Inflation: Official Rate vs. Observed Rate

[CaptTom]

I read this click-bait article in MW, which referenced a click-bait article on CNN. I know. I shouldn't let click bait suck me in. But it got me thinking.


To summarize, CNN's fluff piece was about inflation. They interviewed a couple who complained about a huge (if unsubstantiated) increase in milk prices. Their anecdotal experience with inflation was vastly worse than the official inflation rate "of around 5% over the past year."


Of course there was some sensationalism involved, but my experience is closer to theirs than the official rate. I do a bit of mental arithmetic when I'm in a store lately and it seems most things I buy or have bought are up 20%-40%. I'm not even looking at things like vehicles or houses, or products experiencing temporary shortages.


Is there a more accurate number somewhere, or do we just have to wait for the next annual update? It seems to me this is the worst round of inflation I can recall, at least if it continues at this rate. Everything went up so quickly!

 

[RetiredHappy]

Official inflation measurement is always based on a basket of goods - you need to dig into the details to know what are in the basket. Individuals have their own baskets of goods. Your inflation rate is very likely to be completely different from mine.

 

[Aerides]

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.

 

[OldShooter]

I think the only way to view this is that no one knows how to measure any inflation rate, so there can be no "accurate" number. All purchasers' market baskets are different and betterments have different values for different purchasers. Then there are the carve-outs like "core."

So what to do? "What, me worry?" The only rates that matter are the ones that are used to adjust things that impact us directly, like TIPS yield, SS escalation, etc. And we have no control over them, so no need for angst.

Personal inflation rate is, arguably, important, but I don't think any of us could figure out what ours is. Worry anyway? I don't know. We don't.

 

[Markola]

We’ve been in an historic deflationary period and have come to think it’s normal. Lately, we’re experiencing more historical inflation and we’re shocked, SHOCKED!

 

[CardsFan]

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.

How about a link to confirm this? My recollection is there was a very short period of time (days) when oil futures went stupid, even negative as I recall, but to say oil was $1/barrel 18 months ago is stretching the truth pretty greatly.

 

[Montecfo]

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.

Gasoline IS a component of the CPI. So it is "in inflation" to use your words.

You make a good point otherwise about official CPI and the DOW. Both measured consistently (adjustments to CPI very rare, Dow less so but not common). Anecdotes and fuzzy math may seem to contradict one way or another.

 

[Montecfo]

We’ve been in an historic deflationary period and have come to think it’s normal. Lately, we’re experiencing more historical inflation and we’re shocked, SHOCKED!

When are you talking about that we had "a historic deflationary period"?

To your point, some items have risen a lot. Most have not . This will pass. No reason to panic.

 

[Aerides]

Oh odd for some reason I thought gas wasn't in it. Either way, the price is so wonky, and far from a linear progression, that it's very hard to go "aha gas is up therefore inflation" (while I do of course realize the ripple effect ie, things take more gas money to get to the store shelf).

 

[Aerides]

How about a link to confirm this? My recollection is there was a very short period of time (days) when oil futures went stupid, even negative as I recall, but to say oil was $1/barrel 18 months ago is stretching the truth pretty greatly.

Yes it was the futures price, and it was brief. But I meant it as an example of how crazy oil and gas prices are, almost like their own little ecosystem.

 

[GenXguy]

This was just discussed in another thread where I said the government numbers are much lower than reality.

My homeowner's insurance went up 12% earlier this year, some grocery items are up about 40%, others are not up as much, maybe 15%.

Of course, gas is way up. Natural gas bills are expected to be 30% higher this winter, and that may be underestimated.

I would estimate true inflation for me to be around 10 to 15%.

I'm already pretty frugal and switched from steak to lower cost food years ago, so I can't keep playing the government numbers game to say that it lowers inflation by buying less expensive cuts of meat. Already been there and done that a long time ago.

 

[OldShooter]

When are you talking about that we had "a historic deflationary period"? ...

Yeah. I think I missed that memo, too.

 

[CardsFan]

I think part of the hidden inflation is there are fewer "sale prices" and the ones out there are higher than they used to be, but I have no data to back that up.

