Is the CPI rigged?

[clifp]

"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.

 

[cute fuzzy bunny]

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.

 

[haha]

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?

Ha

 

[twaddle]

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.

 

[haha]

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.

Ha

 

[ladelfina]

This is interesting:
CPI-U Components - How Consumer Price Index (CPI) Component Weights Hide Inflation

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.

 

[Michael]

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.

 

[twaddle]

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.

 

[kcowan]

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:

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:

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.

 

[twaddle]

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.

 

[ladelfina]

twaddle, the argument of the "CPI malcontents" is that shying away from real or perceived "volatility" is throwing the baby out with the bathwater. It's disingenuous.

So what that there's short term volatility that's higher for those categories than for durable goods? It would be strange if it were otherwise.

The "volatile" goods DO go up --maybe not always month-on-month which seems to interest whomever is wont to examine the "core" inflation tea-leaves -- but long term.

If spending patterns are what become skewed (more debt) how does that help in assessing the real price of consumption? If people buy more crap, how does that help us ascertain the core inflation figure I want to see: the Cost Of Real Existence?

Michael puts it nice and succinctly:

..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.

I hope I'm not the only person who thinks that's kind of scary: the more 'we' spend and waste, the less things appear to cost!?

I don't want to throw around the "c" word (conspiracy) but now we've come back full circle to SS and other gov./business COLA which increase based on the lowball calculation (2.3%) of the "big debt spender/grasshopper" profile, and not the "LBYM retiree/ant" profile whose inflation is (seemingly paradoxically) much higher.

---
Nords/clifp, I see what you are saying.. but not everyone lives next to Wal*Mart. When I lived in the suburbs of a major US city just a few years back.. I had never seen one, and have still not been in one to this day! And not everyone takes the time to scout out bargains like the people here. I'm sure dedicated bargain-hunters of times past, pre-Internet, were able to get deals. In fact, the MORE information, the more efficient the xaction.. and the less likelihood of a superb deal for EITHER side (that requires an imbalance of information). Don't forget to deduct the several-hundred-$ yearly investment in the computer and Internet service from your shopping savings.

Wal*Mart is probably a relatively poor example anyway since:

-you buy cheaper (probably crappier) widget at Wal*Mart than at the mom & pop store

-Wal*Mart pays poverty-level wages

-Wal*Mart workers apply for Medicaid (this is acknowledged official Wal*Mart health-care "policy")

-Wal*Mart heirs angle for estate tax reduction that would save them on the order of $30 billion (and spend a few million a year on lobbying to this end.. if it goes their way that's about the whoppingest ROI in history).

-you then get to pay back the few cents' or the few dollars' of "savings" a few times over when you next go to pay your federal/state/local tax bill or your ins. co. premiums or look at your crappy T-bill rate or cash in your "inflation-adjusted' bonds or pension check.

W*M is just a shell game.

--
Cheap laundering tips date back to Heloise and beyond. Those things are always around for seekers. I had an old 1950s magazine that described how to fold sheets so as not to weaken and consume them along the folds (back when sheets were linen, I gathered, since linen is more susceptible to weakening along a fold). You were supposed to wash them one time and fold in quarters. The next time you washed them you were to fold them in thirds. Then quarters, then thirds. A pain -- but they had linen sheets and not ones that got pills on them. What middle-class person can afford linen sheets today? Or a stay-at-home mom or housekeeper to keep track of the folding?

 

[twaddle]

twaddle, the argument of the "CPI malcontents" is that shying away from real or perceived "volatility" is throwing the baby out with the bathwater. It's disingenuous.

So what that there's short term volatility that's higher for those categories than for durable goods? It would be strange if it were otherwise.

The "volatile" goods DO go up --maybe not always month-on-month which seems to interest whomever is wont to examine the "core" inflation tea-leaves -- but long term.

I don't think anybody has argued that the volatile stuff doesn't go up or reflect true inflation. Obviously those volatile components are important. The only reason "core" inflation is reported is because it's a better macroeconomic indicator than "headline" inflation.

You don't want Helicopter Ben to base his monetary policy on a volatile metric. And since those volatile components are "essential," they slowly work their way into the core numbers. If energy prices go up and stay up, every product we buy is affected. If energy prices go up quickly and then go back down quickly, then the economy doesn't get a lasting hit.

Last time we had energy prices go up this fast, the CPI did skyrocket. It is interesting to see how the economy is absorbing the blow. Same with the falling dollar. If these trends continue for much longer, I think you'll get your wish, and the CPI will reflect rising prices.