An Interesting Look At Inflation

[Notmuchlonger]

With both hands and a swivel waist.

Did you say something?

 

[cute fuzzy bunny]

Nope, just one of the other voices in your head.

 

[RockOn]

Look on the bright side, though-- you are paying much less in state tax than people in states with healthy university systems, so it all evens out in the end, right?

Our state tax is 4.63% of Fed AGI, it's not that low. Our property taxes are very low compared to everwhere else though. The Colorado system does sock it to those of with college kids since the state provides little support to the colleges. However it's not just Colorado, college is very expensive and going up double to triple the reported "core" CPI or "core" PPI no matter where you are. Here it is about 4 times "core" CPI for each of the last two years. Education is supposedly measured in the "core" items.

Going off on college costs is really not the point though, inflation is showing up many other places. i.e, food, fuel, health care, house prices (if measued over several years), insurance, taxes, entertainment, eating out, you name it. Most of the things people spend money on.

 

[cute fuzzy bunny]

Is there a second note in this tune?

 

[RockOn]

no, let it go, let it go

 

[HFWR]

91% of Americans couldn't find their ass with a map and a compass.

The FUTA index does not accurately reflect the ACTUAL number of people who can't stick their "Fingers Up Their Asses"...

 

[Independent]

I hate to extend this, but I feel like I should provide a small defense to the 91% of Americans.

I did some Googling and couldn't find a source where 91% of Americans think the CPI understates real inflation. I did find references to a poll about inflation with a 91% number. They linked to this CNN poll: Nine in ten Americans worried about rising inflation - poll - Mar. 18, 2008

Which includes this:

Of the over 1,000 American adults surveyed in the poll conducted March 14-16, 65% said they are "very concerned" about inflation, and 26% said they are "somewhat concerned."

Now, I would have probably answered "somewhat concerned", but that doesn't mean I think the techies at the BLS are cheating me. So you need to subtract at least one person from the 91%.

This is a "small defense" since I think that most people probably would say today that their inflation rate exceeds the CPI. Americans aren't unique in this. While Googling, I stumbled across research papers from Japan and Europe on the topic of the difference between "perceived inflation" and "measured inflation".

 

[cute fuzzy bunny]

.but that doesn't mean I think the techies at the BLS are cheating me.

One of the things I always stick in any post I make on the CPI, which often goes unread as people rush to counteract the "black helicopters" that I dont think actually exist, is that I have no doubt the CPI is a good and accurate measurement for what it is.

Its not a good and effective measurement for all inflation (the BLS even says so) nor is it effective for everyone (the BLS even says so), and I think its a relatively poor marker for an early retiree that owns a home, pays their own health care, and may have a lot of cost around food, energy, travel and entertainment.

We're also not helped by the long term trends of wages outpacing inflation to keep things more fairly adjusted.

So I think the dividing line here are folks who make note of what the BLS says: CPI-U is not THE measure of inflation, but only A measure of inflation for a slice of society that really isnt like most early retirees, and then there are the people who point out how precise and well advertised its measurement methods and data are.

Both are equally consistent and accurate perspectives. If you are not an urban worker who rents and doesnt pay for health care and meet the other budgetary distributions of the CPI-U, then the CPI-U is not a very good measure of your personal rate of inflation.

So I suppose from there the big point of contention is whether the CPI-U is a good measure for most people.

Most people are workers, most dont pay their own health care, most are urban or live near urban areas, but most are homeowners and not renters.

Many DO have to pay for their own health care, have mounting college expenses, see the effects of energy and food prices as very important when they're living paycheck to paycheck.

So maybe its fair to say that the CPI-U is a reasonable average for many if not most people, while being a poor yardstick in some way or other for other large slices of the population?

It also doesnt have to be off much for an early retiree. A half percent off when you're earning a wage that is adjusting is probably not a big issue over time. Its also probably not a huge deal when its effect on your fixed income starts in your late 60's and only lasts to the average lifespan of the early 80's.

I'm thinking its a fairly large deal over 40 years without a wage and with increasing health care costs.

 

[Independent]

One of the things I always stick in any post I make on the CPI, which often goes unread as people rush to counteract the "black helicopters" that I dont think actually exist, is that I have no doubt the CPI is a good and accurate measurement for what it is.