What I HAVE noticed is the price of beef. A year ago you could by a whole tenderloin at Sam's for about $12/lb, and often on sale for $10/lb. Now they are $17/lb (these are choice, not prime). BUT, I can get a smaller, ungraded, one from Aldi's for under $10/lb. (but this used to be $8/lb)

But, I did score a 16lb turkey at Aldi's for $0.87/lb. But I am pretty sure we paid about $0.69/lb last year.

And, we can argue if gas has its "own little ecosystem", but locally prices are up from $1.89/gallon to over $3/gallon.

We all have our own inflation rate. Gas does not hit us hard. Even with travelling we don't put 15,000 miles total on 2 cars in a year. But I have friends that put 30k (each) a year on the 2 cars they own. They are getting hit hard.

 

[Gumby]

We drive very little these days and therefore are also not much affected by gasoline prices. As far as petroleum related products, we are most affected by the price of natural gas, since we use it for home heating, and all the non-nuclear power electric generation stations in CT are natural gas fired. My personal hedge on that is to own shares in a natural gas royalty trust. The distributions usually cover our natural gas and electric bill for a year. If the price of the product goes up, our distributions go up proportionately.

 

[CaptTom]

Good discussion, thanks!

Without hard numbers to back me up, my sense is that every time (since 1974) that fuel prices spiked, it seems a round of inflation followed. Whether it's cause and effect or just a coincidence, I can't prove. And as was pointed out, the gasoline price spike is at least partly a recovery from the pandemic price drop.

But this feels different from any other round of inflation I've lived through. EVERYthing is up, and up sharply, over a very short time. Discounting the pandemic "dip" it seems to me there was a lot of pent-up demand for price hikes. Once one seller started, everyone just piled on. I think a lot of retailers simply know everyone expects price increases now so they're taking advantage of that. We had the same discussion at an organization I'm on the board of. We haven't raised our rates in years, now is the time! Maybe there's some FOMO in there, too.

 

[razztazz]

I've been saying something like this for many months now. There is no actual inflation. What's changed? Nothing. And no, the 600 bucks people got and some extremely short term perturbations in supply aren't going to cause inflation. Government debt? ha ha. Since Andrew Jackson. Big time since Nixon. Bigger big time since Reagan. Not causing inflation.

The story was simply circulated without any clear amplifying data that "inflation was coming." So they wait a few months then say 'Ok let's just jack up prices. If people complain they just say "Hey man it's not me it's that inflation they've been talking about." Nothing has changed except the prices they're asking.

Good discussion, thanks!

Without hard numbers to back me up, my sense is that every time (since 1974) that fuel prices spiked, it seems a round of inflation followed. Whether it's cause and effect or just a coincidence, I can't prove. And as was pointed out, the gasoline price spike is at least partly a recovery from the pandemic price drop.

But this feels different from any other round of inflation I've lived through. EVERYthing is up, and up sharply, over a very short time. Discounting the pandemic "dip" it seems to me there was a lot of pent-up demand for price hikes. Once one seller started, everyone just piled on. I think a lot of retailers simply know everyone expects price increases now so they're taking advantage of that. We had the same discussion at an organization I'm on the board of. We haven't raised our rates in years, now is the time! Maybe there's some FOMO in there, too.

 

[youbet]

We’ve been in an historic deflationary period and have come to think it’s normal. Lately, we’re experiencing more historical inflation and we’re shocked, SHOCKED!

I don't think so. There has been no deflation over the past several years. Where did you see where there was?

 

[CaptTom]

I've been saying something like this for many months now. There is no actual inflation. What's changed? Nothing...



...Nothing has changed except the prices they're asking.

That's kinda the definition of inflation. But I get what you mean.


I think the big difference this time is the number of factors pushing prices up.


Yes, fuel is one. And sellers feeling they can finally get away with it is another.


But there are new issues feeding inflation, too. All the shortages of materials and products. Shipping delays. Labor shortages. Each of these impacts every link in the supply chain. I'm hoping this is just a blip, but unless all these factors are suddenly eased, I don't see any reason the sharp price increases can't continue.

 

[Chuckanut]

I'm hoping this is just a blip, but unless all these factors are suddenly eased, I don't see any reason the sharp price increases can't continue.

You may be right.

