Is the CPI rigged?

[twaddle]

So, those of you who argue that CPI underestimates inflation would like to see higher social security payouts, right? Wait, aren't you the same guys complaining about our national debt and the looming unfunded future obligations crisis?

Would it make you feel better if the government doubled the inflation index, but increased the retirement age to, say, 90?

 

[cute fuzzy bunny]

Since he isn't here to defend himself, I would like to say that it seems to me that you have given a very one-sided viewpoint. You both had interesting things to say; as Maddy said, it was a good debate.

It was still a bit of a one sided fight when he WAS here to defend himself

Do I need to point to the recent post on the retire early home page where he asked the "super brain wizards" how to calculate a dividend yield? I believe the specific question was "If an investments value has dropped by half, how do you figure out what the dividend yield is?". Or the PM he sent me not that long ago where he asked what the difference was between a Roth IRA and a regular one? (seems his Google is broken).

As long as you stayed away from investing, finance, politics, and the quality of farmed vs wild fish...he had a lot of interesting things to say.

But if you'd like to take a swing at supporting his thesis that because he thought that cpi was close enough to his inflation, that it was probably close enough for everyones...I'm all ears. I sincerely pay a lot of attention to your posts Ha.

Not a lot of guys have been in this business since the days when stock certificates were printed on pieces of bark

 

[haha]

I sincerely pay a lot of attention to your posts Ha.

Not a lot of guys have been in this business since the days when stock certificates were printed on pieces of bark

Ah mi laddie, but flattery will get ye nowhere.

ha

 

[brewer12345]

Since he isn't here to defend himself, I would like to say that it seems to me that you have given a very one-sided viewpoint. You both had interesting things to say; as Maddy said, it was a good debate.

Ha

But that won't stop a certain alpha male type poster from peeing on every bit of real estate he can manage to spatter.

 

[Nords]

... a certain alpha male type poster...

Among this crowd that's way too generic a phrase! (*splatter*)

 

[cute fuzzy bunny]

Hey, are you still allowed to make insecure, snarky comments about people on your ignore list? I thought the whole idea of the ignore list was to put some people you dont agree with behind you...not continue to simper about them.

While I have you on the line, didnt MOVI just file for bankruptcy? That ISM/OSM is also down sharply from all the "Buy now!" signals. At least Blockbuster popped back up over 5 to provide a place for people to exit with only a humongous loss.

 

[cute fuzzy bunny]

Ah mi laddie, but flattery will get ye nowhere.

But theres nothing to say that I cant keep trying Uncle Ha.

Among all of the folks screaming "Charge!!!", its insightful to have someone asking if we've loaded the guns, kept some dry powder, and know where the enemy actually is.

 

[maddythebeagle]

While I have you on the line, didnt MOVI just file for bankruptcy? That ISM/OSM is also down sharply from all the "Buy now!" signals. At least Blockbuster popped back up over 5 to provide a place for people to exit with only a humongous loss.

Thanks for the reminder...I was going to suggest a FAQs on individual stocks vs. mutual funds and active vs. passive management... I will put together some past threads and PM Nords when I get bored at work early next week....

 

[cute fuzzy bunny]

Not a bad idea. I noted in the last "Lets track our picks!" thread I saw, a fine example of institutional forgetfulness caused everyone to remember the good and okay picks, but not the bad ones that flew into the ground at warp 12 after receiving glowing recommendations.

Even the good to okay ones that were remembered werent beating the s&p 500. And people got grumpy when you mentioned the bad picks and lack of market beating results. Something defensive about not giving out their best picks to people on the board. I forget the details.

Anywho, back to the original topic (silly rabbit, segues are for kids)...inflation is probably the biggest bugbear an early retiree needs to contend with. As Twaddle more or less implies in his attempts at literacy, you'll probably have to control it with spending. As Nords states often, high allocations to equities have historically been a rememdy, but the volatility and long bull run might give some people trouble.

Factoring in 2% or 3% a year or relying on the CPI are probably going to give you a bad, slow burning surprise in 20 years. As several have noted (and my own dad has concurred with), social security on a CPI adjustment minus increasing medicare payments results in a slowly lowering level of buying power.

We often attribute this reduction in spending to "getting older and doing less" or "depression baby" stories. It may also be less money coupled with pride.

The good news is that you're only in trouble if your primary "earnings" are CPI indexed investments or income sources and you dont plan or want to have to adjust your spending over time.

 

[kcowan]

Would it make you feel better if the government doubled the inflation index, but increased the retirement age to, say, 90?

No but it would be nice if everyone understood that they cannot live on social (in)security without an extra $2 million on the side.

At least then they will keep working voluntarily (and supporting the payments for everyone receiving it).

 

[ladelfina]

More anecdotal inflation bits among which: Domino's can't print menus fast enough to keep up with rising costs.
The Big Picture | Strange Inflation News

(I just bothered to post this 'cause I just came across this site and find it interesting overall.)

 

[cute fuzzy bunny]

Hmm...I'll have to go look for it but there was a guy who created a very reasonable looking basket of goods with a reasonable sounding consumption level and measured the price changes over the past 40 years. Interesting stuff if I can find it.

