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Should you believe the government’s inflation figures?
Old 06-12-2011, 12:48 AM   #1
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Should you believe the government’s inflation figures?

Good blog article.

Should you believe the government’s inflation figures? | MintLife Blog | Personal Finance News & Advice
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Old 06-12-2011, 06:08 AM   #2
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Core CPI vs CPI-X. I don't buy into the big brother tricking us theory.

Economics is not precise... No measure on something that complex is going to be perfect.

Plus, depending on your personal consumption, area of the country and several other factors... it could overstate or understate your situation.

The trickery comes from certain corporations that sell products like food and try to trick consumers by being the first mover on resizing the amount in a package (shrinking the amount). It is a deceptive practice. No way will they convince me that they shaved 1 oz out of the product to make it affordable when the cost difference is $1 or less.

They hope to exploit the short-term confusion where people are not looking closely... this enables them to profit for a while until their competitors catch on and inevitably resize to be competitive.
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Old 06-12-2011, 07:39 AM   #3
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Interesting article. I always find it amusing that people who don't trust the Federal Government to do anything well argue that they are successfully tricking the whole world on CPI figures. From the article:

Since 2007, the Billion Prices Project (BPP) at MIT has been collecting price data the same way you and I do it: by going online. This is completely different from the BLS’s method, which is to send people out to stores to pull shirts off the rack and check the pricetag...So what’s the verdict? “When you look at our statistics and the statistics of the BLS, we have roughly the same inflation rate,” says Rigobon (of the BPP).
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Old 06-12-2011, 07:56 AM   #4
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Originally Posted by chinaco View Post
Core CPI vs CPI-X. I don't buy into the big brother tricking us theory.
I've never bought into it either, and I even see it here among people who should know better. As part of my job, I review CPI monthly in detail. Despite posting the actual documents at work several times, the most unforgiveable claim, and I hear it among people I work with all the time is (from the OP link):
Quote:
The consumer price index, which is used to measure inflation, doesn’t include food and energy prices. If you like to eat, drive, or heat your home, tough luck. THIS IS PLAIN FALSE.
Anyone can see the detail anytime right here http://www.bls.gov/news.release/pdf/cpi.pdf. The detail including food, home energy (utilities) and transportation energy (gas) is clearly shown in the detail beginning on page 9. And quoting the linked document (clearly shown in the detail calculation):
Quote:
The 12-month increases of major indexes continue to climb. The all items index rose 3.2 percent for the 12 months ending April 2011, the highest figure since October 2008. The energy index has now risen 19.0 percent over the last 12 months, with the gasoline index up 33.1 percent. The food index has risen 3.2 percent while the index for all items less food and energy has increased 1.3 percent; both figures represent increases over recent months.
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Old 06-12-2011, 08:43 AM   #5
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So the question is, what inflation rate do you use? Personally I would use 5%.
especially if you are going to need private health insurance.
High inflation and low interest rates...not a good combo.
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Old 06-12-2011, 09:41 AM   #6
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Where, in the indexes, are they tracking the costs of getting anyone to do anything - fix your plumbing or your car, mow your lawn, paint your house?

I don't read the "services" category as covering these kinds of services. We just paid $146 for someone to come out to the house to look at the washing machine (this was just the "come to the home" charge), whereas 10 years ago we paid $69.99.

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Old 06-12-2011, 10:04 AM   #7
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Where, in the indexes, are they tracking the costs of getting anyone to do anything - fix your plumbing or your car, mow your lawn, paint your house?
I think the CPI's only relevance to the individual is the amount by which a COLA pension or a Social Security check is raised.

Everything else is an individual situation that has little to do with the big picture.
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Old 06-12-2011, 11:11 AM   #8
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The article says that this criticism of the CPI:
Quote:
– The CPI assumes you will be just as happy substituting cheaper goods for less expensive ones if prices rise. Everybody uses exactly the same example for this: “If the price of steak goes up, the government assumes you’ll buy more hamburger, so there’s no inflation.”
is mistaken, because:
Quote:
As for steak and hamburger, as the BLS puts it, “Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.” So quit saying that. Please. Have a burger.
Well, I have some questions about this.
  1. Is it true that steak and hamburger are in different item categories? In the BLS document that midpack referred us to, I see only expenditure categories, and just one category for "meats, poultry, fish, and eggs".
  2. How does showing that the example of steak and hamburger is inappropriate refute the argument, anyway?
  3. What happened to the prime beef that grocery stores used to have for sale in my youth? When I was first learning about shopping, I recall asking my mother what "choice" meant, and she said that was what poor people bought -- not us. Now, we're all poor, it seems.
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Old 06-12-2011, 11:22 AM   #9
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Quote:
Originally Posted by Nords View Post
I think the CPI's only relevance to the individual is the amount by which a COLA pension or a Social Security check is raised.

