Inflation: Official Rate vs. Observed Rate

[youbet]

^^^^^

There ya go. The rate of inflation slowed for a few years but there was no deflation.

We should also note that “transitory” does not mean prices will go back down. It means the rate of general price increases will moderate but continue upward.

 

[Car-Guy]

I don't know how bad inflation really is, but, IMO, it's bad and probably worse than what we are being told "officially"... But not to worry, it's just transitory...


My best gauge is what I spend on grocery shopping every two weeks... The DW and I have been buying the same things (products/quantities) for years now and of course prices have generally gone up over that time. However, in the past year my grocery bill is about 15% more than is was a year ago.. That's as far back as I keep receipts but that % is not a surprise to me... Before that price increases seemed like a slow creep rather than the sprints of today. YMMV

 

[milford]

In a matter of one year my barber increased his prices for a haircut from $10 to $15 and my local carwash's weekly special rate went from $12.95 to $19.95.

 

[Montecfo]

My poor choice of words. I should have said that we’ve gotten used to a period of falling inflation, so it’s a shock to see it spike into more historically-normal territory.

 

[RetiredHappy]

My son who lives in CA showed me a notice that he received. His garbage collection - recycle and trash collection, are going up by $2+ a month starting this month and another $2+ a month in January. He does not have a green/yard collection bin and those are also going up. In addition, the letter indicates that food waste needs to go into the green/yard bin, which means that if he cooks at home and have leftovers etc, he needs to start paying for a green/yard bin as well. Sooner or later I may be able to convince him to move out of state to where we live.

 

[CaptTom]

One thing I notice too is some services seem to be taking advantage of the "perception" of inflation to make what appear to be "catch-up" price increases.

I think this is a big part of it. Basically the reason for many price increases is "because we can."

If your business has been hurting, but you've been afraid to increase your prices for fear of driving away customers, now is a great time to make your move. Everyone expects price increases now, so they won't be so mad.

I don't really consider that gouging. Just part of a cycle.

Also, raw material and labor prices have truly spiked, forcing many to raise prices just to stay in business. The big question now is whether the inflation rate will continue at double digits or return to normal once the pent-up demand and spot shortages are gone.

 

[misanman]

DW, who normally does our shopping, had a total knee replacement done seven weeks ago so I've been filling in for her at the grocery store. Now that she is getting back to normal, she shopped the grocery store this AM and commented "I can't believe how much prices have gone up in the seven weeks I've been off." She refused to purchase some items because she couldn't accept the prices. I suppose in a few more weeks she will come to grips with the changes. I doubt that the prices will go back to where they were.

 

[brett]

We are definitely experiencing increased food costs.

I believe that inflation impacts people to different extents. Depends on where you live...housing costs, climate, energy sources/costs, as well as what you eat and what your lifestyle is.

No question though...the bottom line is that it has a much more significant impact on those with fixed incomes.

 

[audreyh1]

The thing about the official rate is it's the same dozen or so things all the time. So you can complain that they aren't looking at the right things, but they are consistent. Kinda like the Dow30 doesn't always represent the market (and yes I know they do shift stocks in and out.

Like...a lot of folks complain about the price of gas right now, which isn't in inflation. Gas is right about where it was 13 years ago. It has its own nuttiness. 18 months ago a barrel was $1. It's way too volatile to include as a factor for inflation.

Either way, it does seem like a LOT of milk.

The price of gas is definitely included in the CPI.

 

[OldShooter]

FWIW, the CPI is much more complicated than one would conclude from most of the posts in this thread. Go to https://www.bls.gov/cpi/ and click on the "CPI Methods" tab. Also try this Google search: "adjustments to the CPI site:https://www.bls.gov/cpi/"

Identifying inflation is a tough problem that must be solved before inflation can be measured.