Pizza prices are incredibly stupid. I stopped at a place last week with my family and a 16" pizza with two drinks was $18...with a 50% off the pizza coupon! Costco's under $8 pizzas are the bomb. Now they've even made it square so that it completely fills a standard humongous pizza box.

Edit: shoot, that was amazingly easy
An Alternative Inflation Index

Very interesting read.

 

[honobob]

An Alternative Inflation Index

Very interesting read.

CFB Thanks for the information. I thought it was interesting that his figures show a 6.6% annual compounded appreciation rate for the "average home".
On 20% down that would be a 11.5% annual compounded return on your down payment. Most people I know in the midwest were doing the 3% down FHA thing so they'd be making a return of 17.5%.

For you young pups their payments would be $138.38 with 20% down and $167.79 with 3% down. Imagine making your last payment of $138.38 when the new neighbor just paid $54,000 down to get a monthly payment of $1,370.52 for the same house. If you think inflation will be similar over the same time period you might want to think again about paying off the mortgage.

 

[cute fuzzy bunny]

I think one of their points was that due to the loss of overall value of the dollar, and the debt situation, you werent doing so well on any of the investments...including equities, real estate or gold.

And as I always have to point out, while inflation weighs heavily on the dollars the bank loans to you for a mortgage, it weighs equally on the invested money you'd have used to pay off the mortgage. Risk adjusted, its a wash.

I suppose theres one way to play investments against inflation. Taking a long range look at pricing as this report has done shows some great performers and some poor ones.

For example, investing in real estate, insurance, gas and oil, coca cola, beer, and higher education institutions look like winners. Hmmm, and those are some of the places that Warren likes to put his money, and those colleges sure do well with their investments too.

Losers? Sears, appliance and tool makers, barber shops, music, farm and dairy produced products, news media, consumer electronics suppliers.

Seems pretty rational to me...

 

[twaddle]

An Alternative Inflation Index

Very interesting read.

Hey, it's a start. But I couldn't figure out why anybody would buy a new house each year without selling the old one. In other words, it seems absurd to put the cost of homes in an inflation index. Which is probably why the BLS doesn't do that.

Also, I couldn't figure out how he determined his weights. For example, he decides to weight natural gas twice as high as electricity. The BLS weights electricity more than twice as high as piped gas. Personally, our home is 100% electric, but I know this isn't about my personal inflation rate.

 

[lifeisgood]

The article about the alternate inflation index is really interesting. Yet, the idea of constructing private inflation measures seems to have gained no traction - at least, I've never heard of any Wall Street firm, or media organization, or anyone, calculating their own inflation measure.

Evidently you can't profit from the knowledge that inflation is understated. The author of that article says investors would demand higher rates if they know inflation was higher. OK, I'll demand a higher rate on gov't debt right now...hey, nothing happened.

Still, it seems odd to me that so many people accept the CPI and base contracts worth billions on it. Foreign exchange rates, for example, would seem to based in some degree on relative rates of inflation; do FX traders just accept gov't figures at face value? If America games its number, how much would you trust Russia?

Another point, also noted by others, is that it saves the taxpayers mucho dinero to understate inflation. For those of us not drawing Social Security, it's not such a bad thing.

Anyway, thanks for all the thoughtful comments.

 

[haha]

Still, it seems odd to me that so many people accept the CPI and base contracts worth billions on it. Foreign exchange rates, for example, would seem to based in some degree on relative rates of inflation; do FX traders just accept gov't figures at face value?

Since FX rates are market determined, it would not be possible to say what they might be based on. Surely some estimate of relative inflation must play a part, probably varying over time and estimated in differing ways.

ha

 

[clifp]

An Alternative Inflation Index

Very interesting read.

CFB Thanks for the information. I thought it was interesting that his figures show a 6.6% annual compounded appreciation rate for the "average home".
.

I am sorry but a reading through his piece and his list of 2004 prices reminds me of one of my favorite quotes. "The plural of anectodes is not data." $20 for a mens haircut, hum news to me and I don't even go to Supercut and I live in Hawaii where the haircuts are taxed. Crosby Still and Nash concert tickets in your basket of goods, why. Does one think that it is possible that aging rock bands realizing that their audience was increase affluent raise priced in order to increase profits.

I distinctly remember paying $2 for movie tickets back in 68 when we moved back to LA, and I can still see movies for $1 here. Not to menition Netflix makes entertainment even less expensive and better, ah but it didn't exist.

I'll concede that Govt. has a vested interested in minimizing reported inflation, but I think we can all agree that a "gold bug" has vest interest in seeing it exaggerated.

The government collects a vast amount of data for calculating CPI, reasonable people can argue if they are collecting the right data, processing it right, or just downright lying about it... But... this type of half ass analysis belongs better in puff piece in Newsweek.

 

[cute fuzzy bunny]

Ah, you've opened pandoras box to the realization that no measure is going to be effective or agreeable to everyone, or even perhaps a reasonable median.

