Change in CPI Calculation
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cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Nice roundup of whats wrong with CPI.
Keep in mind what your source of information is. Kitco.com is a precious metals dealer. They make more money when people are scared into buying precious metals as an inflation hedge. It isn't surprising that the article attacks the current CPI calculations so vigorously.
I disagree with a number of points in the article. The hedonic adjustments from what I understand are intended to reflect the price of the same basket of goods (holding quality constant). The TV that gets better in quality is "worth" more. I'm not sure if I'm arguing hedonics is an acceptable adjustment. When I look at the historical price of a TV, I see a great increase in quality and a reduction in price. Look at a 27" tv 15 years ago. It would probably cost $500. Today, a better quality unit with more features may cost $200 at Walmart. I think the standard of what is an "acceptable" tv has increased over the years. That $500 you spent 15 years ago on a 27" tv will get you an entry level HD tv now. Consider computers where the prices keep dropping and the quality (speed, storage, etc) keeps increasing over the last few decades.
Look at housing. The median price of homes keeps rising. But so does the average size of housing and the amenities inside of the housing. The homes are getting bigger and better. I don't recall the statistics exactly, but I believe the average house size is now around 2300 sq ft. 20-30 years ago it was around half that figure. These figures may be for new construction, not sure. Where I live, most 1200 sq ft homes are very affordable. I know people in certain areas are seeing double digit increases in house prices in their areas. However, the CPI-U reflects the prices for all urban areas, not strictly bubble areas. I think there are CPI figures for different MSA's or regions that should more accurately reflect localized changes in prices.
I disagree with a number of points in the article. The hedonic adjustments from what I understand are intended to reflect the price of the same basket of goods (holding quality constant). The TV that gets better in quality is "worth" more. I'm not sure if I'm arguing hedonics is an acceptable adjustment. When I look at the historical price of a TV, I see a great increase in quality and a reduction in price. Look at a 27" tv 15 years ago. It would probably cost $500. Today, a better quality unit with more features may cost $200 at Walmart. I think the standard of what is an "acceptable" tv has increased over the years. That $500 you spent 15 years ago on a 27" tv will get you an entry level HD tv now. Consider computers where the prices keep dropping and the quality (speed, storage, etc) keeps increasing over the last few decades.
Look at housing. The median price of homes keeps rising. But so does the average size of housing and the amenities inside of the housing. The homes are getting bigger and better. I don't recall the statistics exactly, but I believe the average house size is now around 2300 sq ft. 20-30 years ago it was around half that figure. These figures may be for new construction, not sure. Where I live, most 1200 sq ft homes are very affordable. I know people in certain areas are seeing double digit increases in house prices in their areas. However, the CPI-U reflects the prices for all urban areas, not strictly bubble areas. I think there are CPI figures for different MSA's or regions that should more accurately reflect localized changes in prices.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
That seems to be the crux of the point though...you STILL have to pay for the item no matter how 'good' it is, and the 'goodness' is relative to the buyer.
For some people, a tv is a tv is a tv, and a car just gets them someplace and back again. Its relative 'goodness' doesnt change the fact that it costs more and you have to pay more to get the 'goodness'. You cant decide to buy a 1985 car for 1985's cost if you dont want the 'goodness'.
My personal opinion is that the govt has no business deciding quality issues vs inflation. If something costs more to buy, its quality has very little relevance...at least to me.
That they're a precious metals seller didnt really bug me. Bill Gross who pitches bonds says essentially the same thing. So do a lot of other people in different areas of finance.
But if you're one of the folks that doesnt mind getting short-changed on their cola'd pension, social security, tips and ibonds because the stuff you're buying is somehow 'better' than it used to be, I guess you wont mind the hedonics.
I'm still waiting for someone to explain to me how basket substitutions are good...
Most of the CPI calculations dont include home prices, but rents. In my neck of the woods, home prices are through the roof but rents dont seem to be catching up. So in this case, CPI doesnt track the increases in home prices directly, and only indirectly if rents pace home prices. Sort of sucks for a first time buyer or someone moving from a stagnant RE market to a pitched one.
For some people, a tv is a tv is a tv, and a car just gets them someplace and back again. Its relative 'goodness' doesnt change the fact that it costs more and you have to pay more to get the 'goodness'. You cant decide to buy a 1985 car for 1985's cost if you dont want the 'goodness'.