Everything else is an individual situation that has little to do with the big picture.
The lower CPI is the happier I am because my pension is not COLA'd! Fortunately I started collecting it so young that I will take my fair share anyway.
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Old 06-12-2011, 01:44 PM   #10
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It's possible to argue substitution various ways, but there IMO there is no denying consumers do engage in substitutions so it does reflect cost of living somewhat.
  • I understand the POV that buying more hamburger and less steak saves money by reducing "quality of life." But it is how most people actually behave.
  • And not all substitutions are sacrifices, sometimes people jump back and forth between items to take advantage of spot savings.
  • Some substitution is definitely warranted, otherwise the CPI might include the cost of slide rules, B&W television, rotary phones and whale oil.
Here's what BLS themselves say:
Quote:
What is substitution and substitution bias? And does the C-CPI-U eliminate it?
Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices.
Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes.
The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.
With the geometric mean formula in place to account for consumer substitution within item categories, and the C-CPI-U designed to account for consumer substitution between item categories, any remaining substitution bias would be quite small.
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Old 06-12-2011, 01:54 PM   #11
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Quote:
Originally Posted by GregLee View Post
1. Is it true that steak and hamburger are in different item categories? In the BLS document that midpack referred us to, I see only expenditure categories, and just one category for "meats, poultry, fish, and eggs".
According to the BLS site, "Each month, BLS data collectors called economic assistants visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain information on the prices of the thousands of items used to track and measure price changes in the CPI. These economic assistants record the prices of about 80,000 items each month, representing a scientifically selected sample of the prices paid by consumers for goods and services (<-Amethyst) purchased."

A little research at bls.gov would show you this much detail (which most people don't want, but it's there).

Meats

Beef And Veal
Uncooked Ground Beef
Uncooked Beef Roasts
Uncooked Beef Steaks
Uncooked Other Beef And Veal

Pork
Bacon, Breakfast Sausage, And Related Products
Bacon And Related Products
Breakfast Sausage And Related Products
Ham
Pork Chops
Other Pork Including Roasts And Picnics
Ham, Excluding Canned

Other Meats
Frankfurters
Lunchmeats
Lamb And Organ Meats
Lamb And Mutton

Poultry
Chicken
Fresh Whole Chicken
Fresh And Frozen Chicken Parts
Other Poultry Including Turkey

Fish And Seafood
Fresh Fish And Seafood
Processed Fish And Seafood
Canned Fish And Seafood
Frozen Fish And Seafood
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Old 06-12-2011, 02:05 PM   #12
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If there is a better metric for inflation than the various CPI measures, I don't know what it is. We can't expect metrics personally tailored to our ever-changing consumption habits...
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Old 06-12-2011, 02:45 PM   #13
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Originally Posted by Midpack View Post
If there is a better metric for inflation than the various CPI measures, I don't know what it is. We can't expect metrics personally tailored to our ever-changing consumption habits...
Better get those fillings out toot sweet: that is how the gubmint is doing its mind control on you.

Seriously, what everyone seems to forget is that these figures are compiled and sorted out by economists who generally really care about data and rely on it as a matter of course. They understand that pissing in the well does not make for a healthy village.
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Old 06-12-2011, 03:12 PM   #14
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Interesting analogy, Brewer
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Originally Posted by brewer12345 View Post
They understand that pissing in the well does not make for a healthy village.
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Old 06-12-2011, 04:05 PM   #15
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Originally Posted by kcowan View Post
The lower CPI is the happier I am because my pension is not COLA'd! Fortunately I started collecting it so young that I will take my fair share anyway.
After my initial "Woo-hoo!" at my first COLA, I realized that I really didn't want to live in an economy that requires COLAs.
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Old 06-12-2011, 05:26 PM   #16
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Better get those fillings out toot sweet: that is how the gubmint is doing its mind control on you.

Seriously, what everyone seems to forget is that these figures are compiled and sorted out by economists who generally really care about data and rely on it as a matter of course. They understand that pissing in the well does not make for a healthy village.

