Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Rock On Is On The Right Track
Old 02-19-2008, 03:15 PM   #121
Dryer sheet wannabe
Rocket_J_Squirrel's Avatar
 
Join Date: Oct 2007
Posts: 16
Rock On Is On The Right Track

Rock On - I for one think you are spot on in your advancement of John Williams theories on the Federal Government monkeying with the offical inflation rate. All government entities and organizations who utilize COLA befefit by understating the effects of inflation. The main reason I believe changes over time in how the CPI is calculated are being made by the government is to make the Social Security underfunding look better. The CPI manipulation is a neat trick to extend the number of years of Social Security solvency by reducing actual payouts below the actual inflation rate. This is much more politically attractive than rasing Social Security taxes on existing workers or cutting benefits to existing Social Security recipients. This is a huge amount of money to the government that they will never have to pay out or account for - all gained by just changing how the CPI is calculated. The majority of the US population can't even figure out how they paycheck is calculated so the government runs little risk of the general population even beginning to comprehend what is being done to the numbers.

I find it somewhat strange that many members of this forum have not taken the time to thoroughly study the history of the CPI, the impact of the CPI changes, and what John Williams is advocating. I find it even harder to argue with his analysis of the changes that have been made to the algorithims used to calculate the CPI and the various iterations of the CPI that now exist - those are facts, not some tin hat conspiricy as some have indicated on the forum. The impact of the factual changes can be argued, but everyone knows what a wonderful job the government does on it's other financial and economic estimates.

For those who think the government is monkeying around with the CPI, they should take this in to account in their financial planning. For those who don't, ignore the discussion and use the published government CPI numbers in your calculations. Time will tell who was correct! For me, I'm with Rock On on this one. - RJS
__________________

__________________
Rocket_J_Squirrel is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-19-2008, 03:33 PM   #122
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
What is inflation?

I'm not an economist, but most of us are concerned about rising prices, right? And when prices go up, we expect rising wages to keep up, right?

Inflation is simply the endless game of wages chasing prices, and raising prices due to rising wages.

So let me ask a question of those who believe inflation is 6% or 12% or some number much higher than the CPI.

Are you better off today than you were 10 or 20 or 30 years ago? Is your standard of living higher or lower?

If it is higher, what was your wage growth during that period?

I don't know about you, but I think most people would say they have a higher standard of living than X years in the past.

Wage growth over the last 25 years was a bit less than 5%/year.

Do you think that number is also manipulated? If not, how would it be possible for us to have a higher standard of living if prices went up faster than wages?

[Let the whining about how poor we are as a nation begin! ]
__________________

__________________
twaddle is offline   Reply With Quote
Old 02-19-2008, 04:08 PM   #123
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
Quote:
Originally Posted by twaddle View Post

Do you think that number is also manipulated? If not, how would it be possible for us to have a higher standard of living if prices went up faster than wages?

[Let the whining about how poor we are as a nation begin! ]
housing bubble
__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Old 02-19-2008, 04:36 PM   #124
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
Quote:
Originally Posted by twaddle View Post
Are you better off today than you were 10 or 20 or 30 years ago? Is your standard of living higher or lower?

If it is higher, what was your wage growth during that period?

I don't know about you, but I think most people would say they have a higher standard of living than X years in the past.

Wage growth over the last 25 years was a bit less than 5%/year.

Do you think that number is also manipulated? If not, how would it be possible for us to have a higher standard of living if prices went up faster than wages?
Wage growth only counts if you hold th same position over the time period in question. If your title progresses due to advancement up the ladder, you're comparing apples to oranges.

Look at the growth in pay for the position, not the person if you want to measure standard of living.

Most people that I talk to have a somewhat lower or occasionally substantially lower standard of living in the 21st century.

Ask an auto worker, for instance.
__________________
Consult with only myself as your adviser or representative. My thoughts should be construed as investment advice of the highest caliber. Past performance is but a pale shadow and guarantee of even greater results in the future.
barbarus is offline   Reply With Quote
Old 02-19-2008, 04:36 PM   #125
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
HFWR's Avatar
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 12,964
IMHO, if John Williams knows it, so do lots of other folks, so it's priced into the bond market...
__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Old 02-19-2008, 05:07 PM   #126
Dryer sheet aficionado
 
Join Date: Feb 2008
Posts: 36
Quote:
Originally Posted by twaddle View Post

I don't know about you, but I think most people would say they have a higher standard of living than X years in the past.
"... most people..."

Besides income and expenses, you have borrowing. So, are you better off because you have more things? How's your net worth? Going down? Going up?