My personal opinion is that the govt has no business deciding quality issues vs inflation. If something costs more to buy, its quality has very little relevance...at least to me.
That they're a precious metals seller didnt really bug me. Bill Gross who pitches bonds says essentially the same thing. So do a lot of other people in different areas of finance.
But if you're one of the folks that doesnt mind getting short-changed on their cola'd pension, social security, tips and ibonds because the stuff you're buying is somehow 'better' than it used to be, I guess you wont mind the hedonics.
I'm still waiting for someone to explain to me how basket substitutions are good...
Most of the CPI calculations dont include home prices, but rents. In my neck of the woods, home prices are through the roof but rents dont seem to be catching up. So in this case, CPI doesnt track the increases in home prices directly, and only indirectly if rents pace home prices. Sort of sucks for a first time buyer or someone moving from a stagnant RE market to a pitched one.
Justnot,
For tvs, you can simply buy the lower quality tv by buying the cheapest tv on the market. I'm sure there are $150 27" tvs and there are $1000 27" tvs. The $150 version is probably as good as the much more expensive 27" twenty years ago.
For cars, you buy the ford focus. No anti-lock brakes, no tape player/cd xm/sirius, no keyless entry, no power doorlocks/windows, no security system. I guess the air bags are standard now, but a lot of the other stuff you can avoid paying for by buying an entry level car. I'll admit that if you're comparing the bare bones car from 20 years ago to a bare bones car today, there is no way to buy an even cheaper bare bones car today. But a mid-level car 10 or twenty years ago probably has a lot of the same features as the bare bones cars today. Part of every car's increase in cost is the extra options and features that have become standard.
I'm not sure if the hedonics adjustments are to counteract our ever-increasing standard of living (or expected standard of living). Consumers want (and get) more and are paying more for it. A mid-level sedan or high-end luxury car is going to be a lot nicer and have many more gadgets and features than the same type car today.
For someone keeping up with the Joneses, their expenses will continue to increase at a faster rate than the CPI. Think about the goodies that we "expect" in our lives now: cell phones, digital cable, HD TV's, internet (maybe even high-speed), computers, dvd players, etc. etc. These items would not have been considered a part of the average persons' life 20 years ago (except maybe regular cable). Now the Joneses have all of these things.
As for the substitution of goods, I know that I practice the substitution of goods. I assumed everyone else did, too. If I go to the store and apples are on sale, I'll buy more of those than bananas. If grapes are on sale, I'll buy more of those than other fruits. Ground turkey vs. ground beef is the same way. I'm indifferent to which of the two I purchase, so if one is cheaper than the other, I'll go for the cheaper one. I recall that tomatoes were very expensive locally the last year or so. Other cheaper vegetables were substituted for these goods. If beer prices doubled but wine stayed the same, I'd probably buy less beer and more wine. If car repair prices doubled, I'd junk my old car sooner and buy a newer one. I think most people practice substitution of goods in one form or another. Think about the food in your kitchen. I bet if half of the items doubled in price, you'd find substitute products to purchase that would be nearly equivalent (but different). What if shrimp or lobster dropped to $2/lb and bologna became $4/lb. I bet you a pound of $2 lobster that you'd eat a lot more lobster sandwiches (unless you really hated it).
Long term, I think people will start to practice substitution of goods in the rent vs. own a house decision. I have to admit that in this decision, there are more economics behind it other than lowest price. On the other hand, many people won't have the choice between paying a $3000 mortgage or paying $1200 in rent, and so they will be forced to rent instead of own. I've heard plenty of people talk about renting for a few years to see if the market cools down. There are also financial reasons to rent now versus buying a house.
For tvs, you can simply buy the lower quality tv by buying the cheapest tv on the market. I'm sure there are $150 27" tvs and there are $1000 27" tvs. The $150 version is probably as good as the much more expensive 27" twenty years ago.
For cars, you buy the ford focus. No anti-lock brakes, no tape player/cd xm/sirius, no keyless entry, no power doorlocks/windows, no security system. I guess the air bags are standard now, but a lot of the other stuff you can avoid paying for by buying an entry level car. I'll admit that if you're comparing the bare bones car from 20 years ago to a bare bones car today, there is no way to buy an even cheaper bare bones car today. But a mid-level car 10 or twenty years ago probably has a lot of the same features as the bare bones cars today. Part of every car's increase in cost is the extra options and features that have become standard.
