An Interesting Look At Inflation

[RockOn]

Originally Posted by Independent

From your perspective, the BLS is measuring the wrong things and has the wrong prices.

The thing is it's not just my perspective, it's the perspective of 91% of all Americans according to a recent MSN poll. There are only a few holdouts like yourself. You can pick them apart one by one, but in aggregate the cost of living is going up much more than 3 or 4% a year.

The education stats that you researched are nice. But they are not even close for Colorado. Probably most other states also. (This is at public colleges). The 24.3% increase in two years is a cost increase (either in current costs or additional amounts needed to be saved) for all of the parents with kids in this state that have hopes of sending their kids to college. It is real money. This is a pretty good example of the how the CPI is under-reporting the true cost of living for families in America. It might be possible to play with the statistics, and make it go away. It doesn't just go away for me.

[clifp]

Originally Posted by ladelfina

Independent, I don't think anyone's saying "the BLS is measuring things wrong" as much as they are saying "the BLS is measuring the wrong things". I don't have reason to doubt that what they calculate may be correct, nor that the way they calculate it may be correct, according to what they say they are measuring (as you say, "open methods").

BUT does it serve the real purpose of tracking real people's COL?? Folks are finding that it doesn't, for various reasons. Thus, it may well be a perfectly 'valid' statistic that just doesn't happen to be useful to anyone but the gov.

I think the CPI is as useful as say the 4% SWR rate. It provides a good rule of thumb to use as a guideline for the population as an aggregate.

It seems to me that CPI is probably overstate for most retires, with the very important exception of health care. In the case of health care if somebody else pay for your health care than CPI is overstated.

But in general most of the fast rising measure have a less of impact on retirees. Gas, retirees don't go to work every day so drive less. College nope, housing prices most own their own houses with low or no mortgage.

Of course everybody eats and buys clothes.

Like independent, I have looked at the BLS website and the CPI discussion in the past. They seem like a very dedicated group really trying to do the best they can. While I think the government has a vested interested in understated CPI, the BLS seems to pretty independent.

[ladelfina]

clif, to say that your cohort (assuming barely rising health and food costs) is closer to the CPI than what the mass of people experience.. does not make the CPI a good rule of thumb for most. The CPI is not for healthy immobile retirees with scarce appetites, much as the gov. would desire so. The rest of the country moves, eats, and gets sick. (Where costs permit, nowadays.)

[clifp]

The CPI-U is single number design to measure inflation for American urban and suburban households. By definition it will be wrong for virtually everybody, because I doubt there is a single American who consumes in exactly the quantity the BLS assumes.

The question is it a good average. The OP article and most of on the others on thread are pulling out a bunch of anecdotes. Since all of us can play the anecdote can I am simply pointing an example of group where CPI probably overestimates the real cost. Retirees (contrary to what the article state).

Housing prices have been a big factor in the last few year of the CPI. By far the largest single group (mode) of American own a house with a fixed rate mortgage. It may even be a majority 70% own homes 70%+ fixed mortgages=49%. If you don't move )most American on only move every 5-7 years) the housing component of the CPI could 15% and it would not effect you at all.

College: There are ~16 million college students with ~32 million parents or roughly 1/6 of the population, again for the 5/6 of the population who isn't in college and doesn't have kids the rapid raise in college cost is unimportant, especially to retirees.

Gas: According to DOE gas prices rose from 2.76 to 3.38 in the last 12 months. The average American drove ~12,000 miles (number decreased last year) assuming a 24 MPG car that using 500 gallons/gas or an additional $310 in gas per year. Now since 12K miles is an average that means that ~1/2 the folks drove less. I think us retirees are prominent among those below average drivers. So for us the impact of gas prices is even less.


If we take a typical middle class 62 year old retired couple with paid off house, Social Security, a modest government pension, an annuity. Say they spend $50K a year. I think it is very likely that they won't see a 4% (i.e. $2,000) rise in expenditures. The COLA increases from SSAN, and pension will more than likely cancel out higher, gas, utility, and food bills.

However, what is really hurting them is the drop in interest rates. Even if they have a small portfolio of $100K stocks and 100K in CDs and money markets. Interest rates dropping from 5-6% for CD/Money Markets last year to 2.5-3.5% mean their income has dropped by $2,500 year. This is a lot bigger impact than if the true CPI is 4%,5%, 7%. My experience is that what most retirees will notice and talk about when they say, "my money is really stretched thin" is higher prices not lower interest rates...