 

[CRLLS]

I do believe that my personal inflation rate has gone up over the last year and will go up further. Gas is about 50% higher than last year. I haven't bought a new vehicle for ~10 years. Every indication is they have gone up, if you can get one. Groceries are up close to 33%. I used to spend ~$150 every 2 weeks now it is never under $200. Clothing? IDK! Housing? Mortgage is paid off. Electricity? I just signed up for hourly pricing. They predict I might save 5-10%. of my electricity cost. I already use less than my lowest 10% of meighbors. Now they are anticipating heating natural gas going up 30%? How do I cut back on that? I'm not turning my thermostat down. I am concerned that the Gov is down playing the actual inflation rate. That, or their numbers are based on some trailing weighted average. If so, 2022 inflation numbers will definitely be higher.

 

[CaptTom]

I am concerned that the Gov is down playing the actual inflation rate. That, or their numbers are based on some trailing weighted average. If so, 2022 inflation numbers will definitely be higher.

Those were my concerns which prompted the OP.

I've read suggestions that the government is highly motivated to paint a rosier inflation picture than reality. Beyond the political benefits, there's the financial incentive not to increase payments like Social Security. Just as our highly complex tax laws are structured to benefit those in power, one can imagine the same manipulation being done with the inflation formula.

Obviously there's nothing we as individuals can do about that. But understanding how the official rate differs from reality is important for many retirees. Right now I'm bracing for a historic round of inflation. I hope I'm wrong, but I think it's prudent to at least consider the possibility.

 

[Montecfo]

FWIW, the CPI is much more complicated than one would conclude from most of the posts in this thread. Go to https://www.bls.gov/cpi/ and click on the "CPI Methods" tab. Also try this Google search: "adjustments to the CPI site:https://www.bls.gov/cpi/"

Identifying inflation is a tough problem that must be solved before inflation can be measured.

Well stated and you make an excellent point. Thanks OldShooter.

Another common point made is the idea that the government is manipulating the numbers or can simply change how they are calculated to meet their desires. This is on fact not the case. Changes are pretty rare and well communicated.

And as you point out, it is a tough problem. People Do substitute goods. And home ownership has a housing and and investment element. Using a rent figure is an attempt to isolate the rent part, which is an expense, and leave out the investment element. Certainly this is imperfect, but no one has proposed improvements that I have seen.

 

[MichaelB]

Just a couple of comments on the fear that “the government is deliberately understating inflation”.

CPI is tracked and determined by the Bureau of Labor Statistics. The methodology and calculations, however, are heavily scrutinized by other institutions, most of which are not part of government. That includes regional Reserve Banks (especially San Francisco), The National Bureau of a economic Research (NBER), University affiliated think tanks such as the Hoover Institute, and independent think tanks such as Cato Institute, Peterson Institute for International Economics, Brookings Institute and the Rand Corporation. Even private businesses, such as Goldman Sachs, scrutinize these calculations and even do their own diligence.

They share no common ideologies and often disagree on economic matters, yet none has even suggested inflation numbers are manipulated or incorrectly calculated. There is just too much scrutiny on this number for it to be manipulated or deliberately understated. All have minor quibbles with methodology. No institution challenged the core methodology to calculate CPI in the US.

The only point of significant discussion (and possible disagreement) among them (regarding inflation) is chained CPI vs current methodology. In other words, many believe CPI is overstated.

If CPI were deliberately understated and inflation really higher, that means our GDP calculations are flawed and real GDP would be lower or nominal GDP higher. This is basic accounting. If nominal GDP were higher it would show in the income statements and tax revenues. It’s not there.

If annual inflation were really just 1% higher, that means after 10 years, our real GDP would be 10% lower than reported. This would have an enormous impact on employment - which has not happened.

The view that CPI is understated, deliberately or not, is a view unsustained by those with the means to prove it.

 

[CRLLS]

Well stated and you make an excellent point. Thanks OldShooter.

Another common point made is the idea that the government is manipulating the numbers or can simply change how they are calculated to meet their desires. This is on fact not the case. Changes are pretty rare and well communicated.

