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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:20 PM   #41
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Re: CPI ... Your Confidence Level in this Statistic?

If you continue to create it, knowing how it is used, yes.

I dont think I've ever heard anyone argue that CPI is not flawed. As SG's post above demonstrates, the indicator is rife with disclaimers.

Repeating again, I dont have any issues with the measurement excepting the following:

- It is not an accurate measure of broadbased inflation for everyone
- It is not an accurate measure of the changes to the cost of living for everyone
- CPI indexed investments do not necessarily produce "real returns" for all investors.

Yet is it used to adjust incomes, pensions, social security and a raft of other things as though it does meet those criteria. With an implication that these things are now "cost of living adjusted" or "producing a real return".
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:27 PM   #42
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
- It is not an accurate measure of broadbased inflation for everyone
- It is not an accurate measure of the changes to the cost of living for everyone
- CPI indexed investments do not necessarily produce "real returns" for all investors.
I agree with your conclusions, but merely point-out that there is a clear difference between the limitations of its construction and the misuse of the result.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:29 PM   #43
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
What you had was a 30 year "CPI proof" investment plan.* In some areas, lifestyles and spending patterns, that might be better than an inflation proof plan.* I'm betting that for most ER's, its not.
You are soooo right. What you really want is a bond indexed to your personal cost of living increases instead of those evil TIPS. Hmm, now where can I get one of those? Oh, that's right. I can't.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:38 PM   #44
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Re: CPI ... Your Confidence Level in this Statistic?

"d", perhaps a statement of your opinion on the topic subject would be helpful rather than your feelings about others opinions. I still dont know what yours is. Sounds like you think CPI is a good measure and that it shouldnt be put to the tasks its being put to?

Wab - I didnt say tips are 'evil' nor am I looking for an investment product that doesnt exist. But thanks for injecting what you think I think into the discussion

My point is simply that tips and ibonds do not produce a "real" return; at least not for everyone. I think a lot of people dont understand that. In fact, Vanguards and the Treasury both describe their CPI related products using the terms "real return".

Further, a CPI indexed pension and the CPI indexed social security payments are not inflation indexed or inflation protected for everyone receiving them. I think a lot of people dont understand that either.

What sucks is that the realization that they're not inflation indexed to produce a "real" return or a "real" monthly payment wont become fully apparent until 10-15 years after retirement.

Further, I'm concerned that the effect is multiplied for an ER. We have to pay for our own health care. We dont have a wage adjusted income stream that often helps battle inflation better than CPI does. Our tastes in recreation might create somewhat higher expenses that are more sensitive to inflation than a 9-5'er.

Do I have a great solution to this? Not really, except to eschew investments that barely tread water or lose ground like clockwork unless thats your expectation of the investment.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:41 PM   #45
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
. . .Tell you what though, I'd be happy to agree on two things.* One is that CPI <> Inflation, and the other is that buying a CPI indexed asset does not produce a "real" return.* Those two misconceptions could be pretty painful for an investor to misunderstand.* . . .
I agree completely. *While I think the compilation and statement of CPI represents excellent work and a very honest attempt to capture inflation with a single metric, you would be a fool to believe that it captures your personal experience. *Inflation indexing that tracks the CPI is better than not getting increases when inflation rises. *But if CPI actually tracks your personal requirements for increasing income it would be simply a wild coincidence. *

Some people with simple living requirements who live in small towns in the Mid-West or South-East actually find CPI to be a bonus payment. *Most people, however, will either 1) live in a place with above average cost of living and inflation, 2) Will buy a mix of products very different from the CPI mix, or 3) both.

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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:45 PM   #46
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Re: CPI ... Your Confidence Level in this Statistic?

well said fuzzy
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 12:52 PM   #47
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Re: CPI ... Your Confidence Level in this Statistic?

I must be reading the wrong web site.

Or you guys are being methodically replaced by exact duplicates.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 01:12 PM   #48
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
My point is simply that tips and ibonds do not produce a "real" return; at least not for everyone.* I think a lot of people dont understand that.* In fact, Vanguards and the Treasury both describe their CPI related products using the terms "real return".
This is just semantics. For most people, the definition of "real return" is the return - CPI. My cost of living varies from year to year. I do what I can to hedge against inflation, and that includes investing in "real" assets like real estate, investing in a healthcare fund to hedge against healthcare costs, investing in energy stocks to hedge against energy costs, and investing in TIPS, which are indexed to a *transparent* index that *attempts* to capture an average increase of a basket of goods for an average urban consumer.