I'm not sure if the hedonics adjustments are to counteract our ever-increasing standard of living (or expected standard of living). Consumers want (and get) more and are paying more for it. A mid-level sedan or high-end luxury car is going to be a lot nicer and have many more gadgets and features than the same type car today.
For someone keeping up with the Joneses, their expenses will continue to increase at a faster rate than the CPI. Think about the goodies that we "expect" in our lives now: cell phones, digital cable, HD TV's, internet (maybe even high-speed), computers, dvd players, etc. etc. These items would not have been considered a part of the average persons' life 20 years ago (except maybe regular cable). Now the Joneses have all of these things.
As for the substitution of goods, I know that I practice the substitution of goods. I assumed everyone else did, too. If I go to the store and apples are on sale, I'll buy more of those than bananas. If grapes are on sale, I'll buy more of those than other fruits. Ground turkey vs. ground beef is the same way. I'm indifferent to which of the two I purchase, so if one is cheaper than the other, I'll go for the cheaper one. I recall that tomatoes were very expensive locally the last year or so. Other cheaper vegetables were substituted for these goods. If beer prices doubled but wine stayed the same, I'd probably buy less beer and more wine. If car repair prices doubled, I'd junk my old car sooner and buy a newer one. I think most people practice substitution of goods in one form or another. Think about the food in your kitchen. I bet if half of the items doubled in price, you'd find substitute products to purchase that would be nearly equivalent (but different). What if shrimp or lobster dropped to $2/lb and bologna became $4/lb. I bet you a pound of $2 lobster that you'd eat a lot more lobster sandwiches (unless you really hated it).
Long term, I think people will start to practice substitution of goods in the rent vs. own a house decision. I have to admit that in this decision, there are more economics behind it other than lowest price. On the other hand, many people won't have the choice between paying a $3000 mortgage or paying $1200 in rent, and so they will be forced to rent instead of own. I've heard plenty of people talk about renting for a few years to see if the market cools down. There are also financial reasons to rent now versus buying a house.
The bank I work for is run on the assumption that inflation is at least 2% higher than what is reported using CPI. While the source of the article may have a bias, the federal government definitely has a strong reason for reporting low levels of inflation - the effects on TIPS and entitlements would put this country even further in the red.
The tuition for the classes I am taking at my local college went up 9% from last year. I wonder if employers would let new hires use substitution...could I just read the books and say I'm substituting that for the classes?
The tuition for the classes I am taking at my local college went up 9% from last year. I wonder if employers would let new hires use substitution...could I just read the books and say I'm substituting that for the classes?
I think tuition increases at state colleges are due to hedonistic increases as well as reductions in subsidies from the state. I don't know if your local college is a state school, but state schools around here are receiving a smaller subsidy from the state govt (or the state isn't increasing their subsidy to keep pace with inflation, CPI or "real"). Schools' fees also increase because of the new recreation center, new stadium, new student center, new swimming pools, new rock climbing wall, new health center, new transit center, new computers, networks, and new technology center, etc. Like it or not, students are getting more and better services from their school. The student also has to pay for these "improvements".
I don't know that there is a good substitute for your local university in your situation. Some items don't have good substitutes. However, if the price of your local university doubled or tripled, you might choose to take an online program at another university where the fees are much lower. Many full time students might relocate to go to a cheaper university.
I'm not arguing that all goods have a perfect substitute, but rather some goods have an acceptable substitute. I haven't researched the CPI substitution of goods that much, but I'm guessing they don't just make up substitutes that aren't reasonable (like your example of reading books instead of attending classes). College expenses are only incurred by a portion of our population, and then for only a relatively short period (you hope!).
Hey, my health insurance premium decreased by 12% this year. Look, the CPI isn't accurate because my health insurance premium deflated this year.
I don't know that there is a good substitute for your local university in your situation. Some items don't have good substitutes. However, if the price of your local university doubled or tripled, you might choose to take an online program at another university where the fees are much lower. Many full time students might relocate to go to a cheaper university.
I'm not arguing that all goods have a perfect substitute, but rather some goods have an acceptable substitute. I haven't researched the CPI substitution of goods that much, but I'm guessing they don't just make up substitutes that aren't reasonable (like your example of reading books instead of attending classes). College expenses are only incurred by a portion of our population, and then for only a relatively short period (you hope!).
Hey, my health insurance premium decreased by 12% this year. Look, the CPI isn't accurate because my health insurance premium deflated this year.