I agree. I have always wanted to doubt the CPI numbers, but every time I read some claim by a group claiming a evil government conspiracy, I see that Census/BLS has very logical explanation. Furthermore when I read papers the economist write it is clear not only have they thought about all the problems I've wondered about by many I hadn't considered.

I think the CPI are as good as we can hope for from the data collected. The problem is that data collection by virtually all government agencies relies on methods that date back from the 1930, when FDR tasked the government to collect more economic data. In an increasingly online world this is recipe for ending up with some very misleading statistics, i.e. garbage in --> garbage out.

For instance price data is collected by sending people out to stores and checking the prices on shelves. Now back in 1938 this was a fine way of collecting data, but now days you know that WalMart, and virtually every grocery has exact data on how the average selling price of 6 pack of coke for each week (including the impact of coupon, sales, and the fact that more people are buying the more economical 12 or 24 packs which probably didn't exist 50+ years ago.) None of which is reflected in the CPI statistics.


To me the even more alarming statistic is the way the government collects income statistics. Rather than using any type of automated system to collect income data, the government sends out an army of workers armed with massive questionnaires to talk to 10,000-20,000
people. Typically these people are interviewed every couple of months for a year or so, and then several years latter asked to participate again. Sometime the Census bureau will pick a particular apartment and interview everyone who lives there over a 5 or 10 year period.

The only changes that have occurred in this process in the last 80 years, is that the census workers carry PDA to input the answers, and some interviews are conducted by phone. However they must conducted on land lines, and not them new fangled cell phones cause other people maybe listening.

The questionnaires are amazingly detailed this 405 page one is pretty representative. The problem that I have is just don't believe that people are particularly accurate about the answer they give. Imagine you've just got home and you spent the last 1/2 hour patiently answered the questions about he size your house, the number of workers at the place of employment, explaining that no you didn't get food stamps, none of the kids got free lunches at the school etc. The interviewer then asks in the last two months how much interest income you have received, dividend income, and what is the value of your 401K. Now are you really going to dig through your bank statements looking for this data or are you just going to make a wild ass guess?

So while I think the CPI is probably reasonable accurate. The moment somebody like Google or even Walmart publishes a price index based on an automated data stream, rather than thousands of interviews I'll be much more inclined to believe them.
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Old 06-12-2011, 05:43 PM   #17
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The moment somebody like Google or even Walmart publishes a price index based on an automated data stream, rather than thousands of interviews I'll be much more inclined to believe them.
While this would be useful, and I have no doubt a company like Walmart has that data already, I doubt it'll be published, ever.

Imagine the headlines: "Walmart states exactly how much they are raising prices on you" etc

To the main point of the thread, the problem I see with the conspiracies about the CPI being underreported is that at some point it'd just be so far off from reality.

I.e. If they say it's 1% in a given month, but it's really 3% (three times what they report), numbers are slightly off. Repeat that several times, however, and their numbers would be so far off as to be ridiculous and obviously wrong. They'd have to "catch up" at some point, and then they would be accurate enough at that point. So why not just be accurate (or close to it) in the meantime?
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Old 06-12-2011, 05:56 PM   #18
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The problem is that data collection by virtually all government agencies relies on methods that date back from the 1930, when FDR tasked the government to collect more economic data. In an increasingly online world this is recipe for ending up with some very misleading statistics, i.e. garbage in --> garbage out.
You may have missed this in the article:
Quote:
Since 2007, the Billion Prices Project (BPP) at MIT has been collecting price data the same way you and I do it: by going online. This is completely different from the BLS’s method, which is to send people out to stores to pull shirts off the rack and check the pricetag. (Can you even imagine having this job?)
The project monitors over 5 million prices in 70 countries, including the United States. ...
So what’s the verdict? “When you look at our statistics and the statistics of the BLS, we have roughly the same inflation rate,” says Rigobon. “The increase in our index is almost identical to the total increase of the BLS.
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Old 06-12-2011, 06:36 PM   #19
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You might want to go to shadowstats.com and look at the alternative CPI compiled by John Williams. It is now over 10%.

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Old 06-12-2011, 07:08 PM   #20
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You might want to go to shadowstats.com and look at the alternative CPI compiled by John Williams. It is now over 10%.
Thanks for the reference --- very interesting. Here, specifically, are Williams' remarks on the CPI: Consumer Price Index .
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