That's really what matters. Since the easy credit is going away then having more things becomes elusive. Paying the debts can be a very long process. Is that the standard of living?
__________________
nepo is offline   Reply With Quote
Old 02-19-2008, 05:12 PM   #127
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
"[quote=twaddle;618059]If you want to be a bond investor, you should first learn how to determine bond yields.
Start with Bloomberg or WSJ:
Bloomberg.com: Rates & Bonds
The 20-year today is yielding CPI+1.97%."



I used TIPS "funds" because it was easy and because I would most likely own "funds" in a tax sheltered account. I know Morningstar would not be showing the actual yield if bought today, it would be based on last years yield payments. If I were to actually want to buy actual bonds, I would figure it out and go to Treasury Direct.

I can find quotes for the 1.97% but do not really see what the CPI part is for TIPS on a daily basis. Please explain to me where I can get that. So what is CPI+1.97% on 2/19/08? If it is not 4.1+1.97=6.07%, please explain why?

P.S. Please and Thank You

One more P.S.....Thanks Rocket Squirrel, I was about to cry
__________________
RockOn is offline   Reply With Quote
Old 02-19-2008, 05:29 PM   #128
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
Quote:
Originally Posted by RockOn View Post
I can find quotes for the 1.97% but do not really see what the CPI part is for TIPS on a daily basis. Please explain to me where I can get that. So what is CPI+1.97% on 2/19/08? If it is not 4.1+1.97=6.07%, please explain why?
TIPS don't pay out daily. They pay every 6 months. The principal is adjusted by whatever the CPI change is over the period.

If you just want to see "6%" printed someplace, here you go:

ETFConnect - Fund Quick Facts - iShares Lehman TIPS Bond Fund - TIP

That shows that the annualized payout for the TIP ETF is 6.26% YTD. But I'll caution you that the number is meaningless.

Funds try to pay out the inflation adjustment, while bonds adjust the principal. So the funds have to play some games to get the distribution just right, and that means that the YTD distribution is not very predictive of forward payouts. The yield will vary with the change in the CPI, as it should.
__________________
twaddle is offline   Reply With Quote
Old 02-19-2008, 05:38 PM   #129
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
127 posts and no one has brought up the Wal-Mart Effect?!? That link searches inside the book for the term "BLS".

Here's another summary of the issue:
Quote:
Hausman (2003) discusses four sources of bias in the present calculation of the CPI. A pure price index based approach of surveying prices as done by the BLS cannot succeed in solving the problems of bias. We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. We demonstrate the use of scanner data that permits implementation of techniques that allow the problem to be solved.
In contrast, the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out Wal-Mart's lower prices. We find that a more appropriate approach to the analysis is to let the choice to shop at Wal-Mart be considered as a new good to consumers when Wal-Mart enters a geographic market. This approach leads to a continuously updated expenditure weighted average price calculation.
We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.
So no one has to buy TIPS or bonds, we just have to shop at Wal-Mart...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 02-19-2008, 05:47 PM   #130
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
FWIW, there are multiple approaches to calculating inflation that don't involve a "basket of goods." I've already mentioned the GDP deflator, but there's also the PCE deflator.



Bottom-line: I've never seen an objective metric that indicates that the CPI understates inflation.
__________________
twaddle is offline   Reply With Quote
Old 02-19-2008, 05:57 PM   #131
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 2,020
I think the BLS says it best:

Is the Consumer Price Index (CPI) the best measure of inflation?

Quote:
The "best" measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today's prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period. It is also the best measure to use to translate retail sales and hourly or weekly earnings into real or inflation-free dollars.
__________________
Marquette is offline   Reply With Quote
Old 02-19-2008, 06:04 PM   #132
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by twaddle View Post
TIPS don't pay out daily. They pay every 6 months. The principal is adjusted by whatever the CPI change is over the period.

If you just want to see "6%" printed someplace, here you go:

ETFConnect - Fund Quick Facts - iShares Lehman TIPS Bond Fund - TIP

That shows that the annualized payout for the TIP ETF is 6.26% YTD. But I'll caution you that the number is meaningless.

Funds try to pay out the inflation adjustment, while bonds adjust the principal. So the funds have to play some games to get the distribution just right, and that means that the YTD distribution is not very predictive of forward payouts. The yield will vary with the change in the CPI, as it should.
Thanks, that makes sense. Just to check if I got it, if I buy an TIP bond at an auction today (assuming there was one) my current yield would be 4.1% (in added principal) +1.97 (of bond yield) or 6.07%. (Assuming CPI-U remains constant at 4.1% for the year). Correct?

