Inflation: Official Rate vs. Observed Rate

[aja8888]

Yup. 25 years as a landlord for me plus other small and medium sized businesses. Last 10 years pro bono mentor to entrepreneurs and small business. Maybe 200 clients in total. Right now I have a cookie company, a sandblast company, a financial advisor (RIA), a chimney repair company, and a guy who has developed and patented a toy to improve STEM education. It's great fun but making the numbers work is always a challenge.

..Plus teaching a class on investing.....and building a retirement house....when do you have time to sleep??

 

[OldShooter]

..Plus teaching a class on investing.....and building a retirement house....when do you have time to sleep??

Well, I haven't watched TV in years, the in-person investment class has been on hold for COVID, and they don't start digging the house foundation until around March 1. So ... lots of time. The mentoring is about the only fun I'm having lately.

 

[aja8888]

Well, I haven't watched TV in years, the in-person investment class has been on hold for COVID, and they don't start digging the house foundation until around March 1. So ... lots of time. The mentoring is about the only fun I'm having lately.

Yes, I see. I guess there have been a few unanticipated delays in life within the last couple of years.

And the TV thing, I don't indulge at all unless it's a sporting event, and this year's highlight was the Ryder Cup matches.

 

[USGrant1962]

To earlier comments about how the CPI calculation has changed over time - this site suggests that using 1970s methodology inflation is now 14%, and using 1980s methodology it is about 10%. I can't vouch for their math, but I think the website is pretty well known.

Alternate Inflation Charts

Looking at the pre-1980 methodology tells me that the old calculation did overestimate inflation. The graph shows annual inflation bouncing around 9-10% for the last 20 years. That is not realistic at all. That rate of compounding would mean prices were up (or the dollar down) 5 to 6 times in the last 20 years. IRL it is more like 2-3x.

 

[Koolau]

Greed has a trickle down effect and can lead to inflation.

"Greed" is as difficult and pointless to define as "rich." We used to rent out our chosen spot in Paradise. We would hold the line on rent increases for several years, but with HOA dues on the place going up 10% or so per year, we eventually raised the rent by about 16% It didn't even cover all our extra costs. I felt bad about raising the rent but I did NOT feel greedy. By the way, we were WAY under market. When the two "little old ladies" left, we DOUBLED the rent and were still a bit under the market. Greed? I guess you can define it as "who's ox is being gored" so YMMV.

 

[2177V]

..Plus teaching a class on investing.....and building a retirement house....when do you have time to sleep??

I agree. That is not my vision of a good retirement. However everyone has their own vision of a good retirement. I am just glad I will be buying a second home in an area of China where the COL is 1/3 of California. This means my effective wealth will triple in buying power and I can let inflation happen since it will be a long time before any inflation catches up with me.

I appreciate low COL areas ever since I was stationed at the Korean DMZ as a US Army soldier. I was only getting about $100 a month as a buck private in 1973 but I was living like a king. I met a lot of US retirees in China, Thailand and Vietnam who have the same idea. The beaches there are not as good as Hawaii but they come close enough so I can still surf. Catching a good wave, living like a king, and not worrying about inflation and health care is my idea of a good retirement.

 

[aja8888]

I agree. That is not my vision of a good retirement. However everyone has their own vision of a good retirement. I am just glad I will be buying a second home in an area of China where the COL is 1/3 of California. This means my effective wealth will triple in buying power and I can let inflation happen since it will be a long time before any inflation catches up with me.

I appreciate low COL areas ever since I was stationed at the Korean DMZ as a US Army soldier. I was only getting about $100 a month as a buck private in 1973 but I was living like a king. I met a lot of US retirees in China, Thailand and Vietnam who have the same idea. The beaches there are not as good as Hawaii but they come close enough so I can still surf. Catching a good wave, living like a king, and not worrying about inflation and health care is my idea of a good retirement.

I've had enough of overseas stuff in my military life and working life. I'm staying put and playing golf every chance I can. Living in south Texas can make that retirement life come true.

Good luck to you in China!

