortgage Equity Withdrawal

Calculated Risk: Mortgage Extraction and the Trade Deficit

This chart is also referred to at, for example, (there are multiple sightings):

Calamos Investments -

with the notation:

"Sources: Real GDP numbers obtained from the U.S. Department of Commerce, Bureau of Economic Analysis (www.bea.gov); Mortgage equity withdrawal gross cash out figures obtained from a model built by Alan Greenspan and James Kennedy. The data was downloaded from Trackback URL: http://blogs.wsj.com/economics/2007/06/12/homeequity-extraction-bounces-back/trackback/."

I notice there are 59 comments attached to the first article so it must have been thoroughly discussed back in '06. (No I didn't read them... way over my head) If it is important, it might pay to look these over.

 

[Independent]

I mentioned cars because someone else did.. (?)
Number of car sales isn't the point; population goes up so car sales mostly will, too.

Jan. 1997 US pop. est. = 266,490,000
now about 300 million

Actually, I'm surprised that 33 million more people "only" translated into 6 million more cars on the road.. since a 2005 figure put US cars at 776/1000 people.
UNECE Trends 2005 - Transport

Then there are peaks in sales due to easy credit and other promotions: 2000 is at the cusp of another bubble.. just like number of home sales peaked last year.

I'm not 'invested' in proving the shadowstats guy right or wrong.. I don't really follow him. I just generally agree that the dollar's purchasing value has declined more than most people/media/politicians choose to notice. To me, 40% (or whatever) divergence has largely been bridged in recent years via debt. That level of debt being unsustainable will create instability.. whether the debt is made to seem to go away artificially for some players at some level or not.

I'm not 'invested' in trying to prove that we're in great shape economically, either. I can look at median wages discounted with the official CPI and see that average people are struggling to make progress. I'll agree that many people used borrowing to live above their means, and, a majority of Americans supported politicians who cut taxes and increased spending at the same time. We also had people who weren't anywhere near "average" who profited hugely while this was going on. Now our past actions are catching up with us, and we should expect that consumption really is going to drop in the near future (if it hasn't already). It's especially frustrating that people who were personally careful, and who would have loved to vote for balanced budgets, are getting caught in the downdraft, too.

But, I don't think the techies in the BLS who do the official CPI numbers have any significant role in all this. They've got the impossible task of trying to determine the "average" change in consumer prices in an economy where products and preferences are constantly changing. We can debate forever whether they are 1% high or 1% low. But I can't reconcile claims that the CPI has been consistently off by 7% per year with the mix of consumption/debt that I see.

I'll suggest this paper at the BLS site: Price measurement in the United States: A decade after the Boskin Report http://www.bls.gov/opub/mlr/2006/05/art2full.pdf

It's one of many technical discussions on their site. The details aren't as important to me as the tone. The BLS authors consistently recognize and address critiques of their methods. I look at this and find it easy to believe that serious researchers know what the BLS is doing. It's clear that the BLS works hard to make their methods transparent to people who want to invest the time in challenging them. But the discussions seem to be on issues that involve fractions of percents, not multiple percents.
I give all that work more credibility than the average American who says that gas and milk are up a lot more in the past year than the CPI, and therefore the CPI must be garbage.
(Or, in the case of shadowstatistics, someone who says that we should trust his black box because it spits out numbers we want to believe.)

 

[RockOn]

But the discussions seem to be on issues that involve fractions of percents, not multiple percents.
I give all that work more credibility than the average American who says that gas and milk are up a lot more in the past year than the CPI, and therefore the CPI must be garbage.
(Or, in the case of shadowstatistics, someone who says that we should trust his black box because it spits out numbers we want to believe.)

The guy at shadow statistics is not black box. He is up front in what he is doing and states he is calculating it the same way it was done before they (the gov) changed the way it is calculated (for their benefit). Until it can be proven he isn't calculating it as he says he is, he has as much credibility as those who say CPI is correct. If I could get specific info from him for your review and you found his calculations to be correct, then what? Would admit inflation is much higher than the 3 or 4% the BLS is telling us? Besides most of the country (91% in one poll) do not believe it is being calculated correctly. Why are you so sure we should trust the government on this? There are numerous instances of less than truthful government reporting over the history of this country. Politicians do fabricate, that's a given. Politicians have many reasons to be fudging the CPI.

I do not beilieve most of us are claiming it is off 7% a year either, maybe 2%, 3%, or 4%, that affects many things.