Sillysal said:
Yes, unfortunately, I am the victim of deflationary health insurance costs. I'm not sure why. I guess it goes up 20% one year, then down 12% the next. I think our local BCBS branch was getting beat up over the record profits they made (they are non-profit, by the way). Maybe it was all the cruises and luxury getaways they gave to their sales associates. Not sure.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
If I've been promised social security or a pension with inflation adjustments, I dont think I should have to buy a small tin can car instead of a mid size because some pencil neck in DC decided the mid size car is 'better' enough that I dont have to receive an adjustment to be able to afford it.
That to me isnt inflation adjustment, its just playing with numbers.
Similarly, basket substitutions arent apples for grapes, a basket substitution says "well, steak got too expensive, so throw that out and get ground beef". I find a hard time figuring out how inflation adjustment somehow gets factored by decisions someone might make if they DIDNT have inflation 'protection'.
Buying smaller, inferior and alternative products that arent as good as what I used to buy because the inflation numbers are spun to say there isnt any inflation when there IS makes no sense to me at all.
At that rate, in 30 years you'll be standing on a roller skate, making faces at yourself in a cheap mirror and eating sawdust. Just because cars, tv's and food have gotten so much 'better' that you cant have them anymore.
That to me isnt inflation adjustment, its just playing with numbers.
Similarly, basket substitutions arent apples for grapes, a basket substitution says "well, steak got too expensive, so throw that out and get ground beef". I find a hard time figuring out how inflation adjustment somehow gets factored by decisions someone might make if they DIDNT have inflation 'protection'.
Buying smaller, inferior and alternative products that arent as good as what I used to buy because the inflation numbers are spun to say there isnt any inflation when there IS makes no sense to me at all.
At that rate, in 30 years you'll be standing on a roller skate, making faces at yourself in a cheap mirror and eating sawdust. Just because cars, tv's and food have gotten so much 'better' that you cant have them anymore.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Easy.
Take a bucket of stuff in average consumption amounts, make a bucket out of it. Put the prices on it. Multiply. Rinse and repeat.
For example, if the average car is a midsized american sedan equipped with x, y and z, thats your car. If the average person eats 200lbs of steak, 50lbs of hamburger, 20lbs of rice, etc...theres your food.
Then you nicely regionalize it so people in different parts of the country get 'their' inflation rate.
Provide the data in a handy calculator format so someone can plug in their stuff and get their personal rate.
Maybe i'm oversimplifying this, but I cant see why it cant be painfully simple. For a given lifestyle, employing a given set of capital goods and consumables, how much more will it cost me this year to live that lifestyle than it did last year.
We USED to do this in CPI, these are recent changes IIRC...Clinton era.
Take a bucket of stuff in average consumption amounts, make a bucket out of it. Put the prices on it. Multiply. Rinse and repeat.
For example, if the average car is a midsized american sedan equipped with x, y and z, thats your car. If the average person eats 200lbs of steak, 50lbs of hamburger, 20lbs of rice, etc...theres your food.
Then you nicely regionalize it so people in different parts of the country get 'their' inflation rate.
Provide the data in a handy calculator format so someone can plug in their stuff and get their personal rate.
Maybe i'm oversimplifying this, but I cant see why it cant be painfully simple. For a given lifestyle, employing a given set of capital goods and consumables, how much more will it cost me this year to live that lifestyle than it did last year.
We USED to do this in CPI, these are recent changes IIRC...Clinton era.
yakers
Thinks s/he gets paid by the post
justin said:
Hey! That is the car I bought when my regular car was totalled. My previous car had all the bells & whisltes. This is a basic Focus 5 speed, no extras. Now this is really a good small car, as good as the two Honda Civics I have owned. Fun to throw around as well as economical and a good exterior to interior space ratio. NO services except oil changes for 100k miles. The oil changes are every 5k miles and are included, no charge.And it has some safety designs built in. It came with decent AC and I added an aftermarket cruse control and upgraded the decent OEM CD player as I wanted something to connect my ipod to. Electric locks would be nice but unfortunately part of an otherwise unnecessary package.
Now the good part. MSRP was $15.1K and I paid $9,788. Just wrote out a check, no financing, no "extras", they must read me well, they didn't even try. This was in Nov 04 on a 2005 Focus ZX4.
My high school age son thinks I'm cheap, but I bet he'll like the car more when he gets his license.
