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Old 10-20-2007, 10:22 PM   #41
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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.
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Old 10-21-2007, 01:29 AM   #42
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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.

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Old 10-21-2007, 02:12 AM   #43
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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.
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Old 10-21-2007, 10:24 AM   #44
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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?
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Old 10-21-2007, 10:59 AM   #45
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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.
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Old 10-21-2007, 11:03 AM   #46
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Here is a lst of the items in his list that exceed his average by 1% or more:
Quote:
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?
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Old 10-21-2007, 01:35 PM   #47
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...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.
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Old 10-21-2007, 02:02 PM   #48
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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?
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Old 10-21-2007, 04:40 PM   #49
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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?
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Old 10-21-2007, 04:54 PM   #50
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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!

Quote:
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.
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Old 10-21-2007, 05:28 PM   #51
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"a.) does anyone feel inflation is somehow less now than in 2004/5/6?"

I do. Rents in 2004-2006 were increasing rapidly here (I bought a house during this period so rents don't directly effect me) and now rents are flat to down. Housing is huge expense for many people. On personal level a couple of expense for me have dropped significantly my cell phone cost and interisland travel has dropped from $200 to $50. Now is the applicable to US as whole? of course not.

I honestly don't know if the CPI is really 2.3% 1.3% or 3.3%. I do believe that the reliability and quality of many expensive products cars, appliances, TVs etc has continued to increase. AFAIK there is no good way of accounting for these improvements. I am quite sure that my 2003 Accura will likely last for many years and I'll be ready to buy a new car well before it stops running. If I buy a new car sometime around 2011-13 Is this a REAL and Unavoidable expense? not sure.. I don't believe the CPI accurately reflect the longer potential life of my car.

Finally, I think one of the reasons that CPI is probably overstated... is because the information revolution has made it so easy for people to shop for the best deals.
Looking for the best travel deals, Orbitz, sidestep, Travelocity... Used goods Ebay, Craigslist. Want tips on cutting your laundry and household cleaning bills, why right here on Early Retirement Forum a whole thread on them, same place information on best CDs and cheapest brokerages.

You don't even have to own a computer to benefit from the information revolution, for poor and middle class you go to your local Walmart and buy most things at prices that were probably lower than your local drug, department or grocery store 5 years ago. For us affluent consumers Costco provides the same function.
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Old 10-21-2007, 11:36 PM   #52
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I think this is a very hard thing to conceptualize when you've got plenty of money and can be flexible about your spending.

I read an article in the local paper yesterday that was a tough reminder to me of days when I ran out of money before the next salary check came in.

They interviewed a lot of local families that were doing pretty well a couple of years ago, but now their check is gone 2 days after they get it rather than 4. Moms skipping meals so their kids can eat. Dads picking up 3rd jobs. Families that took their kids out to eat a half dozen times a month but cant afford that anymore. Vacations dropped, discretionary spending out the window, etc. Seemed a lot more than a half percent or so of variance.

Anecdotal, most certainly. As Ladelfina notes, the good word for people planning on 40-50 year retirements that DONT have more money than they can plausibly spend over that time period is to be aware that a specific measure may or may not fully apply to them.

There is harm in being unaware of pratfalls. I personally dont think the CPI applies to a lot of long term retirees. As someone who sees a lot of budget go towards food, energy and health care, seeing 2% to 3% numbers thrown around isnt syncing with my reality. My medical was 2.5% of my budget 7 years ago...10% this past year. My gasoline, electricity and natural gas costs are up 300% in the past 3 years. My food budget has nearly doubled in the same time period.

2.3%? Bullshit.
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Old 10-21-2007, 11:45 PM   #53
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My food budget has nearly doubled in the same time period.

2.3%? Bullshit.
Agree. The things you could do without are fairly stable in price; the things you absolutely must have go up and up and up. If you need an appendectomy, can you substitute an enema?

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Old 10-21-2007, 11:53 PM   #54
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I appreciate a good rant, but are you guys ranting about the CPI as a measure of average urban inflation, or are you ranting about your personal exposure?

I could give you a nice rant about crazy increases in home remodeling expenses, but that doesn't mean I think the CPI is rigged.

Likewise, I suspect CFB's health insurance costs are due mostly to factors other than inflation. While those factors don't make the expenses any less painful, those don't invalidate the CPI as a metric either.

Costs change with price inflation. Costs also change with lifestyle changes. Costs also change with age (like age-ranked health insurance). Costs also change with locale.

It's fine to rant about your personal out-of-pocket cost increases, but that's not what the CPI-U measures.
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Old 10-21-2007, 11:59 PM   #55
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It's fine to rant about your personal out-of-pocket cost increases, but that's not what the CPI-U measures.
Oh Darn-it Twaddle; there you go being rational.

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Old 10-22-2007, 05:42 AM   #56
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This is interesting:
CPI-U Components - How Consumer Price Index (CPI) Component Weights Hide Inflation

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The first thing that becomes clear is that the CPI is built to measure the out-of-pocket expenses of Americans. In other words, the fact that a housing in your area has risen 20% per year for the last five years doesn't mean to the CPI that housing has inflated by 100%. The CPI only cares about how much the average out-of-pocket housing expense has gone up. This means is everybody changed their mortgages to interest only mortgages to lower their monthly payments, that part (owner's equivalent rent of primary residence) of the CPI housing component would fall, even as home prices doubled. Similarly, medical care which is averaged at just under 6% of the CPI across the country is measuring the out-of-pocket expense for medical care, not the actual cost of that care which is rapidly approaching 20% of the GDP! Education cost are averaged across a population of who only a small percentage are paying for education in any given year, For a $25,000 college bill for one student to be just 3% of your budget (half of the Education and Communication component is for phone bills and cable TV), the family would have to be earning over $833,000 a year.

