An Interesting Look At Inflation

[barbarus]

The Fed's inflation gauge isn't realistic, critics say | The San Diego Union-Tribune

 

[maddythebeagle]

The good news is that clothing and electronics prices are down...

 

[jIMOh]

I think this has been a known issue for years (inflation is under stated).

Maybe this time, there will be inflation calculation reform?

 

[hankster]

The good news is that clothing and electronics prices are down...

Yeah, but that won't be of any help if you're an Amish nudist

 

[bots2019]

As others have mentioned many times before, the CPI clearly understates the actual rate of inflation experienced by most people.

However, when I look at the chart at the bottom of this article, I wonder how the calculation worked prior to 1983. It appears this calculation results in about 10% average inflation for 1/2001 - 3/2008 - this would mean that overall costs doubled during that period. I'm sure they've increased quite a bit (definitely more than the 20-25% increase in CPI), but I can't imagine they've doubled overall.

 

[RockOn]

The Fed's inflation gauge isn't realistic, critics say /quote]

No Sh**!......91% of Americans agree, now a few more gurus stepping up to the plate, the march on Washington is coming soon! Felony theives! We want our money back, we want our money back, we want our money back. I'm fed up and I can't take it anymore. I heard Notmuchlonger is setting up a charter.

 

[dumpster56]

Again the politicians think we are stupid. electronic prices are down housing prices are down, not like it would help since you gotta sell your dog to move. But energy is off the wall food prices way up, sorry things look and feel $hitty in the trenches of America.

 

[copyright1997reloaded]

Deflation in the things we want, Inflation in the things we need

The above is from the Minyanville - - site, and captures (at least to me), what we've been seeing so far in the inflation picture. That is, prices for electronics and other toys continue to drop, but prices in things that humans need to survive (food, shelter, energy) are rising.

The real question is whether we are on a cusp of much worse things to come in terms of inflation in the United States. Certainly a falling USD points to rising prices in terms of import goods. I personally have struggled in terms of my investment strategy in trying to figure out whether inflation or deflation is the more likely scenario as a result of the now not so recent financial asset crisis. (I am grateful that I have accumulated decent sized slug of energy stocks since 2002.)

 

[Khan]

Just as a data point: the price of bird food has recently been rising rapidly (sunflower seed, safflower seed, corn, peanuts).

 

[RockOn]

The real question is whether we are on a cusp of much worse things to come in terms of inflation in the United States. Certainly a falling USD points to rising prices in terms of import goods. I personally have struggled in terms of my investment strategy in trying to figure out whether inflation or deflation is the more likely scenario as a result of the now not so recent financial asset crisis. (I am grateful that I have accumulated decent sized slug of energy stocks since 2002.)

So which is it?

 

[mathjak107]

The good news is that clothing and electronics prices are down...

if you like those crappy k-mart low quality clothes. anything of quality aint down. gap jeans which arent exactley hi end are still just as high or higher

 

[copyright1997reloaded]

So which is it?

I wish I knew.

It sure seems the Fed has been doing everything it can do to prevent a 30's style deflationary environment (or Japan in the 90's). My bet (up to now) has been to underweight financials , over weight energy and tech/growth, and took advantage as much as possible locking in safe money in things like penfed 3-5 year cd's at 6-6.25%.

The question I keep asking myself is how much is already priced in (e.g. into the financials). Early last year, nothing was...but now...?

Disclaimer: I am a fairly conservative investor, so all of this discussion is on the edges in how I change my asset allocation...and not by much. I am currently about 60% equities, 40% bonds/cash. This is down from 67% equities early in 2007. (I am 50 and considering retirement very soon.) Of my equity/bond investments, I have about 1/2 in individual securities, and about 1/2 in low cost funds. One of those lost cost funds is TIPS which I have owned since July 2000.

 

[Independent]

As others have mentioned many times before, the CPI clearly understates the actual rate of inflation experienced by most people.

However, when I look at the chart at the bottom of this article, I wonder how the calculation worked prior to 1983. It appears this calculation results in about 10% average inflation for 1/2001 - 3/2008 - this would mean that overall costs doubled during that period. I'm sure they've increased quite a bit (definitely more than the 20-25% increase in CPI), but I can't imagine they've doubled overall.

Right. In the 80's, economists thought there were technical problems with the CPI that resulted in an overstatement of 0.5% to 1.5% (various studies had different numbers). The BLS made some changes. Maybe they overshot the "right" number and they are under by a little.

