CPI ... Your Confidence Level in this Statistic?

[Craig]

Reading the gold thread, and considering some of our other inflation discussions, I really wonder about your perspective on the consumer price index.

Probably ten years ago, when debating the future of social security, one theory I recall was that the fed's would reduce their exposure to those entitlements by manipulating CPI. Easy enough ... artificially "reduce" inflation enough that the benefits would rise more slowly than the dollar would inflate. Voila ... reduced obligations.

As we watch gold's rise, oil and other commodities, the price of real estate, etc., etc. ... I frankly believe the CPI is bogus, and has been for some time. (February CPI reported as 3.6% ... www.bls.gov/news.release/cpi.nr0.htm ).

Our perspective on true inflation / reduced dollar value obviously has great implications for our choices of investments, whether or not to pay down real estate loans, etc. ... very interested in your opinions.

 

[REWahoo]

Charles, CPI accuracy has been the subject of much discussion:

http://early-retirement.org/forums/index.php?topic=6268.0
http://early-retirement.org/forums/index.php?topic=5964.0
http://early-retirement.org/forums/index.php?topic=1949.0
http://early-retirement.org/forums/index.php?topic=1420.0

 

[TromboneAl]

Are there any other government or non-gov inflation indices published?

 

[justin]

Producer Price Index. Supposedly more conservative than CPI.

And there are individual components of CPI that you can take and use to estimate your personal CPI based on how much you spend on each of the spending categories that comprise the CPI.

 

[wabmester]

Are there any other government or non-gov inflation indices published?

Yes, the one I've heard most economists perfer is the GDP Price Deflator.

An economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP. The GDP deflator shows how much a change in the base year's GDP relies upon changes in the price level. Also known as the "GDP implicit price deflator." 

   
Because it isn't based on a fixed basket of goods and services, the GDP deflator has an advantage over the consumer price index (CPI). Changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator.

If you believe that the GDP Price Deflator is a good measure of inflation, then the CPI measure is too high, not too low.

 

[cute fuzzy bunny]

The problem with the gdp price deflator is twofold.

One is that is measures everything made or done (goods and services) and the changes in those prices from one year to the next. Consumers dont buy everything in the entire bucket every year, so its not terribly applicable as a year on year measure.

Two is the biggie. Technology and large capital goods and their related services make up a huge percentage of GDP. Drastic price reductions in those products (tv's, computers, ipods) massively affect the GDP deflator. But again, we dont buy those products every year nor do they make up a majority of our personal expenditures. Businesses benefit from a lot of the deflator influences. Individuals dont.

CPI is easy. Are you spending more this year to live than you did previously. If so, how much? Did you change your style of life as a result of increasing costs?

Its going to be different for everyone, based on lifestyle, location and spending habits.

My suggestion for an easy answer? Find someone who lives near you and lives a similar lifestyle thats been on CPI adjusted social security for a while and ask them how much less spending power they have now vs ten years ago. My dad says his social security spending power has lost about 1/3 over the last 10 years. That sounds like ~3% a year. Added to CPI's average of ~3.5% during that time period gives you a little over six percent. I measured my own expenses in an arduous process last year and came up with a little over 6%.

Thats my inflation factor in my area for my lifestyle and my spending pattern. Not even close to CPI.

 

[mathjak107]

the cpi is a joke........want the real rate of inflation? track the price of a slice of pizza..not sure why it works but its pretty accurate

 

[justin]

the cpi is a joke........want the real rate of inflation? track the price of a slice of pizza..not sure why it works but its pretty accurate

So... now we have Cici's pizza buffet at $3.99 versus in the past the old chain pizza buffets were $5.99.

Papa Johns used to be $14 for an extra large deluxe. Now Sam's club/costco has the same thing (better IMHO) for $8.

Are we seeing deflation? Maybe some things went up (healthcare, oil/gas) and some went down (electronics, pizza).

 

[wabmester]

Maybe that's why I'm not seeing the GIANT inflation rates that others are reporting. I only buy computers and pizza....

 

[justin]

Well CFB's inflation rate went up cause he had a baby. :

Mine probably went up too. For the same reason.

 

[wabmester]

Well CFB's inflation rate went up cause he had a baby.   :

Mine probably went up too.  For the same reason.   

Ah, yes. I got one too. But here's my magic formula for keeping the cost of kids low: rich and generous grandparents.

 

[Gone4Good]

the cpi is a joke........want the real rate of inflation? track the price of a slice of pizza..not sure why it works but its pretty accurate

Not sure about a slice, but here are some historic prices I pulled off the web and asjuted to a "current price" using CPI:

Year  Item                               Price      CPI Adj     "Current Price"
1925 Model T Ford                  $300      10.99          $3,298
1948 Movie Ticket                   $0.34      8.17            $2.78
1957 Soft Drink                       $0.07      6.93            $0.49
1951 Roll of Toilet Paper             $0.10      7.43            $0.74
1951 Campbell Soup (10oz)         $0.09      7.43            $0.68

Seems like a mixed bag. 