My first haircut was 50c. I spent well over $20 for them since the late 80's until I started doing it myself after retiring. Sure, theres a couple of guys that'll do it for $8-10 but my head looked like a crazed weasel attacked it with a weed whacker. We had 3rd run, 5 year old movies for $1.25 when I was a kid but regular first run movies were about 2.50-$3. Todat a ticket to a first run theater with a screen 1/4 the size of the ones we had 30 years ago is $16.

As far as crazy analysis...have you looked at the BLS white paper on the hedonic adjustments for computers? The one where they note that computers are so much faster and better than they used to be, that the extra speed and features make your life better, so the price should be adjusted down even further?

 

[kcowan]

Hey, it's a start. But I couldn't figure out why anybody would buy a new house each year without selling the old one. In other words, it seems absurd to put the cost of homes in an inflation index. Which is probably why the BLS doesn't do that.

Good point. But the BLS seems to be hard pressed to account for it at all.

Every year first time buyers are dealing with the current prices while existing home owners are just getting higher taxes assessed and some are also paying for mortgages and HELOCs.

 

[kcowan]

Here is a lst of the items in his list that exceed his average by 1% or more:

1. University of Minnesota cost per credit
2. Medical Insurance Index
3. Natural Gas retail per MCF
4. Crosby Stills Nash Concert Ticket (1969)
5. Average US Home Value
6. MTC Bus Fare
7. Loaf of Bread
8. Vending machine Coke
9. Tap beer at “Ted’s Bar”
10. Men's Haircut
11. 9V transistor battery
12. First-run movie ticket
13. Dress Leather Belt
14. Consumer Medical Expenditures Price Index
15. Time Magazine cover price
16. Gibson Les Paul Standard electric guitar
17. First Class Postage Stamp
18. 1lb red Alaska salmon
19. Pack of Marlboro Cigarettes

Maybe some companies in there with higher revenue growth potential?

 

[Michael]

...have you looked at the BLS white paper on the hedonic adjustments for computers? The one where they note that computers are so much faster and better than they used to be, that the extra speed and features make your life better, so the price should be adjusted down even further?

I never understood how anyone could think that more transistors per square inch of silicon requires increasing the price of food to compensate.

 

[twaddle]

So, in one corner we have the BLS. Transparency. Lots of data. Clear methodology. Accepted by the markets and economists (except for some who think it's still too high).

And in the other corner, we have tinfoil-hat-wearing goldbug. With an opening statement that he thinks the CPI understates inflation, and he's gonna prove it. With prices from memory. Selective memory. And extremely questionable methodology. And weights pulled from who knows where.

The contest concludes: goldbug thinks the CPI is low by 1.2%.

Hmm, let's pretend these are both equally credible sources, so we'll split the difference.

The real CPI is low by 0.6%, OK?

So, if I retire at age 65 and die 20 years later, by the time of my death that compounded "error" will have reduced my purchasing power by 13%. Is that what we're talking about here? A possible error of 13% over the long term if we give goldbug dude equal stature with the BLS? Is that a catfood-eating magnitude of error?

 

[ladelfina]

twaddle, I agree the gold bug is tendentious. Leave computers aside; any inflation measurement that underweights people's REAL unavoidable lifetime expenses --on food, energy, housing-- is of precious little use. There should be a NEW "core": Cost Of Real Existence!!

The point is not so much what the COLA is for a retiree (I heard the SS increase was 2.3%, the smallest since 2003)
The Big Picture | Real World Consequences of Core Inflation Focus

a.) does anyone feel inflation is somehow less now than in 2004/5/6?

b.) what are the complex and practically incalculable repercussions that radiate BEYOND the realm of COLA for old geezers at the end of life? At every age and income level, who feels (unjustifiably) "richer"? Who spends (unjustifiably) more? The comfy "core" cushion seems to be masking a hard landing.

Some people like CFB and others on the board may take the time to track their monthly expenses and compare them to the CPI. The world at large just takes the CPI for granted.. it's "accepted"!? (So was slavery and monarchy..). Someone who doesn't do this groundwork and research will interiorize that consumer good X is likely to be only 2.3% (or whatever %) more costly than last year. And they are led down the primrose path.

What is the compounding of that effect, not over 20 years, but over 60-70?

 

[twaddle]

a.) does anyone feel inflation is somehow less now than in 2004/5/6?

The BLS isn't telling you that prices are lower. They say prices are higher, but are rising at a slower rate. Makes sense to me since energy costs, for example, had most of their acceleration a few years ago.

It's hard to get an intuitive feel for YoY inflation, especially when people tend to lock onto a few specific items rather than weighting those items as a fraction of their expenses.

Even a 3% inflation rate is painful. That's a 34% increase in prices each decade. Ouch!

b.) what are the complex and practically incalculable repercussions that radiate BEYOND the realm of COLA for old geezers at the end of life? At every age and income level, who feels (unjustifiably) "richer"? Who spends (unjustifiably) more? The comfy "core" cushion seems to be masking a hard landing.

Got me. Taxes and lifestyle changes have a much bigger impact on my pocket book than the CPI does.