CPI ... Your Confidence Level in this Statistic?

[cute fuzzy bunny]

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".

[d]

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.

[wabmester]

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.

[cute fuzzy bunny]

"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.

[sgeeeee]

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.

[mathjak107]

well said fuzzy

[cute fuzzy bunny]

I must be reading the wrong web site.

Or you guys are being methodically replaced by exact duplicates.

[wabmester]

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?

[d]

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.

[cute fuzzy bunny]

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.

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.

[. . . 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.

[. . . Yrs to Go]

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?

[d]

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.

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.

[haha]

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

[Nords]

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.

[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.....

[Focu$ed]

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.

[. . . Yrs to Go]

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.