So, for years I've been convinced that the CPI underreports inflation because we are imported deflation from China and other low labor cost exporters. It turns out that cheap imports have very little to do with how the CPI hides inflation, those imports deflationary effects mainly being felt in apparel, some furnishings, and some other quasi-durable goods, like tools and electronics. The CPI might do a decent job tracking inflation with food and energy because they are largely paid for as they are consumed, but the CPI hides the massive inflation in Healthcare, Housing and Education. Skeptical financial commentators like to get worked up of the core CPI number when it's reported ex-food and ex-energy, as if taking these components out was somehow lowering the inflation number. It turns out that food and energy are two of the few components that track inflation at all.

The average cost of housing in the U.S.doubled between 1994 and 2006, but the CPI was only up 36%. The average cost of a family healthcare plan rose from $7,000 in 2001 to $11,500 in 2006, an increase of 64% in five years. The CPI was up just 14% in those five years. But it turns out the BLS put a tremendous amount of thought into how they account for housing costs in the CPI. However, they do so with the stated purpose of creating a Cost Of Living Index (COLI). The cost of living is inferred to be an accurate relative of inflation because it describes what happens to a consumers cash flow in any given year, but inflationary pressures are easily hidden by creative financing low interest rates. If the Fed really look at the CPI as part of their interest rate setting decision process, but the CPI is partially dependent on the very interest rate they are setting, we get a feedback loop that probably acts to keep both the CPI and the interest rate moving in the same direction, regardless of asset inflation or deflation. Since inflation and deflation are intimately tied to monetary policy, it starts to sound like anything but a middle of the road course will always lead to bubbles and collapses.

If I understood what they were getting at with the rental equivalency, they take housing appreciation into the calculation. If you live in a hot market where housing goes up every year, in the equity balance, you might even come out ahead, thus lowering the CPI. But what happens when housing peaks and starts down? You don't get any appreciation, you get loss, so your rental equivalency cost shoots up. This feeds back into the CPI rising, which forces the Fed to raise interest rates, which further depresses the housing market, which causes your rental equivalency cost to rise, to, oops! Sounds like a feedback loop to me.
I don't buy the "lifestyle differences" line. Food and energy are consumed fairly consistently and at every age and in every city and town; there's also a floor beneath which you can't go. I can choose to have zero apparel or electronics expenses in a year - but would rather not experiment along those lines with food or heating.

Wiser discretionary spending means your personal inflation rate is higher! It may only approach the CPI-U if you buy a lot of crap.
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Old 10-22-2007, 10:45 AM   #57
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Okay, in general essentials are going up fast, and non essentials are going up slowly. If you are a LBYM type person, your CPI may be higher than the official one. If you are a prodigious spender, your CPI may be lower than the official one. Most Americans are prodigious spenders, so the official CPI attempts to track that spending pattern. 75k/yr earners who spend every cent, and borrow to spend more on top of it.I think I get it now.
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Old 10-22-2007, 11:41 AM   #58
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I'm not sure that essentials like food and energy are "going up fast" in the long term, but they are considered the most volatile components, so those prices will definitely jerk you around if you're deep-LBYM.
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Old 10-22-2007, 12:07 PM   #59
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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?
The study from 1968 to 2004 (36 years) concluded that CPI was just under 5% and his methodology was nearly 6% compounded over the 36 years. I found an anecdote from a guy in Calgary about inflation since 2004 in another thread:

Quote:
Clock Watcher wrote:
I knew that I have not benefited from this Alberta oil boom, but I had no idea of the extend that it had negatively affected me, until I sat down and did the calculations today.

My lifestyle has not changed since 2004, yet there is not a single expense category that dropped in price:
- Gasoline: 24% more in 2007 than in 2004
- Home insurance: 96% more (same house, but value has gone up)
- Utilities: 23% more
- Groceries: 59% more
- Property tax: 10% more (one of the more reasonable categories)

My overall expenses year-to-date compared to 2004 is 28% higher, again even though my lifestyle has not changed. In fact, I no longer have mortgage interest which should drop my overall expense.
These rates since 2004 amount to the following annualized rates:
Quote:
Calgary APRs 2004-7 %
Gasoline: 7.4
Home insurance: 25.1
Utilities: 7.1
Groceries: 16.7
Property tax: 3.2
Overall: 8.6
Seems to be a tiny bit higher than the "official" CPI for Alberta, which is higher than for Canada.
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Old 10-22-2007, 12:32 PM   #60
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Gasoline: 24% more in 2007 than in 2004

...

Seems to be a tiny bit higher than the "official" CPI for Alberta, which is higher than for Canada.
The BLS disagrees with the guy in Calgary. The BLS says gas has gone up 80% since 2004.

How can that be?! A component of the CPI going up faster than the CPI itself. Err, yeah, that's why they use component weights based on the average spending pattern.
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