Latest Inflation Numbers and Discussion

[GenXguy]

Haircut today!

My barber said it's time to go all in with stocks and his floor sweep helper agreed! (these guys are "in the know" from what I hear!)

Then my barber said he has raised the price of today's haircut to $30 from $25 and will charge 3% more if I use a credit card.

How much of a tip should I leave is the question?

Wow, my haircuts have jumped a lot, up to $15 now, and I tip 20% even. At some point, I think I might just invest in some clippers and cut my own. Some people do that.

 

[explanade]

There's a wide price range for haircuts where I am. I've spent between $10-15 without tip to over $30 before tip.

Found that the hair salon which used to charge $10-12 does a better job than the much more pricey places.

Now they're around $16 and they also have a surcharge for credit cards so I pay $20-25 including tip and CC charge.

 

[Gumby]

In March 2020, when the world was locked down for Covid, I bought a professional Andis clipper and trimmer set online. It was expensive, but has paid for itself many times over, as the young wife has cut my hair from that day to this. She's really good at it, and when she decides that I'm looking too shaggy for her taste, she can just sit me right down and bring me up to snuff instead of hocking me to go to the barber.

 

[aja8888]

In March 2020, when the world was locked down for Covid, I bought a professional Andis clipper and trimmer set online. It was expensive, but has paid for itself many times over, as the young wife has cut my hair from that day to this. She's really good at it, and when she decides that I'm looking too shaggy for her taste, she can just sit me right down and bring me up to snuff instead of hocking me to go to the barber.

My young wife used to cut my hair at one time too, and she did it for 25 years.

 

[Chuckanut]

Another reason for my skepticism in regards to quickly hitting a 2% inflation rate by the end of 2025 is the recent announcement of new tariffs on certain imported goods. Somebody has to pay for those tariffs and, IMO, it will be the American consumer that shoulders most of the costs. The tariffs are another round of bumpy, stormy weather on the glide path to 2% inflation. My 2 cents. YMMV.

the U.S. is increasing tariffs on Chinese goods, including electric vehicles (100%), steel and aluminum (25%), lithium-ion batteries (25%), critical minerals (25%), solar cells (50%), semiconductors (50%), port cranes (25%) and medical syringes and needles (50%).

 

[Montecfo]

Chuckanut, I hear you. Of course tariffs on Chinese goods are nothing new. They seems to not drive inflation from 2017-20.

I believe the main culprits now are massive deficit spending and the flawed shelter metric.

But also unsure 2% is the right target.

 

[JoeWras]

I believe the main culprits now are massive deficit spending and the flawed shelter metric.

But also unsure 2% is the right target.

I agree on deficit spending. Also not sure 2% is correct either.

I bolded the "flawed shelter metric" and want to discuss this a bit. I understand your concern and agree it has flaws. There's a lag, and we're seeing higher CPI from events that occurred 3 years ago. There's also the issue that things like the recent homeowners insurance increase and home repairs (HVAC especially) get baked into "shelter," and those things are still rising.

However, previous ways of measuring it were also flawed. If we went back to pre-1983 methods, CPI would have been above 10% in 2021-22. I'm not sure that is healthy either. You think everyone went nuts with the numbers we had, well, people would have gone completely off the rails if it spiked as it could have.

You are beating a drum here, so, I'll accept your premise and agree it is flawed, but I'd also like everyone to know that this is not some conspiracy or anything. The actuaries and nerds at BLS are struggling with this too. They know it is inherently flawed but have decided it is the lesser of evils.

There was a huge change in the way it works in 1983. This lag that was induced was intentional after the crazy spikes of the 70s. Since then, there have been many studies -- and continue to be studies -- to look at changing it again.

If anyone wants to deep dive on this, here are a few official references:

Report on why it changed in 1983: https://www.bls.gov/opub/mlr/1982/06/art2full.pdf

Official commentary from BLS on how "shelter" works: Measuring Changes in Shelter Prices in the Consumer Price Index : U.S. Bureau of Labor Statistics

BLS asked the super nerds for suggestions, they came up with this very detailed report. If you really want to get in the weeds, read this. It is interesting. It also discusses the problems with measuring the "medical care" component. The upshot from the National Academy of Sciences nerds was that although it is flawed, they still recommend keeping shelter as is (OER). However, the report suggests that BLS improve data input and broaden ways of getting data. So, we may see some improvement in the future. TBD.