There is no way I can get a new car for $3K and average movie tickets (according to another web site) are currently $6.39.  I think I can find places showing older movies for $2, but that is probably not a fair comparison.  I do, however, get about 8 movies per month from Netflix for $15, which works out to be $1.88 per movie. My parents borrow DVDs from the library so they get them for "free".

On the flip side, I can get soda for less than $0.49 (not sure of size but assume 16oz bottle) and toilet paper for less than $0.74 / roll.  Campbell Soup runs over $1 in my neck of the woods, but I can get it on sale for about the same $0.68 / can.

So in some cases CPI seems very far off (like a $3K new car) but in other cases very reasonable.

 

[justin]

Ah, yes. I got one too. But here's my magic formula for keeping the cost of kids low: rich and generous grandparents.

I've added: don't buy a bunch of crap for your kid. Other people think your kid is cute too and will buy them the crap.

 

[justin]

There is no way I can get a new car for $3K and average movie tickets (according to another web site) are currently $6.39. I think I can find places showing older movies for $2, but that is probably not a fair comparison. I do, however, get about 8 movies per month from Netflix for $15, which works out to be $1.88 per movie. My parents borrow DVDs from the library so they get them for "free".

The cheapest cars out there will run you around $8000 or so new. They are probably 100 times better than the model T. I imagine you could spend $3000 on a used car and get one far superior (in terms of reliability, fuel economy, power, safety and amenities) to a model T.

 

[sgeeeee]

... very interested in your opinions.

I think CPI is as good a metric as you can find to try to measure the average nationwide inflation with a single number.  I've spent quite a bit of time reading the government web site as well as published papers discussing the details of how data is accumulated and analyzed.

I don't see any credible indication that the government is surreptitiously adjusting the data to try to artifically hold CPI down.  I think this kind of conspiracy would be much more difficult to pull off than some people think.  The CPI data and analysis is very public and transparent.  The work gets done by an army of civil service workers -- not by a few politicians with an agenda.

A perfect CPI number for the nation would underestimate the personal inflation rate of about half the population.  I think a lot of people miss this point.  Depending on where you live and what you buy, the CPI may underestimate and may overestimate your personal situation.  I also see no way to actually measure personal inflation rate very accurately.  People simply don't buy the exact same things two years in a row.  

 

[mathjak107]

So...  now we have Cici's pizza buffet at $3.99 versus in the past the old chain pizza buffets were $5.99. 

Papa Johns used to be $14 for an extra large deluxe.  Now Sam's club/costco has the same thing (better IMHO) for $8. 

Are we seeing deflation?  Maybe some things went up (healthcare, oil/gas) and some went down (electronics, pizza).



we are talking a slice of pizza in a local pizza place..lets when i was a kid pizza was 15 cents now it 1.75 a slice here in new york...you do the math

 

[mathjak107]

I think CPI is as good a metric as you can find to try to measure the average nationwide inflation with a single number.  I've spent quite a bit of time reading the government web site as well as published papers discussing the details of how data is accumulated and analyzed.

I don't see any credible indication that the government is surreptitiously adjusting the data to try to artifically hold CPI down.  I think this kind of conspiracy would be much more difficult to pull off than some people think.  The CPI data and analysis is very public and transparent.  The work gets done by an army of civil service workers -- not by a few politicians with an agenda.

A perfect CPI number for the nation would underestimate the personal inflation rate of about half the population.  I think a lot of people miss this point.  Depending on where you live and what you buy, the CPI may underestimate and may overestimate your personal situation.  I also see no way to actually measure personal inflation rate very accurately.  People simply don't buy the exact same things two years in a row.  

lets see if somethings getting to expensive bump it out of the index..or if its getting to expensive sub it with something cheaper....well if you buy a caddy because you like the technology and status,well a ford taurus is probley the equal of your old caddy..forget the fact the new caddy is 2x the price of your old one...oh food and energy? we can weed that out.we dont need to eat or drive or heat the house...oooh yeah no rising home prices allowed in our index,only rent allowed to be figured ....you get the idea.....its all manipulated and massaged.......listen we can always sub cheaper products..but thats not how we live our lives .ice cream to expensive eat pudding,,,,,or only buy it when on sale or switch to a cheaper brand or or and or

 

[justin]

we are talking a slice of pizza in a local pizza place..lets when i was a kid pizza was 15 cents now it 1.75 a slice here in new york...you do the math

Well, assuming you were a kid 50 years ago, that would mean a 4.7% inflation rate.

