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Gov.s Inflation's anomaly .....
Old 07-04-2014, 09:09 PM   #1
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Gov.s Inflation's anomaly .....

Nope, no 4th of July consumption folks, odd you thought that. Other than the rant type OP on my years of readings and continually changing understanding of inflations effects and recalculations dating back to before the 80s by the USAs .gov. IIRC there are a lot of folk's here from CAN. I knew I'd seen that 9% inflation number somewhere and found it today after quite some time in "Don't Count on it" by Jack Bogle, introduction, p.xx(20) I'd still suggest if anyones interested, they watch Rick Santillies inflation rants on youtube, doubtful he's dk. I know the 72 rule and such, I still side with Rick Santillies youtube rants. Heres a multi-link I'd suggest anyone interested watch them. He's a better speaker than I. Correct, "FIRE related political topics" should have been the "classification",sorry. Thanks for the replies!
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Old 07-04-2014, 09:39 PM   #2
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Been sampling the 4th of July jungle juice, eh?
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Old 07-04-2014, 09:58 PM   #3
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This probably belongs in the "FIRE Related Political Topics" section because you're making a political argument rather than an investment argument. You're saying the the gov't chooses to put out bad inflation numbers because ...

If I look at the BLS CPI numbers for all urban consumers, I see 237.9 for May, 2014. When I go back to 1988 I see 117.5 for May, 1988. So prices doubled over 26 years, a compound rate of 2.75%. What I could buy for $20,000 in 1988 costs about $40,500 today.

If I believed 5% instead, that 1988, $20,000 market basket would cost $71,000 today. If I believed 8%, it would cost $145,000 today.

My wife has kept detailed spending histories since we were married in 1970. If I look those numbers, and think about our changing lifestyle and family size over that period, the BLS numbers look plausible. These claims that inflation is much higher than the CPI don't seem plausible.

If you want to get into the details, you might start by clearing up some misconceptions about the BLS process. Start here: Common Misconceptions about the Consumer Price Index: Questions and Answers or read a longer piece here:
http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

If you're interested in changes in the BLS process, some of them were the result of the Boskin Report. Here's the BLS's take on the impact http://www.bls.gov/opub/mlr/2006/05/art2full.pdf

(Or, you could just ask Brewer to link to his earlier posts on this topic.)

Re unemployment statistics, the few lines in the Bogle book refer to different categories of "unemployed" workers. In fact, the BLS gathers statistics on all of them and prints those statistics in its monthly report. It shows six different unemployment rates, depending on definitions. Table A-15. Alternative measures of labor underutilization

Investors are free to use any of these numbers that seem most useful to them.
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Old 07-04-2014, 10:09 PM   #4
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Well, your 8% number (not even the 9% you mentioned), over 30 years would be a 10x inflation factor. Hmmm...

I bought a new compact car back then, even more than 30 years ago, lower end model for ~ $5000 I think. Something like that would be less than $20,000 today, not >$50,0000.

That would mean a $500,000 home in my neighborhood would have sold for $50,000. But that can't be, because I paid $100,000 for a lesser home in a less upscale neighborhood over 30 years ago.

In a casual but nice family-style restaurant, I can get a good dinner burger with sides for ~ $10. I can't recall what that would cost 30 years ago, but for $1, you'd be at a fast food joint, not a decent quality restaurant I'm sure.


According to this, at 8%:

In The 80s - Prices in the Eighties

A postage stamp would be $2.00 now

and the average prices, nationwide:

Bread $6.60
Milk $18.90 a gallon
gasoline $12.50 a gallon
and a car ~ $61,000
and houses over $1M average.

So no, I don't think 8% is a reasonable guestimate.

About the only things I can think of that might be in that range are taxes and tuition - for some odd reason, those seem to outpace the inflation rates of other products/services.


-ERD50
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Old 07-04-2014, 10:15 PM   #5
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Not very scientific but our expenses in retirement have been fairly even at about 64K a year per Quicken since ER on December 2002. Our standard of living has been the same, doing pretty much the same things- eating out about as often and buying about the same toys (and some new ones - three mini horses).

According to my calculation, a compounded inflation rate of 9% since my ER would mean that I'm currently spending about $180,000 per year. I think I would notice that. Me thinks Mr. brewer12345 is onto something...
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Old 07-04-2014, 10:44 PM   #6
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We're still on our 2004 budget with CPI raises (except we skipped 2009 5.8% raise). No tighter than it used to be. Each year I usually allocate the raise to different budget categories, but overall it has always worked out fine. One big help is the mortgage, which we have continually refinanced at lower interest rates (deflation!)
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Old 07-04-2014, 11:21 PM   #7
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It's really difficult to lie about the inflation rate because the reality is easily noticeable by the average consumer.

You can look at Argentina as a case study of what real out of control inflation looks like and what happens when the government openly lies about it. Their rate is an absurd 20% but the government regularly claims that it's half that or even a quarter that figure.

When inflation is that high you will see arbitrage going on everywhere with people trading currency or goods on the black market and it becomes common knowledge what the "real" rate is.
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Old 07-04-2014, 11:59 PM   #8
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An actual inflation rate that differed significantly from the BLS numbers would rapidly make itself apparent over a few years. Pesky geometric growth functions...

Meanwhile, back on Earth, there are things like the Billion Prices Project at MIT:

The Billion Prices Project @ MIT

and the commercial spinoff:

PriceStats ģ

which measure actual prices in the real world, and develop independent inflation estimates.

The US numbers correlate pretty well, even showing the tendency of online prices to respond rapidly to changes compared to physical shops that the BLS uses for their samples.

US Series | PriceStats ģ


I've run across folks claiming to see 9-12% inflation. Their numbers come from their own 'proprietary methodology', which since it isn't described, is not reproducible. I can 'prove' pretty much anything, if you are willing to accept 'Is Sekrit! Just trust me and buy my newsletter!' as sufficient proof.

Shadowstats.com is often cited as the source for 'real' inflation numbers. Alas, Williams was pretty much just winging it.

Shadowstats responds | Econbrowser
Quote:
Williams further clarified the Shadowstats methodology. Hereís what John said to me:
Iím not going back and recalculating the CPI. All Iím doing is going back to the governmentís estimates of what the effect would be and using that as an ad factor to the reported statistics.
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Old 07-06-2014, 07:47 PM   #9
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First and foremost each and every person has their own personal inflation rate based on their consumption, location and living standard. Second, each person's income increases at a different rate based on demand and location.

The bottom line, some people will feel the effect of inflation more than others. It will give the appearance that the published inflation numbers are not accurate. My personal opinion is that published inflations rate are slightly lower reality for most, and income growth is slightly lower for most.
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Old 07-07-2014, 09:00 AM   #10
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Quote:
Originally Posted by jkern View Post
First and foremost each and every person has their own personal inflation rate based on their consumption, location and living standard. Second, each person's income increases at a different rate based on demand and location.

The bottom line, some people will feel the effect of inflation more than others. It will give the appearance that the published inflation numbers are not accurate. My personal opinion is that published inflations rate are slightly lower reality for most, and income growth is slightly lower for most.

I just read an article this weekend that was dealing with what you are mentioning. It cited a bunch of numbers I have now forgotten, but essentially part of it came down to this over the last past decade or so. If you were a person who had health issues, raising family, and relied heavily on car transportation your inflation figures were higher than the governments. If you lived in the city, rented, were childless, and healthy your inflation figures were below the government figures. The generality is not exactly earth shattering as the former would have hit the teeth of inflation concerns...college education, healthcare, gasoline, and feeding a family.


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