Just not said:
There are already regional CPI figures.
It seems like the CPI is pretty simple already. It states the amount that consumer prices increased by each year. If your consumption patterns are atypical, you can get the categorical CPI data and rebalance your bucket of goods to reflect the mixture of goods you consume. I'm not really sure how what you are proposing is better, simpler, more accurate or more reliable than the existing system of CPI calculation.
justin said:
I agree with your assessment too. Several months ago, I spent several days reading stuff on the government web site that explains and publishes CPI. It seemed to me like the research and analysis was legitimate. Hedonistic adjustments really have a fairly insiginificant affect on the final numbers and were incredibly well researched and documented in detail. The site also provided detail about regional differences and basket of goods breakdown so you could compute your own personal inflation number.
I think there are legitimate questions about CPI calculations. Should CPI compute the rate of inflation required to keep a person in a particular percentile of consumers (ie. stay in the top 10%) or should it compute the rate of inflation required to maintain a specific lifestyle regardless of how the overall US lifestyle changes? I think it attempts to do the latter, and retirees -- especially early retirees -- need to decide if they will be happy with that kind of lifestyle over then next 30, 40 or 50 years.
My biggest gripe about CPI is that the web site is not very intuitive and is difficult to navigate. Also the tools available to calculate inflation rates for different basket mixes or for different regions of the country were not impressive.
VoyT
Recycles dryer sheets
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I do the grocery shopping at my house, and believe me, I'm well versed in substitution. But guess what, inflation hits those items too. Example, I seldom biought cuts of beef -- bought ground beef instead. But that 99-cent per lb ground beef is now $1.29 per lb. OK, so I buy ground turkey. But the 88-cent per lb stuff is now 98 cents per pound.justin said:
Same with chicken ... when whole chicken prices rose, the quarters were a better buy. But instead of 39 cent and 49 cent per lb quarters, it's 59 and 69 cents per lb. So what do I do, subsist on rice and beans?
You might say, "but your grocery bill is still cheaper because you substituted." Maybe so, but the baseline costs are going up -- and there comes a time when you can't substitute any more. (BTW, go back and check the price of that bare bones focus a year or two from now.)
I belong in the boat (w. Bill Gross and others here ) that believes that the CPI (for most nations) is 1-2% understated. I have seen apple for apple comparisons showing that too. Like Just Not says; it is really not that hard to do. I have also seen friends Quicken/Money sheets over the years and a general 5% increase seem to be the norm.
I also believe that one can postpone (not totally remove) the impact by smart shopping(Incl. buy plenty when on sale/do internet comparisons Etc.) and delay of purchase (car/PC/electronics comes to mind).
I have noticed that I in FIRE have much more flexibility to actually do so and being single certainly adds to that flexibility. For a family of 4 with schools/health care/need for 2 cars/can't move to far from schools/work-costs(lunches/suits Etc.)/sports memberships and so forth it can be much harder to fit smart shopping and substitution into the busy daily schedule - or even find any decent substitutions.
When working I hardly ever asked for a discount (too busy in my 30 min lunch break!) but now I do - and even the Western style malls in Thailand will take 5-10% off on the spot. That is 2-3 years of inflation....
I never understood the hedonic adjustments (I use explorer/word/excel...who cares that the processor now can run the space shuttle?) - but my understanding is that it has very little impact on the official CPI no.
What DOES have a HUGE impact is the silly notion to use the rental price for housing costs when biggest chunk of population decides to own.... Again; like Just Not mentioned, the average ratio of owners/renters with the corresponding cost increases should be used - or better; since they already make the silly "CORE CPI" taking out minor irritations such as FOOD and ENERGY : they should instead make a "renter CPI" and "owner CPI".
Cheers!
) that believes that the CPI (for most nations) is 1-2% understated. I have seen apple for apple comparisons showing that too. Like Just Not says; it is really not that hard to do. I have also seen friends Quicken/Money sheets over the years and a general 5% increase seem to be the norm.I also believe that one can postpone (not totally remove) the impact by smart shopping(Incl. buy plenty when on sale/do internet comparisons Etc.) and delay of purchase (car/PC/electronics comes to mind).
I have noticed that I in FIRE have much more flexibility to actually do so and being single certainly adds to that flexibility. For a family of 4 with schools/health care/need for 2 cars/can't move to far from schools/work-costs(lunches/suits Etc.)/sports memberships and so forth it can be much harder to fit smart shopping and substitution into the busy daily schedule - or even find any decent substitutions.
