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Old 11-09-2007, 02:16 PM   #21
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Twaddle,
If the government is attempting to find out how much more or less a family spends to live, vs how much things in the economy have gone up or down, then generics should replace brand names. However, if people are using generics because they can no longer afford brand names, because the brand names have increased in price, or other items in their lifestyle have increased, then substitution should not be made. I could see the cost of a horse for a car or a computer for an abacus, but chicken for beef is wrong.
I haven't seen any evidence that the BLS is substituting chicken for beef. I admit I didn't look very far, but all I found was this on their site:

Drugs losing patent protection:When a brand-name drug in the sample loses its patent protection, generic versions of the drug receive a one-time chance to replace the original, brand-name drug even if the sample pharmacy continues to sell the brand name drug. Six months after a drug in the sample loses patent protection, CPI field staff selects among all drugs (including the original) that the Food and Drug Administration deems to be therapeutically-equivalent. Delaying the reselection for six months allows emerging generic drugs an opportunity to gain market share. The chance of drug selection is proportional to the number of prescriptions sold for each version of the drug over the previous 3 months. If a generic is selected, the CPI treats any price difference between the original drug and its selected substitute as a price change, and reflects this change in the index in the month when the procedure was performed.

That seems perfectly reasonable to me.

As far as chicken vs steak, even though I don't see them doing that, I would think it would be a reasonable thing for them to do if cows went extinct, for example.
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Old 11-09-2007, 02:56 PM   #22
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My doctor, for one, does not like generics. We did not get into a long discussion as to why, but he does not. Often he will write 'no substitution' on the pad. If the CPI is intended to keep the SS beneficiary at a standard of living, and it forces people to change their preferences, then while that change may seem reasonable to you and me, the CPI, IMHO, is not doing what it was intended to do.
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Old 11-09-2007, 03:09 PM   #23
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Personally, I think the BLS has a tough job creating a fair CPI, and I think they do a much better job than I could. Every time I look at their methodology, I'm more and more impressed.

Take a look at the paragraph I quoted, for example: The chance of drug selection is proportional to the number of prescriptions sold for each version of the drug over the previous 3 months.

Maybe I'm just easily impressed, but that seems about as close to a scientific approach as one could get. They don't shop for the best price. They don't go to Wal-Mart. They choose their samples based on a statistical analysis of sales trends, and they still may end up picking the more expensive brand over an equivalent generic.

I guess I wouldn't call that "stealing" from poor old pensioners.
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Old 11-09-2007, 03:12 PM   #24
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My doctor, for one, does not like generics. We did not get into a long discussion as to why, but he does not.
I believe some doctors simply don't trust the inactive ingredients in some generics. The generics will have the same active ingredient and in the same concentration as the name brand medication, but it may have considerably different inert ingredients (and perhaps, less well-known side-effects).

That would be the only reason I could think of, other than being on the take from Big Pharma...
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Old 11-09-2007, 03:45 PM   #25
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I don't think either that inflation is running at 10-12%, there is no way. But my gut feeling and my own personal finances say that it is probably running at 4-5% right now. So say it runs at 4.2%, double what the government number is. Real inflation is only about 2% higher that official inflation. That may not sound like much, but in fact it is huge. It means that the government is underreporting inflation by 50%. If the government continues this practice and you compound that over the years then my social security check will be worth about half what the SSA is quoting me right now by the time I qualify for SS benefits in 35 years.
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Old 11-09-2007, 03:55 PM   #26
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I wouldn't dare compare your gut feeling to the BLS methodology, but you might want to know that they don't use the CPI to determine your initial benefit amount. They use wage inflation. Once you start collecting social security, the COLA adjustments are based on the CPI.
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Old 11-09-2007, 04:03 PM   #27
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And CFB, if you were a first time homebuyer would you actually have double digit? I mean, you were not consuming the house before
Sorry, not getting this. If I'm a first time home buyer and homes that cost $200k last year and are $300k this year (pretty common in many regions), that just doesnt count?

By definition, inflation is either an increase in price or devaluation of an amount of currency.

Unless rent was maintaining parity with rising home prices (unlikely), and wages were pacing that rise (hasnt been the case the last 5-7 years), then for a first time home buyer the increased cost of entry against last years prices would represent inflation.

Are we seeing a reason why so many people jumped into 40 year interest only ARMS? After waiting for years to buy a home and watching them continue to increase in value well beyond a wage earners ability to keep up?

On the other matter, its easy to have organizational bias without having to scream 'conspiracy'. There are a lot of subjective components and economic leeway in making a measure of inflation.