 

[2177V]

I'm staying put and playing golf every chance I can. Living in south Texas can make that retirement life come true.

Good luck to you in China!

Don't forget Thailand, Vietnam, Japan, Korea , Singapore, etc since China will only my home base to shorten my travel time while I am hopping from place to place during my retirement. South Texas is a better place than California since Florida, New Orleans, Carribean and other places are nearby. Hawaii and Grand Cayman Island are my favorite vacation spots but the COL is just too high for me.

 

[JT90505]

Sigh.
Not true for Californians who recently purchased a house in California. On my tax bill, I see a line item of 1% and then the fees are added so I am paying 1.07% which is the national average.

If the DMV chose to collect fees through the property tax revenue collection mechanism, would this be viewed this as an increase in property taxes?

Direct assessments (fees) are essentially local taxes which have no correlation to the value of your property. Bond repayment charges are also independent of the value of your property. Local agencies find it easy to collect their bills through a common revenue collection mechanism (property tax bill)...separate how a bill is collected from what it is paying for.

Our property tax rate is 1% of assessed value, which was discussed in previous post. I agree with you that, as a person who recently purchased a home, you are subsidizing those of us who have been in our houses longer. I won't argue that this side effect of Prop 13 is fair.

Congrats on your second home, all the best...

 

[aja8888]

Don't forget Thailand, Vietnam, Japan, Korea , Singapore, etc since China will only my home base to shorten my travel time while I am hopping from place to place during my retirement. South Texas is a better place than California since Florida, New Orleans, Carribean and other places are nearby. Hawaii and Grand Cayman Island are my favorite vacation spots but the COL is just too high for me.

Great! Sounds like you will be busy! But for guys like me that traveled the globe for 35+ years, I am content to stay here with family and friends for the long haul (at 78, I hope it's long!). I belong to a private club and can play golf here year round.

I have been to all 50 states and there are still some parts of the U.S. that I'd like to visit that I have not seen. I lived in California for 12 years and have no desire to visit there as no family or friends are left there. I only have a few relatives in Connecticut so that could be a visit from time to time.

Other than that, I'm going to live a boring rest of my life!

 

[GenXguy]

To earlier comments about how the CPI calculation has changed over time - this site suggests that using 1970s methodology inflation is now 14%, and using 1980s methodology it is about 10%. I can't vouch for their math, but I think the website is pretty well known.

Alternate Inflation Charts

That looks more like what I'm feeling over the last year. It seems like I'm hearing about the soaring cost of something new every day. Today, I read that Medicare Part B premiums and deductible are going up about 15%. I've got about a decade to get there, but I'm planning for it in my long term FIRE and drawdown plans.

https://www.cnbc.com/2021/11/12/med...emiums-for-2022-jump-by-14point5percent-.html

 

[daylatedollarshort]

Looks like prices for any costs with labor included are going to increase and not go down any time soon, and this forum is partially to blame.

Goldman just figured out why the labor shortage will last for a long time: 60% of the missing workers retired, many for good. "Roughly 1.5 million of them were early retirements, and 1 million were normal retirements. Those two groups of retirements "likely won't reverse," meaning that, out of the five million workers Goldman estimates are still missing from the labor force, about half may not ever return." https://sports.yahoo.com/goldman-just-figured-why-labor-195246080.html

 

[GenXguy]

Looks like prices for any costs with labor included are going to increase and not go down any time soon, and this forum is partially to blame.

I don't expect prices to ever go down on most things. If inflation moderates in the years ago, it doesn't mean prices will drop, it just means they won't continue going up as quickly. But most of the current price increases due to inflation are already baked in going forward, not temporary.

 

[CaptTom]

To earlier comments about how the CPI calculation has changed over time - this site suggests that using 1970s methodology inflation is now 14%, and using 1980s methodology it is about 10%.

That looks more like what I'm feeling over the last year.

Exactly my reaction.

I'll grant that only the most extreme examples make the news, so it's easy to over-estimate what we're seeing.

