CPI ... Your Confidence Level in this Statistic?

[Craig]

The Gillespie data appears to be only available to subscribers.

I appreciate the info ... sgeeee, thanks for passing on your experience in more closely reviewing the BLS process.

 

[justin]

you cant even say electronics are cheaper today either...as an example my sony xbr set was 750.00 about 15 years ago..if you know tv's the xbr line represents the latest and greatest technology of that day..while yes today you can buy an equivelent performing to my 15 year old set for 250 bucks the equivelent xbr representing todays latest and greatest technology is 2200.00........you cant compare just equal performance without comparing it to where it is in the "quality performance scale of that time period...........my first cd player was 1,000 dollars but it was state of the art new technology best of breed in those days...while a cd player today can cost 50 bucks the best of breed is 2500-10,000 bucks

I see the same problem with the cutting edge of flight.

60 years ago tickets on a jet would cost $100. Now, flights on the equivalent cutting edge technology (space flight) cost $20 million. Clearly evidence of hyperinflation. :

Do you ever feel like you've got a solution, but you have to go out and search hard to find the problem?

 

[mathjak107]

Well, assuming you were a kid 50 years ago, that would mean a 4.7% inflation rate.

Did the pizza get bigger, better, tastier?  Does it have more expensive ingredients now? 

I'm thinking back to what a combination dinner at your generic mexican restaurant cost when I was a kid (10-15 years ago).  Around $5-6 bucks.  Now it is $6-6.50 at the same types of places.  Does this suggest astronomically low inflation?  I have successfully refuted your pizza example by introducing this new proof.

I would love to be a little kid now.  With walmart and the dollar store selling all those awesome toys (cheap plastic crap to us adults), it would be amazing!  The stuff they sell now is twice as nice, there's twice as much of it all at half the cost. 

 

[mathjak107]

actually pizza was 15 cents a slice about 40 years ago which brings the inflation rate to about 4.5%

 

[mathjak107]

by the way check out the figures the cpi allows for health care costs and education...they are laughable..

 

[mathjak107]

thinking back to what a combination dinner at your generic mexican restaurant cost when I was a kid (10-15 years ago).  Around $5-6 bucks.  Now it is $6-6.50 at the same types of places.  Does this suggest astronomically low inflation?  I have successfully refuted your pizza example by introducing this new proof.

I would love to be a little kid now.  With walmart and the dollar store selling all those awesome toys (cheap plastic crap to us adults), it would be amazing!  The stuff they sell now is twice as nice, there's twice as much of it all at half the cost. 

cheap crap has always been cheap crap and walmart is cheap crap ,at least lets compare walmart to johns bargain stores of yesterday ...remember johns bargain stores...shirts for a buck..the usual quality well made stuff always cost way more...the cpi is about always excepting less than and downgrading what we had because functionally they found a cheaper equal...while a ford taurus may be nicer and even out perform a caddy of 7 or 8 years ago a caddy owner dosnt want to trade for a ford taurus in his next car...

 

[mathjak107]

lets start an annuties topic as i have mixed feelings about immeadiate annuities which we can toss around....ill start one in a few

 

[mathjak107]

oops wrong topic accidentily..first day with the new mouse

 

[cute fuzzy bunny]

The main reason is because it's not as simple as many people think it is.
...
Now multiply those problems by everyone in America.

You just described why its an implausible number to measure. And if you go back to my first post on this, i'm not interested in exposing a government conspiracy, simply pointing out that the number does not reflect inflation for a lot of people, and i'm betting for most ER's.

In a prairie dog moment, lets remember that this stat is supposed to measure changes in the costs of living, and 80 million peoples income is dependent on it. The guys who measure it are part of the same club whose success is measured by keeping the number low, and who have to open their wallets and pay the difference. Not a formula for accuracy.

I'm sure its a hard thing to measure. With hard measurements, I've found the right answer is to keep things simple. The current CPI measures are more complicated to understand than the dang tax code.

Tell you what though, I'd be happy to agree on two things. One is that CPI <> Inflation, and the other is that buying a CPI indexed asset does not produce a "real" return. Those two misconceptions could be pretty painful for an investor to misunderstand. It was one of my main disagreements with the "wonder twins" when they said you could buy TIPS and have an "inflation proof" 30 year investment plan.

What you had was a 30 year "CPI proof" investment plan. In some areas, lifestyles and spending patterns, that might be better than an inflation proof plan. I'm betting that for most ER's, its not.

Good data, and some interesting articles.

http://jimrogers.com/content/stories/articles/They_Are_Lying_to_Us_Again.html
http://www.mises.org/freemarket_detail.asp?control=368
http://en.wikipedia.org/wiki/Consumer_price_index

 

[cute fuzzy bunny]

AH HAH!

I had seen this web site some time ago, and have been looking for it ever since.

Check this out.

http://www.gold-eagle.com/editorials_04/paulos090904.html

 

[d]

...lets remember that this stat is supposed to measure changes in the costs of living...

This is not true.  It is designed to measure price changes.  "Cost of living" obviously includes this, but also includes many other things. Herein, I'd guess, lies much of the expressed dissatisfaction with CPI.

 

[cute fuzzy bunny]

How a measure is employed becomes the purpose of the measure.