Its not a good and effective measurement for all inflation (the BLS even says so) nor is it effective for everyone (the BLS even says so), and I think its a relatively poor marker for an early retiree that owns a home, pays their own health care, and may have a lot of cost around food, energy, travel and entertainment.

We're also not helped by the long term trends of wages outpacing inflation to keep things more fairly adjusted.

So I think the dividing line here are folks who make note of what the BLS says: CPI-U is not THE measure of inflation, but only A measure of inflation for a slice of society that really isnt like most early retirees, and then there are the people who point out how precise and well advertised its measurement methods and data are.

Both are equally consistent and accurate perspectives. If you are not an urban worker who rents and doesnt pay for health care and meet the other budgetary distributions of the CPI-U, then the CPI-U is not a very good measure of your personal rate of inflation.

So I suppose from there the big point of contention is whether the CPI-U is a good measure for most people.

Most people are workers, most dont pay their own health care, most are urban or live near urban areas, but most are homeowners and not renters.

Many DO have to pay for their own health care, have mounting college expenses, see the effects of energy and food prices as very important when they're living paycheck to paycheck.

So maybe its fair to say that the CPI-U is a reasonable average for many if not most people, while being a poor yardstick in some way or other for other large slices of the population?

It also doesnt have to be off much for an early retiree. A half percent off when you're earning a wage that is adjusting is probably not a big issue over time. Its also probably not a huge deal when its effect on your fixed income starts in your late 60's and only lasts to the average lifespan of the early 80's.

I'm thinking its a fairly large deal over 40 years without a wage and with increasing health care costs.

You are certainly correct about the difference between CPI-U and CPI-personal. I'll add another caveat, the CPI-U is entirely backward looking, and "Past performance is no guarantee of future performance."

The BLS had food prices going up at a compound 2.5% for the 9 years from 3/98 to 3/07. An early retiree might have concluded that food prices were pretty well under control.
But the number from 3/07 to 3/08 was 4.5%. That's a pretty big step if you thought food would be an important part of your personal CPI.

 

[RockOn]

I hate to extend this, but I feel like I should provide a small defense to the 91% of Americans.

I did some Googling and couldn't find a source where 91% of Americans think the CPI understates real inflation. I did find references to a poll about inflation with a 91% number. They linked to this CNN poll: Nine in ten Americans worried about rising inflation - poll - Mar. 18, 2008

Which includes this:

Now, I would have probably answered "somewhat concerned", but that doesn't mean I think the techies at the BLS are cheating me. So you need to subtract at least one person from the 91%.

This is a "small defense" since I think that most people probably would say today that their inflation rate exceeds the CPI. Americans aren't unique in this. While Googling, I stumbled across research papers from Japan and Europe on the topic of the difference between "perceived inflation" and "measured inflation".

Try this:
The Consumer Price Index may underestimate inflation. - Apr. 3, 2008
"So how do we account for the discrepancy between the Federal Reserve's recent assurances that inflation is under control and the 91% of the population that's worried it isn't?"

Not exactly 100% scientific proof and not entirely on point, but Fortune does suggest a "slight" credibility concern among almost everyone except a few like yourself.

I consider myself to be a pretty average American, married, two kids, one dog, 2 cars, own my house, go to work, pay my bills, save for retirement. CPI-U is not even close for me and hasn't been for about 3 or 4 years now. It is being fudged for the benefit of the government (politicians). I have no doubt they are fudging it to help hide the true government debt and we are all paying for it in many, many, ways.

You say that I should go through the BLS methodology and find something wrong. I say it is so complicated, hedonics and all, that the coverup is pretty secure. "How to Lie with Statistics", I read it in college. Government statisticians are masters.

Last point, lets say the reported inflation is 4% which is the most the BLS has admitted in a long time. If I have an family income of about $70k, probably about the average family income in the US, that means my total costs should have gone up about $2800 last years. In my case my income is more than $70k so this is not really correct, but.... my college expense for 1 kid went up about $3000/year; my health insurance went up about $800/year (I only pay 1/2); gas went up about $1,800; food, good god who knows, probably way more than $1000; my property taxes went up $1000 last year; that's already $7600 (11% of $70k) and I could go on;......get the picture. Many families have all of the same expenses I listed, except maybe the property tax increase.