But I also do some quick math whenever I look at prices. A significant number of core purchases are up 15-30% over the past several months. Even making the unlikely assumption that all the others I haven't noticed haven't increased at all, I wouldn't be surprised if "real" inflation was close to that 10-14%.

Whether it's flawed methodology, deliberate manipulation or just the fact that I'm not in anyone's target demographic, the official numbers are not consistent with what I'm seeing in the real world.

 

[Mulligan]

I agree. I am glad that you supported your statement with the link. Common sense should make Rent as part of the CPI and inflation.

On a separate and related issue. My wife owns a small business with a 5 year lease which expires in 3 months. The building owner is demanding a rent increase of 15%. This forces my wife to increase her prices to her customers.

Greed has a trickle down effect and can lead to inflation.

Good point about the trickle down, which could more of a lagging effect to hit later possibly. And CPI as another commenter mentioned seems to not be fully understood (count me in that camp), and old wives tales about it continually being passed on.
CPI is what it is. I doubt it ever was created to best measure the average Americans personal inflation, because it would be an impossible endeavor in itself.

 

[Librarian]

https://www.statista.com/chart/26006/cpi-increase-by-item-united-states/

I recently saw a similar graph & noted that things like used cars, rental cars & lodging were driving the top end of inflation rates.
Steaks & seafood are not items that those on a strict budget anyway.
Eggs up 12.6%--they run .99 (ish)/ dozen here. So most are not concerned by 1.13/dozen.
I realize that prices for individual items vary widely across the US.

But my point is that for items that most of us buy regularly, yes, prices have ticked up a bit...

Gasoline I always laugh at. It was $1.20/gallon for gas in the 1980s--which is VERY similar to today's prices factoring in long term inflation.

I look at the big picture.
The inflation is a global issue, so mostly not driven by just US issues.
Economists by & large agree that high inflation rates will not be with us for the long term.

As for 12 gallons of milk/week--well, they chose to have a large family that requires large amounts of food. It is naive to think that prices would remain stagnant at any time. So, yeah, a total click-bait story.

(on another tangent--the 1st world problems caused by supply chain disruptions is hysterical. Yes, there are occasional bare shelves. Yes, occasionally I cannot get a particular item/brand I want. But there are a PLETHORA of options to buy. NO ONE is going hungry from unavailability of food.
And heaven forbid we have to use store brand toilet paper...)

 

[jkern]

sigh.

CA Prop 218, passed in 1996, eliminated the ability of local governments to levy special fees and assessments collected on the property tax bill without voter approval. The only way you would be surprised by an inflation (or any other) fee or assessment on your property tax bill was if you did not pay any attention to elections.

How property taxes in CA are calculated is fairly straightforward and very favorable to homeowners. "California property taxes are based on the purchase price of the property. So when you buy a home, the assessed value is equal to the purchase price. From there, the assessed value increases every year according to the rate of inflation, which is the change in the California Consumer Price Index. Remember, there's a 2% cap on these increases." In deflationary years your property tax is reduced.

Despite the clarity on how a home is valued for property taxes, I am fairly certain if I contacted enough licensed assessors and let them know I felt my property assessment was too high, there would be a fair number who would be happy to take my money and deliver a lower number.

Due to props 13 and 218 CA property taxes are significantly lower than the national average, approximately 0.73% vs. 1.07%. So, for property owners anyway (and especially long term property owners), the whining about high CA taxes is significantly offset by a lower property tax.

Not really a lower property tax when a $200K house in middle American cost $1M in CA. Not only that, the additional assessments typical range from 1/4% to 3/4%.

 

[jkern]

Sigh.

Not true for Californians who recently purchased a house in California. On my tax bill, I see a line item of 1% and then the fees are added so I am paying 1.07% which is the national average.

You are not wrong because it is well known that California home owners who purchased their homes a long time ago pay less property taxes that their neighbors who recently purchased their homes. You did qualify your statement with the words “especially long term property owners” but the whining about high taxes in California is justified for some people…but not for you.