Nerd talk: https://www.bls.gov/evaluation/modernizing-the-consumer-price-index-for-the-21st-century.pdf

 

[Montecfo]

JoeWras,

That's all very interesting and great background. Thanks for providing it.

Was not suggesting conspiracy. Just the angst over inflation when such a meaningful chunk of it is driven by shelter price moves which are largely in the past. This does not appear to be well understood.

There is definitely a benefit in giving shelter a "long tail" but it certainly cuts both ways. Measuring housing price increases mixes a living cost with investment. So I understand that OER is an attempt to isolate the living cost piece.

I do applaud efforts to improve data collection for OER. It seems odd that while most of the CPI is collected with such precision, OER appears to be rather subjective.

In any event, I appreciate your insight.

 

[Gumby]

I agree on deficit spending. Also not sure 2% is correct either.

I bolded the "flawed shelter metric" and want to discuss this a bit. I understand your concern and agree it has flaws. There's a lag, and we're seeing higher CPI from events that occurred 3 years ago. There's also the issue that things like the recent homeowners insurance increase and home repairs (HVAC especially) get baked into "shelter," and those things are still rising.

However, previous ways of measuring it were also flawed. If we went back to pre-1983 methods, CPI would have been above 10% in 2021-22. I'm not sure that is healthy either. You think everyone went nuts with the numbers we had, well, people would have gone completely off the rails if it spiked as it could have.

You are beating a drum here, so, I'll accept your premise and agree it is flawed, but I'd also like everyone to know that this is not some conspiracy or anything. The actuaries and nerds at BLS are struggling with this too. They know it is inherently flawed but have decided it is the lesser of evils.

There was a huge change in the way it works in 1983. This lag that was induced was intentional after the crazy spikes of the 70s. Since then, there have been many studies -- and continue to be studies -- to look at changing it again.

If anyone wants to deep dive on this, here are a few official references:

Report on why it changed in 1983: https://www.bls.gov/opub/mlr/1982/06/art2full.pdf

Official commentary from BLS on how "shelter" works: Measuring Changes in Shelter Prices in the Consumer Price Index : U.S. Bureau of Labor Statistics

BLS asked the super nerds for suggestions, they came up with this very detailed report. If you really want to get in the weeds, read this. It is interesting. It also discusses the problems with measuring the "medical care" component. The upshot from the National Academy of Sciences nerds was that although it is flawed, they still recommend keeping shelter as is (OER). However, the report suggests that BLS improve data input and broaden ways of getting data. So, we may see some improvement in the future. TBD.

Nerd talk: https://www.bls.gov/evaluation/modernizing-the-consumer-price-index-for-the-21st-century.pdf

Thank you for the report. I do understand the difficulties of measuring the actual cost of housing consumed apart from the investment component in housing, but it has always seemed unusual to me that they measure the change in the price of something by just asking people what they could sell it for when they are not currently selling and likely not ever intending to sell the product.

 

[explanade]

I believe inflation has been higher in other G8 countries, many of which have much lower fiscal deficits.

 

[GenXguy]

There's also the issue that things like the recent homeowners insurance increase and home repairs (HVAC especially) get baked into "shelter," and those things are still rising.

You're not kidding! 31% increase in my homeowner's insurance this year with a larger deductible, to boot. And yes, home repairs for HVAC and everything else are way up. Then my property tax just went up 8% in just the last year as well, more than double the gubment inflation figures and 400% of the target rate. Just saw a national news story a few days ago about all the housing related costs rising rapidly, which also included rent, mortgage costs, home prices, HOA fees, and utilities.

The 2% figure would be fine if they could actually get it anywhere near it. We are still running way too high and have been for years now.

 

[JoeWras]

Thank you for the report. I do understand the difficulties of measuring the actual cost of housing consumed apart from the investment component in housing, but it has always seemed unusual to me that they measure the change in the price of something by just asking people what they could sell it for when they are not currently selling and likely not ever intending to sell the product.

Yeah, that strikes me as odd too. I think we and the BLS are now finding out just how long of a lag this causes. I think this is the first real spike we've seen since they phased in the change of method.