I know my cost increase are likely very high and would be less for someone with less income than mine but I conclude that the CPI doesn't represent what is supposed to and the only reasonable explanation is that it is intentional.

 

[ladelfina]

other media outlets are picking up on "shadowstats":

The Big Picture | Is the Fed Causing a Global Food Crisis?

also linked is a new Harpers' article, "Numbers Racket":
http://bigpicture.typepad.com/comments/files/HarpersMagazine-2008-05-0082023.pdf

 

[Independent]

Try this:
The Consumer Price Index may underestimate inflation. - Apr. 3, 2008
"So how do we account for the discrepancy between the Federal Reserve's recent assurances that inflation is under control and the 91% of the population that's worried it isn't?"

Not exactly 100% scientific proof and not entirely on point, but Fortune does suggest a "slight" credibility concern among almost everyone except a few like yourself.

I consider myself to be a pretty average American, married, two kids, one dog, 2 cars, own my house, go to work, pay my bills, save for retirement. CPI-U is not even close for me and hasn't been for about 3 or 4 years now. It is being fudged for the benefit of the government (politicians). I have no doubt they are fudging it to help hide the true government debt and we are all paying for it in many, many, ways.

You say that I should go through the BLS methodology and find something wrong. I say it is so complicated, hedonics and all, that the coverup is pretty secure. "How to Lie with Statistics", I read it in college. Government statisticians are masters.

Last point, lets say the reported inflation is 4% which is the most the BLS has admitted in a long time. If I have an family income of about $70k, probably about the average family income in the US, that means my total costs should have gone up about $2800 last years. In my case my income is more than $70k so this is not really correct, but.... my college expense for 1 kid went up about $3000/year; my health insurance went up about $800/year (I only pay 1/2); gas went up about $1,800; food, good god who knows, probably way more than $1000; my property taxes went up $1000 last year; that's already $7600 (11% of $70k) and I could go on;......get the picture. Many families have all of the same expenses I listed, except maybe the property tax increase.

I know my cost increase are likely very high and would be less for someone with less income than mine but I conclude that the CPI doesn't represent what is supposed to and the only reasonable explanation is that it is intentional.

I believe you've said these things:

A) Your personal inflation rate is higher than the CPI
B) Your family is "average"
C) A and B, taken together, prove that CPI as reported by the BLS understates "real inflation"
D) The BLS is intentionally understating inflation because this reduces the deficit in the Federal budget.
E) According to a recent poll, 91% of Americans believe that the CPI understates inflation
F) The Federal Reserve should be more concerned about inflation and less concerned about maintaining high employment.

I've never disagreed with (A) or (F). I have disagreed with (B) the first clause in (D)

My last post was about (E). You never provided a source for that claim. I thought the 91% seemed high, but I assumed that any poll would show some number higher than 50% because that fits my understanding of the psychology of these perceptions.

I finally spent a little time looking, and discovered that I couldn't find a source for (D). What I found was a poll that said 91% are at least "somewhat concerned about inflation".
It looks to me like you confused "concerned about inflation" and "the CPI is materially wrong (probably because the gov't is lying)". I think those are two different statements. The poll asked about the first statement, not about the second.
In fact, I agree with the first statement but disagree with the second.


(Regarding (D), I'm glad you read "How to Lie with Statistics". Maybe you can identify a couple of the techniques the book lists which you believe the BLS is using.)

 

[RonBoyd]

To compound things:

Wisdom From Wenchypoo's Mental Wastebasket: Inflation + Shortages = Stealth Tax Increase

 

[RockOn]

other media outlets are picking up on "shadowstats":

Great, maybe someone will investigate the methodology and confirm shadowstats' research. If so, that would be enlightening (or alarming). The pre 98 method seems about right to me, the pre 83 seems like a stretch. If John Williams is not fudging the truth (I trust him about as much as getting the numbers from the fox in the hen house....the BLS), the 70's inflation problem never really happened according to the new and improved BLS. (of course, things are different this time!) Simply amazing!

 

[RockOn]

.)/quote]

You know what, I finally found something that we all need to buy that hasn't gone up more than reported inflation. According to the Denver Post the average auto premium went up 2.5% a year (from $515 to $827) the last 19 years in Colorado. The CPI as reported, was 2.96%/year.

We did switch to a tort system moving medical claims from the insurance companies to the legal system (a sort of hedonics substitution I suppose), but ignoring that small fact, I feel much better now.