Depends on what you buy. I dont buy new tv sets every year, and the one I want to buy always costs $2000 anyhow. But most of the things that are heavily weighted in my budget have increased a lot more than 35% over the last ten years. Insurance, food, gasoline, electricity, water...a lot of those have doubled on me in the last 2-10 years.

On top of that, you have invisible inflation. Products getting smaller, extra being left out, product quality suffering, customer service being cut to nil. Stuff isnt made as well as it was and you cant get service when it breaks.

Just in the last 5 years, I've had two television sets that were less than 3 years old drop dead, a new refrigerator die and the manufacturer unable to repair and unwilling to replace it, and a 1 year old dishwasher break down. Not cheap junk, all mid range major brand name merchandise.

Prior to that time, you could count on any of those purchases lasting 10, 15 years or more with little or no problems.
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Old 11-09-2007, 04:17 PM   #28
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So, now that house prices are going down, you'd want that reflected as a large negative component in the CPI, right? I have a feeling we'd be getting some rants from pensioners if that happened.

Good article on the housing component:

Housing costs in the CPI: what are we measuring? | Business Economics (January, 2006)
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Old 11-09-2007, 04:23 PM   #29
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Absolutely.

Problem remains that rents dont come close to representing housing costs.

I cant buy a home anywhere in the region I live in and then rent it out for a profit.

Its not a year on year reactionary thing either. The house I bought 10 years ago and the one I just bought are substantially similar and in the same town. I paid twice as much for this one as the one I bought in 1996. That means twice the real estate taxes, much higher homeowner insurance, not to forget the nutty costs of labor for repairs and maintenance. Cost to paint this house was $2750 in 1996. $5200 today.

But lets forget about all that stuff. Renters dont have to pay it.
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Old 11-09-2007, 04:30 PM   #30
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I wouldn't dare compare your gut feeling to the BLS methodology, but you might want to know that they don't use the CPI to determine your initial benefit amount. They use wage inflation. Once you start collecting social security, the COLA adjustments are based on the CPI.
I did not know that they used wage inflation to determine initial benefit amounts. It helps poeple like me who are not yet receiving SS benefits. But it still leaves people who just started collecting SS benefits with much smaller benefits down the road.
As far as comparing my gut feeling to the BLS methodology, I am glad you didn't dare . I am a scientist and a natural sceptic and I like nothing more than debunking a "good" methodology to the despair of my collegues. But in all seriousness I don't trust anyone to tell me what inflation rate is crippling my budget every year, no matter how advanced their methodology. I can see that major items in my budget have gone up this year far more than ever before: food, sales and property taxes, gas, car repair costs (darn VW), electricity, water, SS taxes (because they raised the cap), health, life and disability insurances... Since I am certain I am not the only one consuming those items and services, I am pretty sure that inflation is running well above 2.1%....
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Old 11-09-2007, 04:31 PM   #31
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But lets forget about all that stuff. Renters dont have to pay it.
I think you'll find that the BLS does account for that stuff in their owner's-equivalent rent calculation. At least that's what I got from the article referenced above.

They also publish different CPIs for different regions, and I'm sure you'll find that the west coast CPI is closer to your experienced inflation. CPI-U is just a national average.
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Old 11-09-2007, 05:24 PM   #32
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You need to read a bit more. The portion of CPI allocated to housing is based on a sampling of area rents, with a presumption that such rates incorporate all salient costs and a margin of profit.

As a lot of landlords will confirm, renting RE in california is not terribly profitable unless you've owned the property for a long time.

I havent looked at the regional CPI numbers, but the last time I did (~2 years ago) there was a minor variance from one area to another, but the way they weight it and the inputs used dont really allow for a huge difference.

Further, the regionalized stats are sort of worthless. Nobody pays adjustments based on regional CPI figures, but on the average number and almost nobody knows what their regional number is unless they like digging through the BLS web site.

But lets stop weed picking and prairie dog it. Do you consider CPI-U to be an adequate number for an early retiree to incorporate into a 40-50 year plan without further consideration as to changes in cost of living due to inflationary factors?
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Old 11-09-2007, 05:58 PM   #33
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Do you consider CPI-U to be an adequate number for an early retiree to incorporate into a 40-50 year plan without further consideration as to changes in cost of living due to inflationary factors?
Inflation metrics are backward looking. I don't use the CPI for planning, and I'm not sure how one would.

I'm interested in the CPI-U because the market is interested in it. Bond rates are partly based upon it, for example.

If I have the choice between two bonds: one with a guestimate of the future CPI, and one explicitly indexed to the CPI, I'll chose the indexed bond as long as there's no outrageous insurance premium.

A CPI-linked bond will protect you from *surprise* increases in inflation. It's not any better than a nominal bond if inflation plays out exactly as the market expects it to.