And as you point out, it is a tough problem. People Do substitute goods. And home ownership has a housing and and investment element. Using a rent figure is an attempt to isolate the rent part, which is an expense, and leave out the investment element. Certainly this is imperfect, but no one has proposed improvements that I have seen.

I have seen the "substitute goods" here and by many expert economists, as a way to fight inflation. Once you have made those substitutions from the last inflation period, and have embraced those choices long term, or maybe the LBYM lifestyle has been there all along, substitution is not a tool one can use the next time inflation hits. The next step is doing without. i.e. one cannot substitute choice meats for prime Angus meats cannot be done if you were using non-graded meat to start with. One cannot substitute gasoline without spending mucho money on an electric vehicle. If one doesn't buy organic vegetables and buys generic packaged foods wherever possible, what is to substitute. I will not and others probably agree, Ramen noodles can not be a substitute for beef. IMO, the presumption of substituting goods to counter inflation can be a very flawed one.

 

[OldShooter]

... IMO, the presumption of substituting goods to counter inflation can be a very flawed one.

Well, and that's only one of the worms in the can. Consider a 1965 Chevy pickup vs a current model. Now we have air bags, fuel injection, backup camera, galvanneal steel, touch screen entertainment, ... etc. And we have a huge price increase. How much of that increase is not inflation but instead should be assigned to the betterment of the product? And how about everyday products that didn't even exist in 1965, like cell phones and consumer microwave ovens?

... The view that CPI is understated, deliberately or not, is a view unsustained by those with the means to prove it.

Like almost any conspiracy theory, it is unprovable nonsense.

 

[Gumby]

....Like almost any conspiracy theory, it is unprovable nonsense.

Of course those who are in on it are going to say that. You're not fooling us one bit.

 

[Turbo29]

If CPI were deliberately understated and inflation really higher, that means our GDP calculations are flawed and real GDP would be lower or nominal GDP higher. This is basic accounting. If nominal GDP were higher it would show in the income statements and tax revenues. It’s not there.

Just a note:

The CPI, the GDP Price Index, and the GDP Implicit Price Deflator are different indices and and are calculated differently.


Comparing the Consumer Price Index with the gross domestic product price index and gross domestic product implicit price deflator

 

[GenXguy]

I have seen the "substitute goods" here and by many expert economists, as a way to fight inflation. Once you have made those substitutions from the last inflation period, and have embraced those choices long term, or maybe the LBYM lifestyle has been there all along, substitution is not a tool one can use the next time inflation hits. The next step is doing without. i.e. one cannot substitute choice meats for prime Angus meats cannot be done if you were using non-graded meat to start with. One cannot substitute gasoline without spending mucho money on an electric vehicle. If one doesn't buy organic vegetables and buys generic packaged foods wherever possible, what is to substitute. I will not and others probably agree, Ramen noodles can not be a substitute for beef. IMO, the presumption of substituting goods to counter inflation can be a very flawed one.

Yeah, I mentioned this much earlier in the thread. I stopped buying steak and starting buying the lower priced grocery items years ago, yet the government will always underinflate inflation by saying I can make that switch again, and again, and again. Ridiculous.

I'm leaning more towards inflation on items I purchase being closer to 15% rather than 10%. Natural gas is up over 100% from a year ago. I've heard heating bills are expected to be 30% higher. I'll have to wait and see how that actually pans out.

One thing I've rarely seen mentioned is that these inflationary pressures end up cost you more in taxes as well. While you need to earn 5% to 15% more this year to keep up with inflation, tax tables are only being increased 3%, and that's not until next year, so it's not enough, and it's lagging! So, the higher inflation amounts to a tax increase as well.

 

[GenXguy]

I'm leaning more towards inflation on items I purchase being closer to 15% rather than 10%. Natural gas is up over 100% from a year ago. I've heard heating bills are expected to be 30% higher. I'll have to wait and see how that actually pans out.