Did the pizza get bigger, better, tastier? Does it have more expensive ingredients now?

I'm thinking back to what a combination dinner at your generic mexican restaurant cost when I was a kid (10-15 years ago). Around $5-6 bucks. Now it is $6-6.50 at the same types of places. Does this suggest astronomically low inflation? I have successfully refuted your pizza example by introducing this new proof.

I would love to be a little kid now. With walmart and the dollar store selling all those awesome toys (cheap plastic crap to us adults), it would be amazing! The stuff they sell now is twice as nice, there's twice as much of it all at half the cost.

 

[d]

the cpi is a joke........want the real rate of inflation? track the price of a slice of pizza..

cpi is a joke?

 

[sgeeeee]

lets see if somethings getting to expensive bump it out of the index..or if its getting to expensive sub it with something cheaper....well if you buy a caddy because you like the technology and status,well a ford taurus is probley the equal of your old caddy..forget the fact the new caddy is 2x the price of your old one...oh food and energy? we can weed that out.we dont need to eat or drive or heat the house...oooh yeah no rising home prices allowed in our index,only rent allowed to be figured ....you get the idea.....its all manipulated and massaged.......listen we can always sub cheaper products..but thats not how we live our lives  .ice cream to expensive eat pudding,,,,,or only buy it when on sale  or switch to a cheaper  brand  or or and or

There is an implication that some un-named individual or group can simply adjust the basket of goods at their own whim. This is far from the truth. It is very popular to make more out of the hedonic adjustments or product substitutions that make up CPI than is real. With a little research, you can find a long list of papers about these topics. A couple of important facts emerge from this actual data collection and research process: 1) these adjustments are quite small and have a very small impact on the CPI number, and 2) there is a lot of research and quantified data that goes into making each change. If you read one or two of these research papers, you are likely to come away with an appreciation of how difficult a job it is to develop a CPI value and how hard the people who do it work to get it right.

 

[cute fuzzy bunny]

If the adjustment is so small, then why do it?

Why does it need to be made so complicated that an intelligent person has to read a 3-5 page paper to understand how somethings cost is measured?

 

[d]

A couple of important facts emerge from this actual data collection and research process

do you really want to introduce facts into this discussion?

 

[sgeeeee]

If the adjustment is so small, then why do it?

Why does it need to be made so complicated that an intelligent person has to read a 3-5 page paper to understand how somethings cost is measured?

The main reason is because it's not as simple as many people think it is. It is complicated to try to quantify inflation as it applies to life on average in this country. Some people say things like, "Why don't they simply buy the same basket of goods every time?" That sounds so simple, but it won't work for a number of important reasons. The products typically purchased by a family evolve and change dramatically over fairly short periods of time. Purchased items change and the features and quality of items change.

Although the impact of each adjustment is minor, the attempt is to make the metric as accurate and useful as possible. It the USBLS can conceive of an aspect of inflation that may need to be captured, they conduct research and analysis to figure out if it can be quantifed with enough accuacy to help or hurt the value. Of course they don't know the impact is going to be small until they've done months or years of statistical research and come up with the answer.

Anyone who thinks this is easy should try to figure out how to quantify their own personal inflation rate with any accuracy. Imagine that you have a complete and thorough list of items you purchased from 1990 to 2005. How would you quantify your inflation rate? Many of the things you bought in 2005 didn't even exist in 1990 and vice versa. Because your lifestyle is likely to have shifted over that period, you also probably changed the kinds of food you eat, the clothes you wear, your vacation and dining habits, etc. The cell phone or computer you bought in 1990 bears no resemblance to the one you bought in 2005. The newer one costs less, does much more, and is more reliable. Then there are all the items that you may have had to purchase only once or twice during the entire 15 year period -- major appliances, furniture, cars, . . . How long will you keep the washing machine you purchased? In many cases it may be for over 20 years. The lifetime of the items contributes significantly to the inflation calculation. While it is pretty easy to sum up the total expenses by year and find out whether you spent more or less in 1990 than in 1991 or 2005, those numbers fail completely to tell you anything about personal inflation.

Now multiply those problems by everyone in America.

 

[haha]

Are there any other government or non-gov inflation indices published?

http://www.gillespieresearch.com/

 

[mathjak107]

you cant even say electronics are cheaper today either...as an example my sony xbr set was 750.00 about 15 years ago..if you know tv's the xbr line represents the latest and greatest technology of that day..while yes today you can buy an equivelent performing to my 15 year old set for 250 bucks the equivelent xbr representing todays latest and greatest technology is 2200.00........you cant compare just equal performance without comparing it to where it is in the "quality performance scale of that time period...........my first cd player was 1,000 dollars but it was state of the art new technology best of breed in those days...while a cd player today can cost 50 bucks the best of breed is 2500-10,000 bucks