If you determine that your personal rate of inflation is higher than the CPI, my question for you is: what are you going to do about it?
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 01:44 PM   #49
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
perhaps a statement of your opinion on the topic subject would be helpful rather than your feelings about others opinions. I still dont know what yours is. Sounds like you think CPI is a good measure and that it shouldnt be put to the tasks its being put to?
My opinion: the CPI is a reasonable measure of what it purports to be.* It is not without limitations, and in all liklihood cannot be.* When one chooses to use it, the user should be aware of what it is and what it is not.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 03:44 PM   #50
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by wab
This is just semantics. .
No, it is not. The naive investor who reads 'real return' feels that this produces an inflation neutral return. It is not that.

Quote:
If you determine that your personal rate of inflation is higher than the CPI, my question for you is: what are you going to do about it?
Invest in stuff that beats my actual personal rate of inflation.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 03:46 PM   #51
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Re: CPI ... Your Confidence Level in this Statistic?

Some more data:

According to the Energy Information Agency,

Average residential electricity cost 2.6 cents per kilowatt hour in 1960 and 8.94 cents in 2004.* If you adjust the 1960 cost of 2.6 cents using CPI, electricity should cost 16.6 cents in 2004.*

In 1976 a gallon of unleaded gasoline cost 60.5 cents on average.* In March of 2006 the average cost for a gallon as 231 cents.* If you adjust the 1976 price of 60.5 cents using CPI, a gallon of gasoline should cost 216 cents in 2006.


Based on some spot checking that I've posted here (and in an earlier post), it does seem as if CPI is a pretty good barometer of prices.* In some cases its unreasonably low (as in tracking automobile prices) and in some cases it is unreasonably high (as in tracking electricity prices) - but I guess that is to be expected in any broad average.*

The idea that CPI is wholly unrepresentative of changes in prices seems not to be supported by the data.

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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 03:48 PM   #52
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
No, it is not.* The naive investor who reads 'real return' feels that this produces an inflation neutral return.* It is not that.
Hmmmm.* Is it true that everyone's personal rate of inflation is higher than CPI?
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 04:53 PM   #53
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Cute Fuzzy Bunny
The naive investor who reads 'real return' feels that this produces an inflation neutral return. It is not that.
By definition, I think it is that; however, it is not likely a cost-of-living neutral return.* A "real" is simply a "nominal" relative to some other "nominal" ... one could use whatever they wanted for the reference, but it is commonplace to use CPI as the reference.
Quote:
Originally Posted by 3 Yrs to Go
Hmmmm.* Is it true that everyone's personal rate of inflation is higher than CPI?
Providing the components reasonably represent what everyone (in aggregate) is purchasing, it's not possible ... for some it will overstate, for others it will understate. As the components are considered fixed during the period being measured, CPI tends to understate on the whole.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 07:00 PM   #54
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by d
As the components are considered fixed during the period being measured, CPI tends to understate on the whole.
Or so the Germans would have us believe.

Ha
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-14-2006, 08:35 PM   #55
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by 3 Yrs to Go
Some more data:
According to the Energy Information Agency,
Average residential electricity cost 2.6 cents per kilowatt hour in 1960 and 8.94 cents in 2004. If you adjust the 1960 cost of 2.6 cents using CPI, electricity should cost 16.6 cents in 2004.
In 1976 a gallon of unleaded gasoline cost 60.5 cents on average. In March of 2006 the average cost for a gallon as 231 cents. If you adjust the 1976 price of 60.5 cents using CPI, a gallon of gasoline should cost 216 cents in 2006.
Based on some spot checking that I've posted here (and in an earlier post), it does seem as if CPI is a pretty good barometer of prices. In some cases its unreasonably low (as in tracking automobile prices) and in some cases it is unreasonably high (as in tracking electricity prices) - but I guess that is to be expected in any broad average.
The idea that CPI is wholly unrepresentative of changes in prices seems not to be supported by the data.
This electricity model is no better than a Model T.

Utilities have hedonics adjustments too. I grew up in an electrical-engineering family (father & grandfather) and I used to hear this "too cheap to meter" crap all the time. Electricity in the 1950-60s was created from burning oil & high-sulfur coal, or from nuclear plants with no realistic provisions for refueling or nuclear-waste disposal. No one was making utilities use clean fuel or stack scrubbers or worry about trading CO2 credits. Electricity was much dirtier then (variations in both voltage & frequency) and power reliability was much lower (overloaded poles, no tornado/hurricane resistance) with much more manual switching. The grid wasn't computer controlled across the entire TVA from coast to coast and up into Canada.

