CPI ... Your Confidence Level in this Statistic?

[cute fuzzy bunny]

If you want a real tome to put you to sleep laugher interesting read, try the BLS document on hedonic adjustments for clothes dryers...in 30 pages or less, they describe why clothes dryers really cost less than they do because they have better motors, more cycles and some other nice features. Except that part where 20 year old clothes dryers lasted 15-20 years and now you're lucky to get 10. I tried the hedonic argument with the appliance store salesman. Unfortunately he didnt study economics and wouldnt sell me the dryer for less because its better.

http://www.mises.org/story/1873
http://moneycentral.msn.com/content/P72746.asp

 

[Gone4Good]

If you want a real tome to put you to sleep laugher interesting read, try the BLS document on hedonic adjustments for clothes dryers...in 30 pages or less, they describe why clothes dryers really cost less than they do because they have better motors, more cycles and some other nice features.  Except that part where 20 year old clothes dryers lasted 15-20 years and now you're lucky to get 10.  I tried the hedonic argument with the appliance store salesman.  Unfortunately he didnt study economics and wouldnt sell me the dryer for less because its better.

http://www.mises.org/story/1873
http://moneycentral.msn.com/content/P72746.asp

CFB, I tend to distrust "analysis" that leads with its conclusion (i.e. articles titled "Illusions of Hedonics" and "How the government manufactures low inflation").  When in doubt I try to verify these things on my own.

To that end, I have to admit I wasn't able to find a historic cost reference for a clothes dryer.  I did, however, find this reference to the cost of a refrigerator:

In 1918 Kelvinator introduced the first refrigerator with any type of automatic control. One manufacturer's 1922 model had a wooden cabinet, a water-cooled compressor, two ice cube trays and nine cubic feet of storage space. It cost $714. In 1923 Frigidaire introduced the first self-contained unit. Steel and porcelain cabinets began appearing in the mid-20s.

If you adjust the $714 1922 refrigerator to today's dollars using CPI, refrigerators should cost $8,394!!!  Prices in this week's Sears flyer range from $399-$999.

The more I look at this the less I'm convinced there is any problem with how CPI is calculated.  It appears that people have extrapolated their general distrust for government to a distrust of government statistics.  And then latched on to "hedonic" adjustments as the boogeyman mechanism by which the government cheats the populous out of its social security benefits.  Problem is, it seems not to be true.

 

[Gone4Good]

Just for kicks, here is a reference to the price of a blender in 1937:

In 1937, the Waring-owned Miracle Mixer blender was introduced to the public at the National Restaurant Show in Chicago retailing for $29.75.

Adjusted for CPI a blender should cost $422 today.  But I can get one at Walmart for $17.72.  Must be some serious deflation going on.

I don't imagine any of the conspiracy theorists account for the fact that some things actually have fallen in price in their analysis . . . do they?

 

[Gone4Good]

I think this settles it (at least for me). 

Here is a site that lists prices advertised in the Daily Record newspaper over the past 100 years.  I've chosen a sampling of prices from 1935, adjusted them for CPI and then compared them against the 2005 listing from the same site.  Here is the results (feel free to waste your own time on this as there are many, many more prices and dates to play with at the site). 

Item                           1935 price      CPI adjust      1935+CPI    2005 Price
Automobile                 $495               14.47              $7,163        $18,485
Men's rain coat           $24.90            14.47              $360           $70
Ground Beef $/lb        $0.125            14.47              $1.81           $3.29
Cereal                        $0.21               14.47              $3.04          $1.99
Butter $/lb                  $0.40               14.47              $5.79          $1.99
News paper                $0.02               14.47              $0.29          $0.35
Mattress                     $18.50              14.47              $268           $279
9 pc Dining room set   $99.50              14.47              $1,439        $1,599
Toothpaste                  $0.26                14.47              $3.76          $2.49

Over a 70 year period the prices seem to track amazingly well.  There are outliers on both sides . . . automobile inflation is much greater than CPI, but the cost of a rain coat is inflating much slower.  Ground beef is more costly but butter and cereal are less expensive.  The price of a mattress is almost spot on and a 9 piece dining room set is nearly so.

CPI seems to be very representative of changes in prices.  Sorry folks.

Incidentally, a 3% per year tracking error would mean the “1935+CPI” column should be wrong by 800%.

 

[Gone4Good]

If you want a real tome to put you to sleep laugher interesting read, try the BLS document on hedonic adjustments for clothes dryers...

Hey CFB, the previously mentioned site does have a listing for a clothes dryer in 1955 at 159.95. In today's dollars that would be $1,142. Kenmore washer & dryer set on sale at Sears this weekend for $329 . . . sounds like a deal.