I have lived in CA my whole and I have never seen a property tax rate as low as 1.07%. I can view 9 properties in my immediate family and not one comes close to that rate. I also volunteer as a tax preparer and I have never ever once seen anything remotely close to that rate. The best I've seen is about 1.25% and I've seen as high as 2%.

 

[jkern]

^^^^^ Abuse? No one forced you to buy it.

He could be referring to the additional taxes placed on so called Cadillac Medical plans provided by your employer.

 

[GenXguy]

But my point is that for items that most of us buy regularly, yes, prices have ticked up a bit...

A LOT ore than a bit! I'm estimating 15% average increase over the last year alone as to how it affects my total expense budget including sinking funds. And that doesn't include used cars, rental cars, & lodging. Nor does it include steaks, expensive seafood, or dining out. I'm a frugal spender, but I'm getting hit hard. Homeowner's insurance went up 12% earlier this year before inflation really got much coverage in the news. Home repairs/improvements haven't gotten much more expensive due to skyrocketing costs for materials and labor. It's really hitting everything. I just mentioned soaring Medicare premiums in my last post.

 

[ivinsfan]

I agree. I am glad that you supported your statement with the link. Common sense should make Rent as part of the CPI and inflation.

On a separate and related issue. My wife owns a small business with a 5 year lease which expires in 3 months. The building owner is demanding a rent increase of 15%. This forces my wife to increase her prices to her customers.

Greed has a trickle down effect and can lead to inflation.

I hardly call a 15% increase after 5 year greed ! What did you expect the landlord to do? How much do you think the property tax on that building has gone up? Your spouse can make less money or raise prices and see if her product continues to sell.

 

[2177V]

I have lived in CA my whole and I have never seen a property tax rate as low as 1.07%. I can view 9 properties in my immediate family and not one comes close to that rate. I also volunteer as a tax preparer and I have never ever once seen anything remotely close to that rate. The best I've seen is about 1.25% and I've seen as high as 2%.

I agree with you. I was disputing JT90505 who stated: (in quote)



"Due to props 13 and 218 CA property taxes are significantly lower than the national average, approximately 0.73% vs. 1.07%. So, for property owners anyway (and especially long term property owners), the whining about high CA taxes is significantly offset by a lower property tax."


My base property tax is 1% but after the county add all the fees, special taxes, ad valorem taxes, my "total" property taxes are 1.3% which is consistent with your comment. JT90505 even highlighted in bold on something that I disagree with.

 

[2177V]

I hardly call a 15% increase after 5 year greed ! What did you expect the landlord to do? How much do you think the property tax on that building has gone up? Your spouse can make less money or raise prices and see if her product continues to sell.

Doesn't matter what you call it, it is still inflationary. As I stated previously the 15% increase is a first year rent increase of the new 5 years lease. The rent increase for the 2nd, 3rd, 4th, 5th year are 3% each. Rent for Commercial spaces do NOT remain the same during the entire 5 years. My wife has to raise her prices to pay the landlord so I would guess that millions of small business owners are doing the same. This is causing inflation.

Besides remember what Gordon Gekko said: "Greed is Good".

Greed can cause a bull market. Greed can also cause inflation.

 

[youbet]

My wife has to raise her prices to pay the landlord so I would guess that millions of small business owners are doing the same. This is causing inflation.

This is the opportunity to test demand for her product as to its elasticity! What is she expecting in terms of volume decreases due to the price increase?

 

[ivinsfan]

Doesn't matter what you call it, it is still inflationary. As I stated previously the 15% increase is a first year rent increase of the new 5 years lease. The rent increase for the 2nd, 3rd, 4th, 5th year are 3% each. Rent for Commercial spaces do NOT remain the same during the entire 5 years. My wife has to raise her prices to pay the landlord so I would guess that millions of small business owners are doing the same. This is causing inflation.

Besides remember what Gordon Gekko said: "Greed is Good".

Greed can cause a bull market. Greed can also cause inflation.

Well do you have any idea of the increase in tax burden for the landlord? I imagine most 5 year commercial leases are written this way. Would your spouse rather have a completely unstructured 2, 3 4, and 5 year price?