I've mentioned it before that I was in a BLS survey years ago. I typically just answered "no change" because that was easy. I suspect OER people do that too. They sit down with you the first time you answer and coach you on what the question means, so the first sampling is likely the cleanest.

I've seen people, and the BLS, mention the mathematical reasons for the lag. They are absolutely right. Even if people answered the questions perfectly, there is a built in lag due to the way they sample and turn over samples. As new sample groups come in, they are more realistic.

But I contend there is something else going on here. Like I said, it is easy to say "no change." However, when you get your insurance bill that just went up 100%, then the next day you get the BLS survey, well you may sit down and think about that question asking what I would rent the house out for, and you won't be happy.

In a TL/DR summary, I'm saying there is both a math lag (everyone agrees) and a psychological lag (my theory).

 

[JoeWras]

I believe inflation has been higher in other G8 countries, many of which have much lower fiscal deficits.

And many measure housing inflation very differently. We're still catching up.

 

[FREE866]

The last 12 inflation readings:

May 2023 - 4.05%
June 2023 - 2.97%
July 2023 - 3.18%
Aug 2023 - 3.67%
Sept 2023 - 3.70%
Oct 2023 - 3.24%
Nov 2023 - 3.14%
Dec 2023 - 3.35%
Jan 2024 - 3.09%
Feb 2024 - 3.15%
Mar 2024 - 3.48%
Apr 2024 - 3.36%

It's been sub-4% for almost a year now

 

[latexman]

^^^^
By my eyes, that is about 3.6% average.

 

[FREE866]

Which is I believe only slightly higher than historical norm , yet it’s such a buzz word that people can’t stop
Talking about. Amidst it all the stock market is at an all time high.

 

[Dtail]

Which is I believe only slightly higher than historical norm , yet it’s such a buzz word that people can’t stop
Talking about. Amidst it all the stock market is at an all time high.

True. Perhaps if they would stop referencing a 2% goal, the concern would lesson.

 

[GenXguy]

^^^^
By my eyes, that is about 3.6% average.

And sadly, what I and most people have experienced in real world inflation is so much higher than that. By comparison to experienced real world inflation, I would be happy with 3.6% inflation, even though that's still quite high vs. the fed target of 2%. They need to try harder to get us to 2%.

 

[Gumby]

And sadly, what I and most people have experienced in real world inflation is so much higher than that. By comparison to experienced real world inflation, I would be happy with 3.6% inflation, even though that's still quite high vs. the fed target of 2%. They need to try harder to get us to 2%.

Why? I've read several economists arguing that 2% is too low and that the Fed's goal should be 2.5% or even 3%. What's the case for 2% being the right number.

 

[MichaelB]

And sadly, what I and most people have experienced in real world inflation is so much higher than that. By comparison to experienced real world inflation, I would be happy with 3.6% inflation, even though that's still quite high vs. the fed target of 2%. They need to try harder to get us to 2%.

You clearly have experienced higher inflation, but not “most people”. People that rent may have experienced higher inflation, and people that own probably have experience less. The housing component is large, significant and methodological, so it applies to the whole economy but not us as individuals.

 

[MichaelB]

Why? I've read several economists arguing that 2% is too low and that the Fed's goal should be 2.5% or even 3%. What's the case for 2% being the right number.

There really is no right number, The importance of the target is in managing inflation expectations. As long as longer term expectations are low, current inflation is less important.

 

[Aerides]

They need to try harder to get us to 2%.

No thanks. The only lever they have to pull is to raise interest rates even more. That impacts investment prices with a jittery stock market, and homes, and rent, because people can't buy houses.

I'd rather pay more at the grocery store than be unable to buy a house.

 

[SecondCor521]

I'd rather pay more at the grocery store than be unable to buy a house.

Not an economist, but from what I understand I think the Federal Reserve Board thinks that those two things are inextricably intertwined.

 

[Chuckanut]

True. Perhaps if they would stop referencing a 2% goal, the concern would lesson.

I think that’s what’s called moving the goalposts.

 

[JoeWras]

This 2% thing came about after we seemed to settle in micro-inflation mode. I agree that those of us who lived through the 70s and 80s could find that 2.5% or possibly 3% isn't horrific, although not optimal.

MichaelB says it all: "managing inflation expectations". I would add to that "avoiding rapid changes in inflation rate." You can't plan for anything if it is jumping all over the place.