When working I hardly ever asked for a discount (too busy in my 30 min lunch break!) but now I do - and even the Western style malls in Thailand will take 5-10% off on the spot. That is 2-3 years of inflation....
I never understood the hedonic adjustments (I use explorer/word/excel...who cares that the processor now can run the space shuttle?) - but my understanding is that it has very little impact on the official CPI no.
What DOES have a HUGE impact is the silly notion to use the rental price for housing costs when biggest chunk of population decides to own.... Again; like Just Not mentioned, the average ratio of owners/renters with the corresponding cost increases should be used - or better; since they already make the silly "CORE CPI" taking out minor irritations such as FOOD and ENERGY :
they should instead make a "renter CPI" and "owner CPI".Cheers!
sailor
Full time employment: Posting here.
You are almost right on the money for my personal CPI, since '97 the annualized geometric mean was 6.1%ben said:
What if you were already doing it? Than you don't have a way to reduce the impact.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I guess my point is that if you're living partially to largely on a CPI adjusted income source, you're going to lose 1-2% of buying power a year. Not so bad if you've got a 10-15 year time window, but pretty losuy if you've got a 30-40 year time period. I see a lot of people committing big pieces of their portfolios to tips and/or ibonds or counting on a CPI indexed pension or SS to cover their bills.
My dad and his neighbors, all retired, are seeing that 1-2% a year loss of buying power. So at least in this neck of the woods that figure bears out. While you may enjoy your 'better' cars, electronics and whatnot, eating pasta every night for the last 10 years of my life because thats all I can afford after purchasing the rest of my 'better' stuff that I cant control spending on doesnt sound like fun to me. I mean, I like pasta but....
Maybe I just have the wrong idea of inflation and its measurement. I always though inflation was how much more expensive stuff got over time, and measuring it was to show the percentage of that increase in spending. I missed all that stuff about fiddling around with quality levels having anything to do with price increases.
My dad and his neighbors, all retired, are seeing that 1-2% a year loss of buying power. So at least in this neck of the woods that figure bears out. While you may enjoy your 'better' cars, electronics and whatnot, eating pasta every night for the last 10 years of my life because thats all I can afford after purchasing the rest of my 'better' stuff that I cant control spending on doesnt sound like fun to me. I mean, I like pasta but....
Maybe I just have the wrong idea of inflation and its measurement. I always though inflation was how much more expensive stuff got over time, and measuring it was to show the percentage of that increase in spending. I missed all that stuff about fiddling around with quality levels having anything to do with price increases.
VoyT said:
I think in general everything gets more expensive over time. The point of substitution is not to continually downgrade your consumption to cheaper and cheaper products, but rather to choose between comparable (but different) goods based on the lowest price. In your example, let's say the turkey went up to $1.59/lb and the ground beef held constant at $1.29/lb. Then you'll switch back to ground beef because it is cheaper. Even if the ground beef goes up to $1.39/lb, you would still switch to ground beef since it is cheaper. Rice and beans would not be a very good substitution for many people since they are very different in nature from ground beef or turkey. Theoretically speaking, at some point there may be some substitution from ground meat to rice and beans if the price of meat skyrocketed and the price of rice and beans stayed the same.
On a different note, I posted something about buying a ford focus earlier in this thread as a bare bones car. That got me searching on the net for historical new car prices - ie - what was the MSRP or average sale price for a new 1990 ford escort in 1990? It would be interesting to see how much "inflation" that same car has seen. Does anyone have any ideas on where to find historical new car prices (what the new car price for a particular make was in XXXX year)?
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
My understanding of basket substitution is not that it looks for similar items of more reasonable price, but that it downgrades the product to a cheaper one.
I heard it explained by one of the folks that installed basket substitution that "If steak gets too expensive, people buy hamburger, so in the CPI calculation, if steak gets too expensive we do what the consumer would do and replace steak with hamburger in the basket".
To which my response is that if I'm supposed to be getting compensated for inflation, and steak gets more expensive, my inflation adjusted income better accommodate that.
As far as regionalization goes, yes I realize you can see some regional stats. But you arent paid that way. You get paid as a national CPI average figure, not your 'true' local inflation rate. So if you live in a cheapo area, CPI is good to you. You live in a more expensive area where prices rise faster, you're getting screwed.