[RockOn]

Originally Posted by clifp

College: There are ~16 million college students with ~32 million parents or roughly 1/6 of the population, again for the 5/6 of the population who isn't in college and doesn't have kids the rapid raise in college cost is unimportant, especially to retirees.

However, what is really hurting them is the drop in interest rates. Even if they have a small portfolio of $100K stocks and 100K in CDs and money markets. Interest rates dropping from 5-6% for CD/Money Markets last year to 2.5-3.5% mean their income has dropped by $2,500 year. This is a lot bigger impact than if the true CPI is 4%,5%, 7%. My experience is that what most retirees will notice and talk about when they say, "my money is really stretched thin" is higher prices not lower interest rates...

On college: besides all the parents with kids in college there are many more saving for college. When the price goes 24% in two years, the cost of savings goes up for those people also. That is real money coming out of their pockets. By the way, in my case it's not just the tuition, the total cost including books, and room and board also went up about 14% last year. I don't know what they'll do this year but with rising food I expect another large increase.

On the interest rates: if inflation was being reported at 7% instead of 3% then the interest rates that the government is paying would surely be higher. That would affect all savings rates. The only way the Fed can cut rates this low right now, driving down all savings rates, is because they are hiding behind the reported low CPI numbers. Look at what happened in the late 70's, reported inflation was 10% and savings rates were 12%. So, you retirees are getting screwed by this, just like the rest of us. CPI numbers affect many, many, things.

[clifp]

Originally Posted by RockOn

On college: besides all the parents with kids in college there are many more saving for college. When the price goes 24% in two years, the cost of savings goes up for those people also. That is real money coming out of their pockets. By the way, in my case it's not just the tuition, the total cost including books, and room and board also went up about 14% last year. I don't know what they'll do this year but with rising food I expect another large increase.

There are 25 million households with kids between the ages of 12-17 who I think are primarily concerned with saving for college. So while this is a big concern for a very large segment of the population, for the majority of us college costs have little or no impact.

Personally, given the abysmal saving rates for most Americans, I am not sure having parents save more for college is bad thing. Every dollar they are saving is one less dollar they are consuming and helps decrease demand for other products and reduces inflationary pressures. (Ya I know this sounds insensitive to the millions of parents trying to save for Jack and Jill's education...)

[RockOn]

Originally Posted by clifp

There are 25 million households with kids between the ages of 12-17 who I think are primarily concerned with saving for college. So while this is a big concern for a very large segment of the population, for the majority of us college costs have little or no impact.

Personally, given the abysmal saving rates for most Americans, I am not sure having parents save more for college is bad thing. Every dollar they are saving is one less dollar they are consuming and helps decrease demand for other products and reduces inflationary pressures. (Ya I know this sounds insensitive to the millions of parents trying to save for Jack and Jill's education...)

If I get your stats correctly from what you posted there are 16M kids in college, 32M parents with kids in college, 50M parents with kids 12-17 soon to be in college, and let's assume another 100M parents with kids 0-12 that should be saving for college....that's starting to add up to real numbers. I doubt I got it right.... it is way too many.... but nonetheless the rapid cost increase of college is affecting a lot of people. (What does the BLS use... a 1.37% factor of consumer spending?)

[mb]

Originally Posted by cute fuzzy bunny

Yeah but its so nice here all the time, we never have to go on a vacation to somewhere warm!

Plus its a $45 pool!

Sacramento in August! Nice! You have got to be kidding! I don't even like to get out of the car in the Central Valley that time of year on the way to Tahoe or LA! Might as well be Texas

[cute fuzzy bunny]

Nah, we dont have chiggers or scorpions.

Sacramento in august is fine sitting under an umbrella at Lake Natoma with your feet in the ice cold water with a cold drink.

[Notmuchlonger]

Sacramento is fine in August. I just head up to Tahoe. Ahem.. But at least you can go out for a walk in 105 degrees heat. Since the humidity is like 3. Makes me wonder why I want to move..

[cute fuzzy bunny]

Tahoe, San Fran, Marin or wine country. They all work.

Pools are also great equalizers.

[mb]

Originally Posted by cute fuzzy bunny

Nah, we dont have chiggers or scorpions.

Sacramento in august is fine sitting under an umbrella at Lake Natoma with your feet in the ice cold water with a cold drink.

I'll grant you that.

[ladelfina]

Daily Mail (UK).. same story

The REAL cost of inflation: The Mail's Cost of Living Index reveals food prices rising at SIX times official figure | the Daily Mail

[RockOn]

Originally Posted by ladelfina

Daily Mail (UK).. same story

The REAL cost of inflation: The Mail's Cost of Living Index reveals food prices rising at SIX times official figure | the Daily Mail

I wonder who they got the idea of fudging the inflation rate from? The problem there sounds almost exactly like the problem here. The consumer price index is not measuring what consumers costs really are.