 

[d]

while one can have lots of fun poking fun at hedonics (no suggesting some of it is not deserved), seems rather clear that some sort of adjustments do need to be made. 

Remember the slide rule? 99 key calculating machine? How do they compare with your HPxx or TIyy ... They are all calculators.

Compare your first computer to what you've got on your desk(or lap) right now; speed, memory, reliability etc.

What was the average life of an automobile tire 50 yrs ago? Today? I distincly remember getting flat tires on a regular basis when I first started driving... got a flat last year, first in perhaps 10 years. For that matter, what was the average life of a car 40 years ago ...

My point (other than the one atop my head) is simply to suggest that adjustments for product changes cannot be reasonably ignored.  Whether the adjustments are reasonably achieved is, of course, another matter. (I'd guess that BLS does a reasonable job with it.)

Another alternative, of course, is to just use the price of gold as our yardstick.

 

[sgeeeee]

. . . Another alternative, of course, is to just use the price of gold as our yardstick.

That's the answer.

 

[Martha]

I think this settles it (at least for me).

Here is a site that lists prices advertised in the Daily Record newspaper over the past 100 years. I've chosen a sampling of prices from 1935, adjusted them for CPI and then compared them against the 2005 listing from the same site. Here is the results (feel free to waste your own time on this as there are many, many more prices and dates to play with at the site).

Item 1935 price CPI adjust 1935+CPI 2005 Price
Automobile $495 14.47 $7,163 $18,485
Men's rain coat $24.90 14.47 $360 $70
Ground Beef $/lb $0.125 14.47 $1.81 $3.29
Cereal $0.21 14.47 $3.04 $1.99
Butter $/lb $0.40 14.47 $5.79 $1.99
News paper $0.02 14.47 $0.29 $0.35
Mattress $18.50 14.47 $268 $279
9 pc Dining room set $99.50 14.47 $1,439 $1,599
Toothpaste $0.26 14.47 $3.76 $2.49

Over a 70 year period the prices seem to track amazingly well. There are outliers on both sides . . . automobile inflation is much greater than CPI, but the cost of a rain coat is inflating much slower. Ground beef is more costly but butter and cereal are less expensive. The price of a mattress is almost spot on and a 9 piece dining room set is nearly so.

CPI seems to be very representative of changes in prices. Sorry folks.

Incidentally, a 3% per year tracking error would mean the “1935+CPI” column should be wrong by 800%.

The price of a lot of "stuff" seems to match CPI or even be cheaper. But what about drugs? Medical care? Oil? Housing?

I think that as you age you tend to need less stuff and more services. The cost of those services seems to outpace the CPI in many circumstances, especially healthcare.

 

[cute fuzzy bunny]

re: services, wait until the slack from "cost cutting" finally hits its elasticity limit...

 

[cute fuzzy bunny]

To that end, I have to admit I wasn't able to find a historic cost reference for a clothes dryer.

By popular demand.

http://www.bls.gov/cpi/cpidryer.htm

Look at the gyrations. I know where the "invisible inflation" is...paying someone to analyze stuff like this, write documents like these, and then execute on them.

 

[Gone4Good]

The price of a lot of "stuff" seems to match CPI or even be cheaper. But what about drugs? Medical care? Oil? Housing?

I think that as you age you tend to need less stuff and more services. The cost of those services seems to outpace the CPI in many circumstances, especially healthcare.

Oil:
EIA has a slide comparing real vs. nominal gasoline prices since 1918. I assume they use CPI to calculate "real" prices. Based on EIA's data, real gasoline prices have actually been on a declining trend. The recent spike brings prices back up to where prices were for most of the first half of the century.

Housing.
The same site I referenced earlier with data taken from the Daily Record also has some home price listings. In 1935 a 6 room house in Morris Plains NJ listed between $5,500-$6,500. Adjusted for CPI that house would list for between $80,000-$94,000 today - well short of the $339,000 average price for Morris Plains NJ referenced by HomeGain.com.

The nice thing about real estate, though, is that once you buy in you aren't really exposed to most of that inflation. Over the past 5 years my condo has doubled in value, but my housing cost is lower due to the 200bp reduction in interest cost on my mortgage.

Medical care, prescriptions, etc.
I don’t have any data but I wouldn’t dispute that healthcare inflation exceeds total CPI. Based on the other data here, I assume the healthcare component of CPI tracks healthcare inflation reasonably accurately.