P.S. you need to read the Harpers article. They call the CPI reporting "corruption". (I suppose they should also be investigating the BLS statistics before they state the obvious.) "SS checks are 70% below where they should be" is one claim in the article, SS retirees should be up in arms. BLS stats are BS stats.

 

[RonBoyd]

Inflation hits close to home | Chron.com - Houston Chronicle

and the first comment.

 

[RonBoyd]

A solution?

http://www.nytimes.com/2008/04/27/business/27spend.html?_r=1&th&emc=th&oref=slogin

So consumers are going on a recession diet.
Burt Flickinger, a longtime retail consultant, said the last time he saw such significant changes in consumer buying patterns was the late 1970s, when runaway inflation prompted Americans to “switch from red meat to pork to poultry to pasta — then to peanut butter and jelly.”
“It hasn’t gotten to human food mixed with pet food yet,” he said, “but it is certainly headed in that direction.”

 

[Independent]

P.S. you need to read the Harpers article. They call the CPI reporting "corruption". (I suppose they should also be investigating the BLS statistics before they state the obvious.) "SS checks are 70% below where they should be" is one claim in the article, SS retirees should be up in arms. BLS stats are BS stats.

I read the Harpers article when ladelfina posted it. I thought her comment was correct, it was another John Williams sighting. I didn't see anything else of interest there.

I read the Wiki entry for Kevin Phillips to see if he was unusually qualified to analyze CPI data. The most interesting fact about him is that at 28 he was the "senior strategist" for Nixon's '68 campaign, but has since moved to the other end of the political spectrum. No economic credentials mentioned.

Maybe you're thinking along these lines: Presidents like to see low inflation numbers. Therefore, any change that BLS makes which reduces inflation must be "wrong".
That's certainly the "logic" that Phillips is pushing, I think it's a fallacy.

The 70% is the same old story to me. Presumably, SS recipients in Carter's day could afford houses that were 70% bigger, 70% nicer cars, 70% more food, 70% more cruises, etc. than retirees today. My folks were retired in Carter's day, I don't remember anything like that.

 

[Hamlet]

Your expenses are not typical for American families as a whole.

The increase in your college costs is approaching half of your listed inflation. While this is a dramatic increase in your expenses, it isn't representative of most families. Many families have no children. Of the families that do have children, most of them are not currently college age. If they have one child, they have 4 years out of about 50 where they are paying for college, assuming that their child does go (many don't).

How many gallons of gasoline do you use a year to get an $1800 increase? Gas in my neck of the woods is about $3.50. Last year this time it was about $2.80. I figure my wife and I use about 1200 gallons a year, giving us an increase of increase of $840. We both have a moderate commute to work.

Your property tax increase is not typical, at least in my area. I have a pretty average house in a suburb of Minneapolis, and my taxes went up about 10%, from about 2200 to 2400. $200/year is not going to affect my personal rate of inflation very much. You must have an expensive home or live in a high property tax state.

Last point, lets say the reported inflation is 4% which is the most the BLS has admitted in a long time. If I have an family income of about $70k, probably about the average family income in the US, that means my total costs should have gone up about $2800 last years. In my case my income is more than $70k so this is not really correct, but.... my college expense for 1 kid went up about $3000/year; my health insurance went up about $800/year (I only pay 1/2); gas went up about $1,800; food, good god who knows, probably way more than $1000; my property taxes went up $1000 last year; that's already $7600 (11% of $70k) and I could go on;......get the picture. Many families have all of the same expenses I listed, except maybe the property tax increase.

 

[RockOn]

I read the Harpers article when ladelfina posted it. I thought her comment was correct, it was another John Williams sighting. I didn't see anything else of interest there.

Let's assume for a minute that John Williams is correct that current inflation would be around 7% as calculated about 10 years ago, or even as much as 12% as calculated in the 70's. (So far, I haven't found anyone to dispute his findings. If he is wrong I would think someone would be coming forth by now. His finding are not black box, he says he is replicating BLS disclosed reporting methods. That should not be difficult for someone with the time to investigate it.)

Then what would you say? "Things are different now"; or, "inflation was dramatically overstated by the BLS in the 1970's and treasury rates should not have been 12%"; or, "President Carter was screwed by incorrectly reported BLS inflation numbers"; or, "the BLS didn't know what they were doing in the 70's but that's not the case today", or,......................