"Help the Aged argues that the official inflation figures are "stuck in fantasy land"."

Bingo!

[Independent]

Originally Posted by RockOn

The thing is it's not just my perspective, it's the perspective of 91% of all Americans according to a recent MSN poll. There are only a few holdouts like yourself. You can pick them apart one by one, but in aggregate the cost of living is going up much more than 3 or 4% a year.

The education stats that you researched are nice. But they are not even close for Colorado. Probably most other states also. (This is at public colleges). The 24.3% increase in two years is a cost increase (either in current costs or additional amounts needed to be saved) for all of the parents with kids in this state that have hopes of sending their kids to college. It is real money. This is a pretty good example of the how the CPI is under-reporting the true cost of living for families in America. It might be possible to play with the statistics, and make it go away. It doesn't just go away for me.

I bolded some phrases. I'm beginning to think they represent why we're having trouble agreeing on this.

I take the first phrase to mean (I'm making up an example). "Prices for half our spending went up by 10%. Prices for the other half didn't move at all. The BLS says that means that prices went up 5% on average. But I think they are intentionally lying. Sure, they've got the details right, but they are wrong in the aggregate."

The second one goes something like this, "Sure, the College Board survey shows that average prices went up about 6%, that's pretty much what the BLS got, too. That's good data. But my price went up by more, therefore I'm going to believe that prices 'in most states' went up more."

Regarding the third statement, yes it's possible to play with statistics. Statistics are by definition summaries. One way to counter misleading statistics is to drill down into the data. Another is to show that a different statistic using the same data gives a different implication (for example, mean wages might be going up at the same time that median wages are going down). You asserted, without any evidence, that typical college costs are better represented by the state you happen to live in than by the college board's survey. That says nothing about whether they are "playing with statistics", but it is a nice lead in to the last statement ...

I think the fourth statement sums it up. You're sure that the CPI doesn't represent your spending. That's not surprising, it's an average for 100+ million families, so any one family could be a long ways away from the average. But then, for some reason, you want to say it's too low for "most people", because it's too low for people like you.

You repeat the 91% as if that's "proof". I think that's good reason to go out and study the BLS methods and see if they are missing something, after all, people must have some idea of what they are spending. But when I do that, I find that lots of serious researchers got there before I did, and nobody (nobody who's willing to share his detailed analysis with other kowledgeable people) is coming up with the range of errors that you claim. On the other hand, I'm quite sure that 91% of Americans don't write down their actual expenses year after year, then compare carefully to see if they are spending more or less in each category than the BLS reports. So I conclude that the polling data reflects people's feelings, and their feelings are exaggerating reality. (Politicians love to play on that difference.)

[igsoy]

RockOn, I think I'm gonna have to say Independent might have a point re: college inflation in your state. You surely know Colorado is backassward with their college funding issues. When the public universities only receive about 9% of their funding from the state, then it is almost hard to call them public universities in the standard sense.

Most other states have normal inflation built into their taxation system, so when they collect more taxes, they can pass some on to the university system to cover the normal inflation in costs of keeping the system operating. And you know due to CrazyBruce's TABOR, that is not possible here, so 100% of rising costs get passed on to tuition payers.

Look on the bright side, though-- you are paying much less in state tax than people in states with healthy university systems, so it all evens out in the end, right?

[RockOn]

Originally Posted by Independent

.)

All logical arguements but as the whole house burns down you are looking for minor defects in the construction.

You are assuming 91% of Americans do not really know that the house is on fire. The claim that the CPI is not measuring a typical Americans cost of living is obvious to 91% of us.

On education, Colorado may be worse off when it comes to college funding. I suspect, without research, that upper single digit increases are widespread.

[Hamlet]

91% of Americans couldn't find their ass with a map and a compass.

You may well be right that CPI under-estimates inflation, but the opinion of the American populace does nothing to convince me.

Originally Posted by RockOn

All logical arguements but as the whole house burns down you are looking for minor defects in the construction.

You are assuming 91% of Americans do not really know that the house is on fire. The claim that the CPI is not measuring a typical Americans cost of living is obvious to 91% of us.

On education, Colorado may be worse off when it comes to college funding. I suspect, without research, that upper single digit increases are widespread.

[RockOn]

Originally Posted by Hamlet

91% of Americans couldn't find their ass with a map and a compass.

That seems to be a common thought here. Of course, this country did re-elect GW, you could be right.