But shadowstatistics is grossly wrong. He claims that a worker whose wage increases exactly matched the CPI for the 10 years ending in 2007 actually lost half his purchasing power. On average, wages have gone up a little faster than the CPI, so maybe average purchasing power would have dropped by 40%. But that would mean we're buying 40% fewer kwh of electricty, 40% fewer cars, 40% fewer pairs of shoes, 40% fewer cans of Coke, etc. That didn't happen. Whatever shadowstatistics is doing to get his numbers (he doesn't provide the calculations), his result is further from reality than the BLS numbers.

One thing that really is going on is that the average American uses about 25 barrels of oil per year. If a barrel goes from $32 to $100, that means we spend an extra $1,700 each on oil. There is no way we can expect to make that up with higher wages, it's just lost purchasing power. The problem isn't "inflation", it's "inflation that can't possibly be offset with higher wages". I'm sure that we've already lost some of that $1,700 in terms of increased productivity that hasn't found it's way into real wages. Some of it is still ahead of us because businesses haven't completely passed their higher costs through to consumers yet. But the culprit there is the world economy and stupid US gov't policies (that were very popular with the voters). Don't blame that on the BLS.

 

[ladelfina]

that would mean we're buying 40% fewer kwh of electricty, 40% fewer cars, 40% fewer pairs of shoes, 40% fewer cans of Coke, etc. That didn't happen.

Americans may well be buying (let's say..) the same number of kWh -- but they cost 40% more. And what DID happen is that to maintain a roughly equivalent std. of living they are relying on second familiy incomes and (especially recently) going ever more heavily into debt.

See the video I linked to, of a lecture by Elizabeth Warren:
http://www.early-retirement.org/for...er-last-30-years-34575.html?highlight=lecture

 

[cute fuzzy bunny]

It appears this calculation results in about 10% average inflation for 1/2001 - 3/2008 - this would mean that overall costs doubled during that period. I'm sure they've increased quite a bit (definitely more than the 20-25% increase in CPI), but I can't imagine they've doubled overall.

Well lets see...gas more than doubled, so did electricity. My cable bill (if I were still on cable) has close to doubled. My high speed internet has doubled. Milk, meat, eggs and a number of other food products have more than doubled in just the last few years, you know...because we converted all our feed corn into fuel and eliminated our dependence on foreign oil? :

Homes in my area even after the recent haircut are still about twice what they were a little over 10 years ago.

So theres some precedence to say that in many areas like utilities, food, transportation costs, housing costs and others...a doubling has certainly occurred.

Of course, many electronic items we dont really need are cheaper or about the same.

 

[cute fuzzy bunny]

On average, wages have gone up a little faster than the CPI

Which wages have improved faster than CPI and for what time period? I'm not seeing anyone getting big raises in recent times, say the last 8 years.

 

[d]

 

[ladelfina]

1.) per capita is misleading... the now familiar construct "me + Warren Buffett in a room have a per capita income of $23 million!!".

2.) gotta take into account not only reported inflation but real overall purchasing power decline of dollar

Basic CPI inflation calculator here:
The Inflation Calculator

says $8000 in 1950 would be almost $69,000 in 2007.
what's that look like on your chart?.. $29,000 or so?
60% less? Just based on reported CPI.


I DO like the chart origin name, though..!! "ECONOMAGIC"!!!
Thanks for the laugh, d. I guess laughing is better than crying.

Go long Sn.

 

[d]

the chained measure is "real" ... it's you, Warren, and about 320million others

 

[ladelfina]

d. thanks for pointing out "chained".. I found a description of that here:
http://allcountries.org/uscensus/722_selected_per_capita_income_and_product.html

Chained-dollar measures

BEA also prepares measures of real GDP and its components in a dollar-denominated form, designated "chained (1992) dollar estimates." For GDP and most other series, these estimates are computed by multiplying the 1996 current-dollar value by a corresponding quantity index number and then dividing by 100.

For analyses of changes over time in an aggregate or in a component, the percentage changes calculated from the chained-dollar estimates and from the chain-type quantity indexes are the same; any differences will be small and due to rounding. However, because the relative prices used as weights for any period other than the base period differ from those used for the base period, the chained-dollar values for the detailed GDP components do not necessarily sum to the chained-dollar estimate of GDP or to any intermediate aggregate. A measure of the extent of such differences is provided in most chained-dollar tables by a "residual" line, which indicates the difference between GDP (or an other major aggregate) and the sum of the most detailed components in the table.