I wonder. I'm guessing "Things are different now" since the other choices discredit the BLS. If it is "Things are different now", I rest my case. If it's one of the other three, are they to be believed in their approximation of a true CPI for an average American any more in 2008 than they were in 1978? I think the opposite, the government has incentive to report lower inflation today since many things in the tax code and SS for instance have become COLA'd.

 

[RockOn]

Your expenses are not typical for American families as a whole.

The increase in your college costs is approaching half of your listed inflation. While this is a dramatic increase in your expenses, it isn't representative of most families. Many families have no children. Of the families that do have children, most of them are not currently college age. If they have one child, they have 4 years out of about 50 where they are paying for college, assuming that their child does go (many don't).

How many gallons of gasoline do you use a year to get an $1800 increase? Gas in my neck of the woods is about $3.50. Last year this time it was about $2.80. I figure my wife and I use about 1200 gallons a year, giving us an increase of increase of $840. We both have a moderate commute to work.

Your property tax increase is not typical, at least in my area. I have a pretty average house in a suburb of Minneapolis, and my taxes went up about 10%, from about 2200 to 2400. $200/year is not going to affect my personal rate of inflation very much. You must have an expensive home or live in a high property tax state.

I agree my expenses were not average last year, I was just making a point that a 4% increase in CPI isn't a huge amount of money for an average family. It is even much less money at the 2-2.5% rate they have been reporting for the last 4 years or so.

On college, remember that it's much more than 4 years to pay for college. Most families have to save or pay back loans for up to 18 years. It is not a minor cost and families with kids going to college are not a small minority. (For most, it probably doesn't come all in one year (the $3000) as I paid, but the % increase is still there either in the savings rate or loan repayment bill.)

On gas, it was only approxiate but we put about 32k miles on two cars, at about 18MPG and about a $1 increase per gal, that's about $1800/year. I know many people that drive more than we do.

On property tax, I said this wasn't a normal increase but my taxes did go up $1000. Our house is pretty expensive but our prop tax rate is very low. The increase was due to increased assessed value. Maybe I can get it back next year.

 

[Independent]

On college, remember that it's much more than 4 years to pay for college. Most families have to save or pay back loans for up to 18 years. It is not a minor cost and families with kids going to college are not a small minority. (For most, it probably doesn't come all in one year (the $3000) as I paid, but the % increase is still there either in the savings rate or loan repayment bill.)

"families with kids going to college are not a small minority"
In 2005, there were about 18 million college students at all levels (including graduate school and 2 year schools). This compares to about 111 households. If nobody had two kids in college at the same time, that would be 16% of households have a college student and 84% don't.

You guessed something a lot higher than 16%, because you have kids in college and you know a lot of people with kids in college, and you're assuming that you are roughly average.

See table 1 at: http://nces.ed.gov/pubs2007/2007154.pdf
and United States - General Demographic Characteristics: 2005

Yes, some people save for college, others borrow. For those people, a $3,000 increase in tuition is much less than an additional $3,000 annual cost, because they are spreading the cost across more years. If you want to talk about how much college costs impact families that save/borrow, you need to divide the increase by the number of years they use for spreading their cost. (The BLS simply does "price", regardless of whether people save or borrow to pay for it. This works for a "price index".)

On gasoline, the average price per gallon in Colorado went up 62 cents from April to April (Colorado Fuel Price Update - AAA Colorado - Press Release). The national average increase was 65 cents.
Average miles traveled per car was 12,400 in 2006 (BTS | Table 4-11: Passenger Car and Motorcycle Fuel Consumption and Travel
I'm sure you know people who drive more than you do. However, there are a lot more people who drive less.

Once again, the issue isn't whether your personal COL has gone up faster than the CPI, it is whether you are pretty close to average.

 

[RockOn]

"families with kids going to college are not a small minority"
In 2005, there were about 18 million college students at all levels (including graduate school and 2 year schools). This compares to about 111 households. If nobody had two kids in college at the same time, that would be 16% of households have a college student and 84% don't.

You guessed something a lot higher than 16%, because you have kids in college and you know a lot of people with kids in college, and you're assuming that you are roughly average.