Same hedonics with gasoline. Hawaii just passed a legislative mandate to make its "gasoline" at least 10% ethanol. California varies its fuel mix with the seasons as well as all sorts of other additives. "Leaded" gasoline is a thing of the past and most of the additives in use in the '70s are considered to be too polluting today. BTW my fillup at a "cheap" station yesterday was $2.81/gallon and most of Oahu is over $3/gallon.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-15-2006, 03:33 AM   #56
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Re: CPI ... Your Confidence Level in this Statistic?

just reviewing our expenses in 2005 i cant come up with much that isnt up more than 3%..........my auto insurance stayed the same i see but every thing else is way higher....i think my general expenses are probley closer to 5% here in new york....couple that with no raises this year at work and it hurts.....
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-15-2006, 07:16 AM   #57
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Re: CPI ... Your Confidence Level in this Statistic?

This is always a fascinating topic. I have skimmed through the replies and read the interesting article at the link provided by CFB. My personal view is that inflation does appear to be higher than reported, and we personally are doing whatever we can to lock in some of our expenses at today's prices, or reduce our exposure to price increases. Not easy to do, unfortunately. The main thought I always come away with when thinking about inflation is that it seems unfair that we pay taxes on the "increase" in our investments when the increase is more or less a function of money being devalued by the increase of government debt and increased money supply, raising the price of everything, including our investments.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-15-2006, 09:55 AM   #58
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by Nords
This electricity model is no better than a Model T.

Utilities have hedonics adjustments too.* I grew up in an electrical-engineering family (father & grandfather) and I used to hear this "too cheap to meter" crap all the time.* Electricity in the 1950-60s was created from burning oil & high-sulfur coal, or from nuclear plants with no realistic provisions for refueling or nuclear-waste disposal.* No one was making utilities use clean fuel or stack scrubbers or worry about trading CO2 credits.* Electricity was much dirtier then (variations in both voltage & frequency) and power reliability was much lower (overloaded poles, no tornado/hurricane resistance) with much more manual switching.* The grid wasn't computer controlled across the entire TVA from coast to coast and up into Canada.

Same hedonics with gasoline.* Hawaii just passed a legislative mandate to make its "gasoline" at least 10% ethanol.* California varies its fuel mix with the seasons as well as all sorts of other additives.* "Leaded" gasoline is a thing of the past and most of the additives in use in the '70s are considered to be too polluting today.* BTW my fillup at a "cheap" station yesterday was $2.81/gallon and most of Oahu is over $3/gallon.
Nords, I don't think this is the right analysis for the data I put up. According to EIA the nominal average cost for electricity and unleaded gasoline is what I showed in the post above. I then used the change in the CPI index (not a component of CPI but the whole index) to calculate what CPI says those things should cost today and compared that cost against what things really do cost today. In the case of electricy, it has increased at a far slower pace than CPI and gasoline has increased at a slightly higher rate.
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-15-2006, 10:05 AM   #59
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by 3 Yrs to Go
Hmmmm. Is it true that everyone's personal rate of inflation is higher than CPI?
No it isnt, but it IS true that people who dont read the whole thread fail to notice that I said very clearly, several times, that some peoples personal rates are lower and some are higher.

Quote:
Originally Posted by d
By definition, I think it is that; however, it is not likely a cost-of-living neutral return.
It is CPI neutral (not inflation neutral), to the extent that CPI measures inflation, and it is a general/average neutral, not a regional or individual specific neutral. It is definitely not a cost of living neutral. Way too many differences in peoples COL to ever do that.

If anyone is still champing at the bit to "prove me wrong", we're only disagreeing if you agree with the following statement.

"CPI = inflation, and the purchase of "inflation protected" government securities or CPI indexed bonds gives me an inflation neutral investment that produces a predictable and real return that allows me to completely or nearly completely remove inflations effects from my long term retirement planning. For everyone else too."

If you agree with the following statement, then we're in agreement.

"CPI is not exactly equal to inflation for most people. Some will find CPI to be a higher measure than their personal rate of inflation, some lower, a very small number exact. CPI indexed securities are good ideas in times of very high inflation because few other options would pay as well as a CPI security should we see double digit inflation. CPI indexed securities at coupons below 3% for tips and 2% for ibonds are not very good investments when the CPI is in the low single digits. In any case, the ownership of these securities does not full eliminate the factoring of inflation into your personal retirement planning."