I also assume (but don’t know for certain) that as baby boomers age and as healthcare becomes a bigger slice of average American spending, it will also increase its weight in the CPI calculation – possibly to the benefit of those relatively young and healthy.

 

[d]

By popular demand.
http://www.bls.gov/cpi/cpidryer.htm

... and greatful we are ... as promised, it is a scintilating read! Three observations: 1) the regression model therein developed seems eminently reasonable; 2) contrary to your earlier suggestions, the hedonic adjustment resulted in an increased CPI; and 3) given the significance of tomorrow's date (unless your return is mailed to Massachusetts) it is nice to see our tax dollar put to such good use.

 

[d]

The price of a lot of "stuff" seems to match CPI or even be cheaper ...The cost of ...  services seems to outpace the CPI

'tis true that manufactured/processed products tend to inflate more slowly than services, as the latter tend to benefit less from productivity increases.

But what about drugs? Medical care? Oil? Housing?

CFB will be thrilled to hear that at least for drugs, medical care and housing, that it is in part due to hedonics! (more precisely, the failure to include hedonic adjustments.) Pick a specific drug, compare it's current price to it's price x years ago ... the observed increase in overall drug prices is, I expect, largely due to the introduction of new product, some being outlandishly expensive. Housing ... compare the same house, same square footage, same closet space, same heating/AC etc, and again you'll find it has not inflated as rapidly as first you thought.  Similarly, if one needed heart surgery, would they really want the 60's version? in a 60's equipped facility? "3yrs" has addressed oil.

Not suggesting some things have not increased faster than CPI ... some have, some haven't; but on a weighted average basis ...

 

[sgeeeee]

By popular demand.

http://www.bls.gov/cpi/cpidryer.htm

This is an excellent piece of work. It may be dry and mathematically complex, but it describes very detailed and careful work. Read it. It is the kind of paper that completely debunks any kind of conspiracy argument and really knocks the wind out of arguments that hedonic adjustments are nothing more than a smoke screen for reducing CPI.

 

[Nords]

This is an excellent piece of work.  It may be dry and mathematically complex, but it describes very detailed and careful work.  Read it.  It is the kind of paper that completely debunks any kind of conspiracy argument and really knocks the wind out of arguments that hedonic adjustments are nothing more than a smoke screen for reducing CPI.   

The problem with really good sarcasm is that we can't tell when it's being used!

 

[cute fuzzy bunny]

Actually, I made no implications regarding the clothes dryer document, other than it being long and boring.

Aside from that, it appears (to me) to represent thousands of hours of time spent doing something that didnt need to be done, in order to make minute changes to the standing price of a clothes dryer. And the minute changes were to make it at times more expensive and at times less, over the years.

That was just an example of "waste of time" and "your tax dollars in action".

Do you want to read the one that alleges that faster computers are really better than last years models, and how that improves your life?

And for the 99.4th time, I'm not alleging any "conspiracy". I think its a bunch of economists doing a lot of mental masturbation, taking their lead from their leaders...who talk non-stop about capping and controlling inflation.

Ever see a bunch of folks working for a company, taking their lead from the company progenitor, create a stupid, worthless or unsellable product? That was nonetheless magnificent to behold?

 

[mathjak107]

Ever see a bunch of folks working for a company, taking their lead from the company progenitor, create a stupid, worthless or unsellable product? That was nonetheless magnificent to behold?


the story of my career.........but so true...so many things are nothing more than exercises in futility and that index is one of them....its made to artificially surpress things so none of us can even get the cost of living raises we desperatly need to survive in this low inflation time period we are living in...like i said my own cpi is around 5% living here in new york based on our real bills .....and im not even counting the 14,000 additional amt tax i got hit with this year that further increased my cost of living.....

 

[justin]

My personal inflation rate is 23%. Since 2000, my cost of living has increased by 250%.

Of course, I finished college, acquired student loans, bought a house, got married, had a kid, got cable and started eating things besides ramen noodles.

Obviously that looney government statistic is a ridiculous measure of my personal rate of inflation.

Meanwhile, thank god for that hedonic adjustment. I'm glad I'm not paying $7163 for a 1935 model T or $1142 for a 1955 version clothes dryer.

 

[d]

that looney government statistic is a ridiculous measure of my personal rate of inflation

it is not intended to be a measure of your personal rate of inflation; and you seem to be confusing inflation with standard of living

 

[justin]

it is not intended to be a measure of your personal rate of inflation; and you seem to be confusing inflation with standard of living

Sorry, I forgot my (this is sarcasm) tag.

My "basket of goods" has grown considerably since I actually have a decent income now, and I have a family now.