But, I have read that when price increases cross the 5% line people start looking for cheaper substitutes. Or simply delay the purchase of more costly goods and services. I certainly do. Price is a function of supply and demand. People will do their best to reduce demand if price increases are too high.

I bought my first hybrid car in 2012 fully expecting gasoline to go to near $4 a gallon within 4-5 years. (I normally keep a car 10+ years.) I was off by a few years based upon prices in my area. That delayed the pay-back date for the hybrid by about 2-3 years. Today, I [-]laugh at gas prices[/-] am less concerned about gas prices since my vehicle averages about 38 mpg.

 

[GravitySucks]

Gas is less than ten years ago, but up from last few years.
Meat is up.
Cleaning products and paper goods went up at the start of Covid.
Wine went up in 2018.
DD bought a house that is 25% over what it would have been in the Before Times.
I'm putting off a new car and new bicycle and camper van purchase as I think these are temporary highs.
Everything else is about the same for me.

The ones I really feel are the loss leaders on chicken thighs and pork shoulder. For over 10 years I was buying family pack chicken drumstick or thighs and bone in pork shoulders for 99 cents. The chicken is are $1.19 now. The pork is $1.90 now.

Rice, beans, and beer haven't gone up, so I'll survive.

 

[jkern]

My personal inflation rate has almost never matched the official CPI and has been higher most of the time.

Some 50 years ago I use to compare inflation with wages by using the local minimum wage vs the local bridge toll (San Mateo Bridge over the bay). If I remember correctly in 1973 it was $1.65 per hour compared to $0.40 to cross the bridge. One hour of work got you across the bridge 4.125 times. Today it's $15 per hour and $6 to cross. Now one hour of work gets you across the bridge 2.5 times.

 

[BeachOrCity]

There is a solid reason why inflation as reported is lower than inflation as experienced:
#1. Housing. In the 1970s housing was measured as housing prices. Now it is mostly measured as what a homeowner "thinks" their house they own would rent for. Its an absurd measurement as how many people who own, really know what rents are? So housing is way underreported, and also lagging.
#2. Substitution of goods. They used to always measure the same basket of goods. Now if Beef is higher, they substitute chicken which did not go up. Voila more inflation disappears.
#3. They discount prices based on new technology. A new iPhone is pretty much $700 bucks and has been for years. But by their measure the price goes down every year because each newer phone is better than the last.

So you have it folks. Everyone is being manipulated by the official numbers. Many know all this, but are cohorts with the Gov't on playing this game to their own financial benefit.

Hope this was helpful.

 

[razztazz]

That's kinda the definition of inflation. But I get what you mean.

Just for clarification that's not how I meant it. Inflation as people speak of it is "caused by" something. I was referring to those who can simply jacking up prices. That's not an economic reaction to an economic circumstance. It's a decision to jack up prices in the absence of anything unusual requiring it.
All the other things being cited... just don't have the mojo to cause any kind of systemic, ongoing inflationary environment. In fact they happen to some extent all the time. Shortage this & that. The weather. Prices go up and down but nobody is sweating "inflation." Now, of course, it's inflation-in-a-box.

Was talking to my bank yesterday. They asked if I had any questions. I asked how the hell is inflation so bad SS needed a 6% increase but bank accounts still aren't paying any interest? She said they expect interest rates to go up in about a year if the inflation continues.

That's kinda the definition of inflation. But I get what you mean.

I think the big difference this time is the number of factors pushing prices up.

Yes, fuel is one. And sellers feeling they can finally get away with it is another.

But there are new issues feeding inflation, too. All the shortages of materials and products. Shipping delays. Labor shortages. Each of these impacts every link in the supply chain. I'm hoping this is just a blip, but unless all these factors are suddenly eased, I don't see any reason the sharp price increases can't continue.

 

[marko]

Here's one reference point:
I've been doing my mom's (age 92) grocery shopping for her for about 2 years now. She buys the same things every single week with just a few variations.

The tab usually comes to between $93 and $104. Every week. Same grocery store.

Over the past 3 or 4 weeks it's been up and now running about $125 and $132 or so.

 

[Markola]

I don't think so. There has been no deflation over the past several years. Where did you see where there was?

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.