Oh crud, as if what I had been hearing wasn't bad enough, I now hear that they are expecting natural gas heating bills to be 50% higher in this area!

 

[CaptTom]

OK, I'll accept that there's no Great Conspiracy to under-report inflation.

So, when will the massive increases (anecdotally, anything from 15% to 40%) we're all seeing show up in the official numbers? Obviously if it's only calculated once a year we'll have to wait until next year to see it. Or are interim numbers published?

My goal is not to point fingers or pin blame, just to find a source of information I can put some faith in.

 

[youbet]

OK, I'll accept that there's no Great Conspiracy to under-report inflation.

So, when will the massive increases (anecdotally, anything from 15% to 40%) we're all seeing show up in the official numbers? Obviously if it's only calculated once a year we'll have to wait until next year to see it. Or are interim numbers published?

My goal is not to point fingers or pin blame, just to find a source of information I can put some faith in.

Actually it's calculated every month. And you can receive an email with the calculation and results every month by contacting the National Bureau of Labor Statistics. There it'll be right in your inbox!!

Your personal rate of inflation can definitely vary significantly from any of the published inflation indexes such as CPI. But understanding the difference between what is in the basket of goods used to calculate CPI and what is in your basket of goods is key.

Google is your friend. The methodology for calculating the various indexes is widely available and why your own personal inflation may differ (possibly a lot) from those figures can be generally understood without too much effort.

 

[SecondAttempt]

There are some interesting philosophical and practical questions about what should be included in "inflation." That is partly why we have so many different measures. Gas is something that (almost) everyone uses so it should be included But it is also strongly influenced by a cartel (OPEC) historically, although less so recently. We would not want a cartel to steer our laws and policies by manipulating the price of oil.

A lot of the inflation we are seeing lately is due to pandemic influences and I am not convinced they will hold when things get back to normal in a few years. Even the Fed, when they call it transitory they are saying the rate rise in transitory but the price rises will persist. I'm not sure I agree. Once things stabilize the same supply/demand and competition relationships will set prices.

I saved a ton of money on gas while working from home (long commute) and cut my mortgage payment by a few hundred per month due to low pandemic rates. So my personal inflation rate from 2019-2020 was probably -20% without exaggerating. So if it is 10% for 2020-2021 and 2021-2022 I'm not seeing huge expenditure increases since 2019 (actually down 3.2% if my math is right). And when I retire in 2 years the gas savings will become permanent. I also will not buy lunch or dinner takeout because I am too tired to cook. I will travel more though.

I think we will see some modest inflation of 2-3% (up from 1-2%) long term as companies decrease their "leanness" and operate with bigger buffers, truckers are paid more, and so forth.

I think the government numbers are useful to inform Congress and the Federal Reserve Board. But they have never had much specific meaning to me personally. That will probably change marginally when my social security bump depends on CPI.

 

[Mulligan]

Actually it's calculated every month. And you can receive an email with the calculation and results every month by contacting the National Bureau of Labor Statistics. There it'll be right in your inbox!!

Your personal rate of inflation can definitely vary significantly from any of the published inflation indexes such as CPI. But understanding the difference between what is in the basket of goods used to calculate CPI and what is in your basket of goods is key.

Google is your friend. The methodology for calculating the various indexes is widely available and why your own personal inflation may differ (possibly a lot) from those figures can be generally understood without too much effort.

I finally get my revenge after years of Obamacare abusing me. My personal inflation rate has plummeted at a record pace this year. Refinanced my house at 100 bps lower, and health insurance dropped from 700 a month and 7000 deductible to under 200 a month and 200 yearly deductible next month.
Any inflationary spikes in food or energy are just blips to me compared to the savings Im getting now from above. And an upcoming 5% cola raise in pension isnt unwelcome either.

 

[GravitySucks]

Said the heck with the diet and bought Aldi chocolate covered peanut butter cookies for the first time this year. From $0.99 to $1.35. So guess that makes my personal inflation rate 36%