See table 1 at: http://nces.ed.gov/pubs2007/2007154.pdf
and United States - General Demographic Characteristics: 2005

Yes, some people save for college, others borrow. For those people, a $3,000 increase in tuition is much less than an additional $3,000 annual cost, because they are spreading the cost across more years. If you want to talk about how much college costs impact families that save/borrow, you need to divide the increase by the number of years they use for spreading their cost. (The BLS simply does "price", regardless of whether people save or borrow to pay for it. This works for a "price index".)

On gasoline, the average price per gallon in Colorado went up 62 cents from April to April (Colorado Fuel Price Update - AAA Colorado - Press Release). The national average increase was 65 cents.
Average miles traveled per car was 12,400 in 2006 (BTS | Table 4-11: Passenger Car and Motorcycle Fuel Consumption and Travel
I'm sure you know people who drive more than you do. However, there are a lot more people who drive less.

Once again, the issue isn't whether your personal COL has gone up faster than the CPI, it is whether you are pretty close to average.

There are a lot more than 16% of families that either have a kid in college, are saving for college, or have kids through with college where they are still paying off HELOC loans (for instance). Have you looked at PLUS loan interest rates lately? It's not like when we were kids, rates start at about 8 1/2% and there is no free period, loans accrue from day one. Middle class families get very little help these days. (If you are saving $200 a month (based on using reported CPI for the rate of expected increase) and college costs actually go up 25% in two years, I think you'd need to save more than $250 a month to catch up, that's 25% plus more for that item in your budget.) My guess is that around 50% of families are affected by increased college costs. You can nail it to the exact percent if you like.

On gas, I assumed a $1 increase and you found 62 cents using April to April, sorry. I don't remember exactly when the recent 100% plus increase took place. I'm not being exact, let's just say it's going up about 25% a year for 4 straight years, about 6 or 7 times the reported CPI-U. nmber. On how much I drive, I'd say close enough. I'd use more gas than I do right now if I owned an Ford Explorer. $1800 for a family might be slightly overstated, but many families have more than 2 cars and get less than 18MPG on average. There are people commuting much farther than I do. I don't think an average of 12,400 miles per year per car reflects an active average family. There are a lot of cars just sitting around which are included in the average.

I do think I should be considered close to average. I seemed to hear somewhere about the importance of family values. Isn't America about what happens to families anymore?

I noticed you didn't answer whether "things are different now", or "the BLS didn't/doesn't know what it is doing"? Maybe you missed that?

 

[Independent]

First, you wanted a response on post #120. You're saying, (1) let's assume that Williams is accurate on the current difference between the old method and the new method, (2) let's assume that the current difference is also the difference that would have shown up in the 70's, and (3) let's assume that the new method is "right". Does that mean the old method seriously overstated inflation in the 70's? Based on all three of those assumptions, yes.

Please note that I don't believe (1), and even Williams doesn't claim (2). I went back to his website to see how much difference he's claiming between the old and new methods. I couldn't find any claims regarding the difference between the old and the new in the late 70's.

While looking around, I re-read this piece Shadow Government Statistics » Blog Archive » 4. Consumer Price Index which clearly states a difference of 7% in 2004. But I noticed that the graph on today's home page has a difference in 2004 looks like 2.5-3.0%. That's a huge difference. Has Williams dramatically changed his calculations?

I suggested once that maybe the differences that Williams claims come from a big difference in the treatment of owner-occupied housing and a small difference on everything else. Since the housing bubble is relatively recent, the differences he gets will vary quite a bit over time. I'm just guessing here, but since he won't share sample calculations, nobody can do anything but guess.

You also say:

I do think I should be considered close to average. I seemed to hear somewhere about the importance of family values. Isn't America about what happens to families anymore?

It seems to me that you're saying the BLS should design the CPI-U so that it emphasizes the expenses of above-average income couples with teenagers. For some reason, they are "more important" than median income, childless, 20-somethings. I think that the CPI-U is designed to reflect an "average" that includes many types of "families" in reasonable proportion to their prevelance. Obviously, if you think they are trying to measure the wrong thing, you're likely to disagree with the final numbers.

 

[kcowan]

The fundamental fact is that CPI is representative of a whole nation. When it breaks down for individual demographics, then the effect of inflation will be hurtful if people in those demographics have sources of income are geared to the average CPI.

Isn't this why some seniors on pensions resorted to dog and cat food?