For periods close to the base year, when there usually has not been much change in the relative prices that are used as the weights for the chain-type index, the residuals tend to be small, and the chained (1996) dollar estimates can be used to approximate the contributions to growth and to aggregate the detailed estimates.

As one moves further from the base year, the residual tends to become larger, and the chained-dollar estimates become less useful for analyses of contributions to growth. In general, the use of chained-dollar estimates to calculate component shares or component contributions to real growth may be misleading for periods away from the base year. In particular, for components for which relative prices are changing rapidly, these calculations may be misleading even just a few years from the base year.

I'm still not what point you are trying to illustrate, d..
What does the Economagic chart mean to you?

 

[RonBoyd]

1.) ... the now familiar construct "me + Warren Buffett in a room have a per capita income of $23 million!!".

This is becoming a very popular metaphor.

From the Introduction to William J. Bernsteins book, A Splendid Exchange: How Trade Shaped The World http://www.efficientfrontier.com/files/trade/ASE-Intro.pdf:

"And as long as we’re throwing statistical terms around, the synonymous terms “mean” and “average” have of late begun to carry their own ideological freight. The political right embraces the mean, but rarely uses a different bit of jargon, the median—that is, the income or wealth at the fiftieth percentile, the “person in the middle.” When Bill Gates walks into a roomful of people, their mean income skyrockets while their median income changes hardly at all—a concept usually ignored by pro-market conservatives."

 

[d]

the data show a clear increase in the "standard of living". (there is, of course, no data which would convince those who disbelieve any data which conflicts with their own opinion.)

 

[Independent]

Which wages have improved faster than CPI and for what time period? I'm not seeing anyone getting big raises in recent times, say the last 8 years.

Median, CPI-adjusted wage for males has been about flat. The same number for females has been going up slowly. See:
Historical Income Tables - People

If we want to agree that wages have gone up exactly as fast as the CPI, then the point I'm trying to make in post 13 is even stronger.

Shadowstatistics claims that the CPI understates real inflation by approximately a compound 7%. That means that someone who's income went up as fast as the CPI over the last 10 years lost 50% of his/her buying power. If that's the "average" for our population, than in total we're consuming about half of what we consumed 10 years ago. That obviously isn't anywhere close to true. Therefore, whatever method shadowstatistics is using to get his numbers is wrong.

 

[Independent]

Americans may well be buying (let's say..) the same number of kWh -- but they cost 40% more. And what DID happen is that to maintain a roughly equivalent std. of living they are relying on second familiy incomes and (especially recently) going ever more heavily into debt.

See the video I linked to, of a lecture by Elizabeth Warren:
http://www.early-retirement.org/for...er-last-30-years-34575.html?highlight=lecture

It's true that the percentage of women who work outside the home has increased dramatically since 1960. Warren is doing a comparison between 1970 and 2003, and there was an increase for those years.

But, I'm talking about the period 1997-2007. During that period, there wasn't any change. See Table 1 in: http://www.bls.gov/opub/mlr/2006/10/art3full.pdf

So I'm right back to the same argument, if shadowstatistics is correct, we're buying 40% less real stuff (like 40% fewer cars) than 10 years ago. He's wrong.

 

[cute fuzzy bunny]

Median, CPI-adjusted wage for males has been about flat. The same number for females has been going up slowly. See:
Historical Income Tables - People

If we want to agree that wages have gone up exactly as fast as the CPI, then the point I'm trying to make in post 13 is even stronger.

Maybe I'm reading something wrong on that chart. Looks to me like the male inflation adjusted earnings in 2000 were 45,443 and dropped to 43,317 by 2008, while womens earnings gained just a few dollars in the same time period.

Seems like a 5% loss to inflation over that 8 year period for men, no change for women.

Not exactly "wages staying ahead of the CPI" from what I can see.

If wages (for men at least) are losing ground at a little under 1% a year, and theres a variance between CPI as measured for an urban worker and a particular person of another .5%-1%, then workers in the last decade are seing a 7-10% loss to inflation in their spending power, yes?

Seems to me that some hedging or investments with excess return (and risk) might be prudent.

I remember Ted used to buy oil futures as a way to mute this, as he expected oil prices to continue to rise and drive up a lot of other costs with them.