So the people who bought the TIPS at a yield of 3.5% awhile ago would be getting 7.6%?
__________________
RockOn is offline   Reply With Quote
Old 02-19-2008, 06:16 PM   #133
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
Yes, that's pretty much how it works. Just one more complicating caveat. The way the market usually looks at higher coupon bonds is to view them as having the current market yield and adjusting the price of the bond to reflect that yield.

For example, a new issue 20-year TIPS with a 2% coupon would be priced at 100. And an older bond with a 3.625% real coupon maturing in 20 years would be quoted at the same 2% yield, but at a price of 127. The two ways of looking at them are equivalent.
__________________
twaddle is offline   Reply With Quote
Old 02-19-2008, 06:37 PM   #134
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Thanks. I understand how bonds price to equivalent yields, just never really thought about how TIPS pay the CPI part. If TIPS would ever get back to a 3.5% (I might win the lottery too) they'd be interesting regardless of the fact the USA CPI is fudged. I can't stop!

I like Marquette's idea that CPI-P is really the best measure. I'm going to do some figuring in that area and see what I really think it will be in a few years. That idea was helpful. Hopefully my CPI-P is 2% less than the 2 to 3% fudged CPI-U.
__________________
RockOn is offline   Reply With Quote
Old 02-19-2008, 06:44 PM   #135
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Quote:
Originally Posted by Marquette View Post
I think the BLS says it best:
They do make the best claims.

Specifically:

Does the CPI measure my experience with price change?

Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.

and

Is the CPI a cost-of-living index?

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 02-19-2008, 08:16 PM   #136
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Marquette, here is my CPI-P, can you help me please

I pulled these categories out of my multi-year projections, easier than I thought, this is what I'll be looking at in about 6 or 7 years, it's worse now because I have one in college (14% increase last year) and 1 about to go:

Catagories:
Property Tax
Property Insurance
Home maintenance
Utilities, gas, elec, phone, cell, internet, CTV
Car Insurance
Health insurance
Food
Clothes
Entertainment
Travel
Auto expenses
Presents/Holidays
Charity
Income tax
Keeping my spouse and my two young adult children happy

I'm screwed CPI-U plus for me. They almost all look like losers.

Oops forgot a big one, Medical/Dental bills that are not covered by insurance. Do you know how much 1 dental implant and crown costs and that it is not covered at all?
__________________
RockOn is offline   Reply With Quote
Old 02-21-2008, 08:21 AM   #137
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Thursday Outlook: The Inflation Con Game - Seeking Alpha

I couldn't resist. David Fry is not my brother.

I wish someone could verify the Williams claims, if he is correct, then either there was little inflation in the 70's and the Nixon Price Controls, the Paul Volker pain, and treasury rates at 12% should not of happened and the stock market should not have suffered for 12 years; or else TIPS should be paying much more than 6% right now. Inflation is inflation, one cannot just redefine it! "This time is different" once again!
__________________
RockOn is offline   Reply With Quote
The REAL rate in Honolulu
Old 02-21-2008, 10:12 AM   #138
gone traveling
 
Join Date: May 2006
Posts: 1,036
The REAL rate in Honolulu

Honolulu inflation rate hit 4.8% in '07 - Pacific Business News (Honolulu):
__________________
honobob is offline   Reply With Quote
Old 02-21-2008, 08:45 PM   #139
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
Quote:
Originally Posted by twaddle View Post
Wage growth over the last 25 years was a bit less than 5%/year.

Do you think that number is also manipulated?
__________________
Consult with only myself as your adviser or representative. My thoughts should be construed as investment advice of the highest caliber. Past performance is but a pale shadow and guarantee of even greater results in the future.
barbarus is offline   Reply With Quote
Old 02-24-2008, 12:33 PM   #140
Dryer sheet wannabe
 
Join Date: Dec 2007
Posts: 20
how would it be possible for us to have a higher standard of living if prices went up faster than wages?


Don't forget increases in both human (education) physical capital (infrastucture), technology / innovation, and a higher labour force participation rate (more working peeps in the country -15 to 65) all contribute to a higher GDP/cap for the U.S
__________________

__________________
spazz is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
inflation claire Young Dreamers 9 08-28-2006 06:48 AM
Inflation brewer12345 FIRE and Money 70 08-15-2006 12:31 PM
inflation ed teach FIRE and Money 53 03-10-2005 10:16 AM
Inflation or No Inflation? Donner FIRE and Money 16 01-19-2005 01:58 PM
No Inflation Here haha FIRE and Money 4 06-03-2004 10:22 AM

 

 
All times are GMT -6. The time now is 08:59 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.