How is the CPI measure most employed?

 

[d]

should something be misused, does that mean it is somehow flawed?

 

[mathjak107]

yep......

 

[d]

poppycock

 

[cute fuzzy bunny]

If you continue to create it, knowing how it is used, yes.

I dont think I've ever heard anyone argue that CPI is not flawed. As SG's post above demonstrates, the indicator is rife with disclaimers.

Repeating again, I dont have any issues with the measurement excepting the following:

- It is not an accurate measure of broadbased inflation for everyone
- It is not an accurate measure of the changes to the cost of living for everyone
- CPI indexed investments do not necessarily produce "real returns" for all investors.

Yet is it used to adjust incomes, pensions, social security and a raft of other things as though it does meet those criteria. With an implication that these things are now "cost of living adjusted" or "producing a real return".

 

[d]

- It is not an accurate measure of broadbased inflation for everyone
- It is not an accurate measure of the changes to the cost of living for everyone
- CPI indexed investments do not necessarily produce "real returns" for all investors.

I agree with your conclusions, but merely point-out that there is a clear difference between the limitations of its construction and the misuse of the result.

 

[wabmester]

What you had was a 30 year "CPI proof" investment plan.  In some areas, lifestyles and spending patterns, that might be better than an inflation proof plan.  I'm betting that for most ER's, its not.

You are soooo right. What you really want is a bond indexed to your personal cost of living increases instead of those evil TIPS. Hmm, now where can I get one of those? Oh, that's right. I can't.

 

[cute fuzzy bunny]

"d", perhaps a statement of your opinion on the topic subject would be helpful rather than your feelings about others opinions. I still dont know what yours is. Sounds like you think CPI is a good measure and that it shouldnt be put to the tasks its being put to?

Wab - I didnt say tips are 'evil' nor am I looking for an investment product that doesnt exist. But thanks for injecting what you think I think into the discussion

My point is simply that tips and ibonds do not produce a "real" return; at least not for everyone. I think a lot of people dont understand that. In fact, Vanguards and the Treasury both describe their CPI related products using the terms "real return".

Further, a CPI indexed pension and the CPI indexed social security payments are not inflation indexed or inflation protected for everyone receiving them. I think a lot of people dont understand that either.

What sucks is that the realization that they're not inflation indexed to produce a "real" return or a "real" monthly payment wont become fully apparent until 10-15 years after retirement.

Further, I'm concerned that the effect is multiplied for an ER. We have to pay for our own health care. We dont have a wage adjusted income stream that often helps battle inflation better than CPI does. Our tastes in recreation might create somewhat higher expenses that are more sensitive to inflation than a 9-5'er.

Do I have a great solution to this? Not really, except to eschew investments that barely tread water or lose ground like clockwork unless thats your expectation of the investment.

 

[sgeeeee]

. . .Tell you what though, I'd be happy to agree on two things.  One is that CPI <> Inflation, and the other is that buying a CPI indexed asset does not produce a "real" return.  Those two misconceptions could be pretty painful for an investor to misunderstand.  . . .

I agree completely.  While I think the compilation and statement of CPI represents excellent work and a very honest attempt to capture inflation with a single metric, you would be a fool to believe that it captures your personal experience.  Inflation indexing that tracks the CPI is better than not getting increases when inflation rises.  But if CPI actually tracks your personal requirements for increasing income it would be simply a wild coincidence.  

Some people with simple living requirements who live in small towns in the Mid-West or South-East actually find CPI to be a bonus payment.  Most people, however, will either 1) live in a place with above average cost of living and inflation, 2) Will buy a mix of products very different from the CPI mix, or 3) both.

 

[mathjak107]

well said fuzzy

 

[cute fuzzy bunny]

I must be reading the wrong web site.

Or you guys are being methodically replaced by exact duplicates.

 

[wabmester]

My point is simply that tips and ibonds do not produce a "real" return; at least not for everyone.  I think a lot of people dont understand that.  In fact, Vanguards and the Treasury both describe their CPI related products using the terms "real return".

This is just semantics. For most people, the definition of "real return" is the return - CPI. My cost of living varies from year to year. I do what I can to hedge against inflation, and that includes investing in "real" assets like real estate, investing in a healthcare fund to hedge against healthcare costs, investing in energy stocks to hedge against energy costs, and investing in TIPS, which are indexed to a *transparent* index that *attempts* to capture an average increase of a basket of goods for an average urban consumer.

If you determine that your personal rate of inflation is higher than the CPI, my question for you is: what are you going to do about it?

 

[d]

perhaps a statement of your opinion on the topic subject would be helpful rather than your feelings about others opinions. I still dont know what yours is. Sounds like you think CPI is a good measure and that it shouldnt be put to the tasks its being put to?

My opinion: the CPI is a reasonable measure of what it purports to be.  It is not without limitations, and in all liklihood cannot be.  When one chooses to use it, the user should be aware of what it is and what it is not.

 

[cute fuzzy bunny]

This is just semantics. .

No, it is not. The naive investor who reads 'real return' feels that this produces an inflation neutral return. It is not that.

If you determine that your personal rate of inflation is higher than the CPI, my question for you is: what are you going to do about it?

Invest in stuff that beats my actual personal rate of inflation.