My big two points are that CPI <> inflation (and I dont hear a lot of disagreement on that), and that "inflation protected" investment products are perhaps a bit misleading in that they do not truly protect each investor from the effects of inflation.

I thought about this a lot more yesterday and the upshot of it is that I wonder if inflation doesnt have a far more profound effect on the ER than the average person. Heck, the hit from healthcare alone might be a bigger bite than the 3-5% of your total annual budget that CPI claims is the inflation rate.

The odd thing is that for me, inflation should have a lower bite. We dont eat out much, I dont pay for many services choosing to do most maintenance and repairs myself. Healthcare is paid through my wifes part time job.

Yet when I take our year on year spending, cull out unusual expenditures (like the sudden appearance of these mysterious "baby expenses") until I get it to basic core living costs...i'm seeing approximately a 6% growth year on year over the past 3 years. We havent made any conscious decisions to live a different lifestyle nor do I feel like we've 'turned up the knob' in any significant manner. Further, as I've outlined in posts on "invisible inflation",I see quality and quantity reductions regularly in the products and services that I buy. Customer service has been reduced to a joke at most companies. Food portions are smaller. "Extras" you used to get for free now cost extra.

For some, perhaps a lot of people, particularly living away from the coasts and in more rural, low-growth areas and living simply might be see CPI as extravagant. In my area, more urban, near the california coast, in a high growth area...I think CPI is grossly understating the effects of inflation.

I think this bears the ER or prospective ER needing to very closely examine their personal rates of inflation and not just relying on an average or a passing plug of the CPI into the retirement calculator.

To heck with stock market valuations, average rates of return, portfolio diversification and all that. It isnt going to mean squat if you're using a 3-3.5% long term average of CPI in your 40 year calculations and you're off by 2-3% a year.

Up until this point, I was ready to flag on anyone with a seven figure portfolio and no debt to zap their jobs and move forward to ER. Now I think a closer look at the influence of inflation on their lifestyles, long term, particularly around some highly ER enhanced items like health care and educational costs for ER parents, is very well warranted.

In fact, excepting people living away from high growth areas near the coast and people with pretty large sized portfolios, I'm thinking you better have at least a small income stream of some kind in place. Investment gains from a reasonable portfolio simply may not be enough.

As far as cherry picking a few items and looking at their relative cost factors, make sure you look at housing, college costs and health care costs before bothering to dip into piddlers like gas and electricity. Both of which have been kept low by artificially low oil and coal prices.

Hell...even the six million dollar man turned into the six billion dollar man in just 30 years...
http://www.guardian.co.uk/science/st...754356,00.html
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Re: CPI ... Your Confidence Level in this Statistic?
Old 04-15-2006, 10:09 AM   #60
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Re: CPI ... Your Confidence Level in this Statistic?

Quote:
Originally Posted by mathjak107
just reviewing our expenses in 2005 i cant come up with much that isnt up more than 3%..........my auto insurance stayed the same i see but every thing else is way higher....i think my general expenses are probley closer to 5% here in new york....couple that with no raises this year at work and it hurts.....
Unless you are tracking how many ounces of toothpaste you consumer from one year to the next and how many pounds of chicken you eat relative to how many pounds of beef, etc. I don't think those kind of comparisons are worth very much. *

I'm on track to spend about 15% less this year than last year . . . deflation?

Is it possible that this presumed mismatch between CPI and "personal inflation" is a result of the fact that almost everyone is consuming more? *Has gasoline outpaced CPI? *Not since 1976 it hasn't. *But people may very well be spending more on gasoline because they are driving more and instead of owning one 4 cylinder hatchback they now have two SUVs parked in the driveway. *Electricity prices have fallen in real terms but people may be spending more because they are consuming more electricity to run air conditioners that prior generations didn't have to cool houses that are 50% larger on average.

What you are seeing is not a mismatch between CPI and inflation, but keeping up with the Joneses run amok. *It's been noted elsewhere on this site that one of the hazards of matching CPI is that your standard of living remains constant in a world where working stiff’s standard of living is increasing – which makes you feel like you are losing purchasing power in comparison to your neighbors. *That is not a problem with the price index. *The index seems to accurately track prices. *What it does not track is everyone’s insatiable appetite to consume more. *
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