Yeah, I know you can always choose to buy a cheaper car, live in a cheaper area, eat cheaper food. I'm of the expectation that an inflation adjusted instrument thats allegedly delivering 'true' returns should mean that I dont have to make those decisions...at least not often.
My 2000 ford expedition had a base MSRP of 28,000 and change in December of 1999 when I bought it. The same vehicle today has a base MSRP of 36,000 and change. Thats a little bit more than 2-3% a year. If gas, food, clothing or the prices of homes had withdrawn a little bit to accommodate that, that would be good. Except all of those are also up substantially.
I heard it explained by one of the folks that installed basket substitution that "If steak gets too expensive, people buy hamburger, so in the CPI calculation, if steak gets too expensive we do what the consumer would do and replace steak with hamburger in the basket".
To which my response is that if I'm supposed to be getting compensated for inflation, and steak gets more expensive, my inflation adjusted income better accommodate that.
As far as regionalization goes, yes I realize you can see some regional stats. But you arent paid that way. You get paid as a national CPI average figure, not your 'true' local inflation rate. So if you live in a cheapo area, CPI is good to you. You live in a more expensive area where prices rise faster, you're getting screwed.
Yeah, I know you can always choose to buy a cheaper car, live in a cheaper area, eat cheaper food. I'm of the expectation that an inflation adjusted instrument thats allegedly delivering 'true' returns should mean that I dont have to make those decisions...at least not often.
My 2000 ford expedition had a base MSRP of 28,000 and change in December of 1999 when I bought it. The same vehicle today has a base MSRP of 36,000 and change. Thats a little bit more than 2-3% a year. If gas, food, clothing or the prices of homes had withdrawn a little bit to accommodate that, that would be good. Except all of those are also up substantially.
Just not said:
I couldn't find much about how the BLS deals with substitution in the CPI. What I did find said that they don't do substitution at all. I wish I had better sources about the CPI, but I think my 7 year old nephew did their website design.
As for regional differences in CPI are concerned, you can always have whoever you are contracting with include the local CPI index instead of the national one. That is, if you are in a position to bargain. It may not be realistic to expect the US Treasury to issue 87 different TIPS, one for each region with a different regional CPI. You may be on to something where a state pension plan in a high inflation area uses the national CPI instead of the local region's CPI. The state could give pensioners the higher CPI, but that would probably cost the state or the pension plan contributors more.
I looked at your ford expedition example. I couldn't find what the MSRP for 2000 expeditions was, but I found the 2004-2006 MSRP values. I looked at the entry level expedition for simplicity's sake, and found that between '04 and '06, the expedition had an annual inflation rate of 1.46%. The '06 also includes a 5.4l engine versus the smaller 4.6l engine for the '04. Adjusted for hedonics... just kidding. Point is, the expedition lately has been lagging inflation and has improved (if you consider a bigger engine to be better). I'm still looking for historical MSRP's to see more general trends from further back than '04 (which is all I have now).
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Honestly, I wouldnt expect the govt to issue 87 different tips, but I dont see any problem with paying the CPI adjustment based on the primary residence address. Same with social security. If they have the numbers, its just a matter of a computer doing 2 milliseconds worth of work to figure it out.
Really not my biggest concern though. I got hot about this when I read their paperwork on the hedonic adjustment for computers. My last job was all about explaining to people why they needed faster computers and why they would be better for them. The white paper on hedonic adjustments for computers is 110% hogwash and not one of my former customers, industry pundits or analysts would have bought the arguments used. If I had presented it, I would have been laughed out of the room.
While little hedonic and basket adjustment is being done, that the mechanism has been put in place and used sparingly is of concern. Slow boiled frogs anyone?
What makes me more jittery is that greenspan keeps saying he thinks inflation is OVERSTATED by a percent or so.
Really not my biggest concern though. I got hot about this when I read their paperwork on the hedonic adjustment for computers. My last job was all about explaining to people why they needed faster computers and why they would be better for them. The white paper on hedonic adjustments for computers is 110% hogwash and not one of my former customers, industry pundits or analysts would have bought the arguments used. If I had presented it, I would have been laughed out of the room.
While little hedonic and basket adjustment is being done, that the mechanism has been put in place and used sparingly is of concern. Slow boiled frogs anyone?
What makes me more jittery is that greenspan keeps saying he thinks inflation is OVERSTATED by a percent or so.
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