FIREcalc uses the CPI-U to look backward at scenarios in which you automatically increased your expenses each year by the CPI-U. I don't do that, and I'm not sure I'd recommend that anybody take FIREcalc so seriously that they should do that.

I have always adjusted my expenses based on my income, and I expect to do that for a while still.
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Old 11-09-2007, 06:24 PM   #34
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Fascinating.

Anyone else ignore inflation as part of their retirement planning?
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Old 11-09-2007, 06:34 PM   #35
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Fascinating.

Anyone else ignore inflation as part of their retirement planning?
I was hoping we could drive this to its logical conclusion.

You think that:

1) You can calculate your personal inflation rate.

2) And find the difference from the CPI.

3) And use that for planning purposes.

Right?

We know how this ends. If you think that your PIR is consistently 1% higher than the CPI, then your SWR is 3% instead of 4%. If you think it's consistently 2% higher, then your SWR is 2%.

Is that it?
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Old 11-09-2007, 06:57 PM   #36
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Not even close! You're over focussed on the CPI when I'm thinking its irrelevant.

The BLS says they're measuring a statistic based on someone who spends nothing like me, on stuff that I dont spend money on, and notes that all they're doing is measuring a typical rate of inflation based on that kind of person and what their model says they spend. That they are calculating *a* rate of inflation, not *the* rate of inflation.

I believe them.

I think that:

1) One should be aware of their spending and how it changes in retirement

2) One should invest accordingly so as to make more money than they're spending, with attention to increases in spending regardless of the source of the increases.

3) Have a ten year forecasted budget that takes into consideration expectations of price changes to current spending and spending changes, based on reasonable expectations.

4) Its a poor planning choice to buy CPI indexed securities or pick up a CPI indexed pension or annuity and simply presume that you're effectively protected from inflation for the sort of time period an early retiree will experience. Unless your budget looks roughly the same as the urban worker characterized in the CPI-U.
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Old 11-09-2007, 07:02 PM   #37
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I've already mentioned how impressed I am by the BLS's methodology. So, you can imagine how impressed I am by your inflation forecasting abilities. Wow!

I'm not so good at the forecasting bit, and when I look back at my expenses, I see that the inflation effects are small compared to stuff like taxes and lifestyle changes.

Since I'm too dumb to forecast accurately, I must simply adapt. It worked for me when I was in the rat race, so I'm hoping it keeps on working for me in retirement.
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Old 11-09-2007, 07:28 PM   #38
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See, again you're locked up on the CPI. The methodology can be as impressive as it wants to be. It doesnt apply to me. Or I'd imagine to most early retirees.

I'm all for improvisation, and like you have little to fear as far as running out of money. In fact I'm impressed at how much I can stupidly spend and still watch the bank account get fatter.

But I'm well aware that there are a lot of people who arent so fortunate and I try to help them understand all the potential pitfalls.
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Old 11-09-2007, 07:40 PM   #39
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For 2007, the social security cost of living increase was 3.3%, whereas that for federal employees was theoretically 2.2% (those living in places like S.F. and D.C. got more, while those of us living in the "rest of the U.S." area got a 1.8% cost of living increase).

So, my cost of living supposedly went up 1.8% and the cost of living of someone in my neighborhood on social security went up 3.3%. What would have been a realistic increase in cost of living?

I don't know!! Both seem low to me. But I agree with the rest of you. The system is set up to "cook the books" on inflation and cost of living. I suspect that we might see some very low social security cost of living increases once the first wave of baby boomers retire and qualify for social security benefits.

What federal employees get annually is not a COLA. It's not called that and isn't that.
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Old 11-09-2007, 09:48 PM   #40
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The people in my family who have been retired for 20-40 years have all most all owned homes. Mom retired 20 years ago and her house was paid for over 30 years ago. She is low income so gets a property tax discount. She bought a new Toyota at age 77 so will never need another car. House prices, and car prices don't effect her, she doesn't drive much now and gets good mileage so probably spends less on gas than she did when it cost much less. For her inflation is food, bowling, clothing and going out for lunch with her friends and little things for the house. She gets new computers and some new furniture but if the price of furniture was up she would just keep her old furniture. She pays nothing for medical prescriptions are free and no copays. She does have to pay for heat and lights and food prices go up all the time. I don't think her pension is indexed and she only gets about $400 in SS but interest rates are up on her CDs so she has more money than she has ever had even after inflation.
I think people who are going to be retired 30-50 years should try to lock down the price of a house even if you buy it the day you retire and have a 30 year mortgage because in 30 years the interest and principal payment will still be the same then suddenly stop giving you more money for the rest of your life.
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