Is inflation really 3%, if not......

[nepo]

I don't know about you, but I think most people would say they have a higher standard of living than X years in the past.

"... most people..."

Besides income and expenses, you have borrowing. So, are you better off because you have more things? How's your net worth? Going down? Going up?

That's really what matters. Since the easy credit is going away then having more things becomes elusive. Paying the debts can be a very long process. Is that the standard of living?

 

[RockOn]

"

If you want to be a bond investor, you should first learn how to determine bond yields.
Start with Bloomberg or WSJ:
Bloomberg.com: Rates & Bonds
The 20-year today is yielding CPI+1.97%."



I used TIPS "funds" because it was easy and because I would most likely own "funds" in a tax sheltered account. I know Morningstar would not be showing the actual yield if bought today, it would be based on last years yield payments. If I were to actually want to buy actual bonds, I would figure it out and go to Treasury Direct.

I can find quotes for the 1.97% but do not really see what the CPI part is for TIPS on a daily basis. Please explain to me where I can get that. So what is CPI+1.97% on 2/19/08? If it is not 4.1+1.97=6.07%, please explain why?

P.S. Please and Thank You

One more P.S.....Thanks Rocket Squirrel, I was about to cry

 

[twaddle]

I can find quotes for the 1.97% but do not really see what the CPI part is for TIPS on a daily basis. Please explain to me where I can get that. So what is CPI+1.97% on 2/19/08? If it is not 4.1+1.97=6.07%, please explain why?

TIPS don't pay out daily. They pay every 6 months. The principal is adjusted by whatever the CPI change is over the period.

If you just want to see "6%" printed someplace, here you go:

ETFConnect - Fund Quick Facts - iShares Lehman TIPS Bond Fund - TIP

That shows that the annualized payout for the TIP ETF is 6.26% YTD. But I'll caution you that the number is meaningless.

Funds try to pay out the inflation adjustment, while bonds adjust the principal. So the funds have to play some games to get the distribution just right, and that means that the YTD distribution is not very predictive of forward payouts. The yield will vary with the change in the CPI, as it should.

 

[Nords]

127 posts and no one has brought up the Wal-Mart Effect?!? That link searches inside the book for the term "BLS".

Here's another summary of the issue:

Hausman (2003) discusses four sources of bias in the present calculation of the CPI. A pure price index based approach of surveying prices as done by the BLS cannot succeed in solving the problems of bias. We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. We demonstrate the use of scanner data that permits implementation of techniques that allow the problem to be solved.
In contrast, the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out Wal-Mart's lower prices. We find that a more appropriate approach to the analysis is to let the choice to shop at Wal-Mart be considered as a new good to consumers when Wal-Mart enters a geographic market. This approach leads to a continuously updated expenditure weighted average price calculation.
We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.

So no one has to buy TIPS or bonds, we just have to shop at Wal-Mart...

 

[twaddle]

FWIW, there are multiple approaches to calculating inflation that don't involve a "basket of goods." I've already mentioned the GDP deflator, but there's also the PCE deflator.

Bottom-line: I've never seen an objective metric that indicates that the CPI understates inflation.

 

[Marquette]

I think the BLS says it best:

Is the Consumer Price Index (CPI) the best measure of inflation?

The "best" measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today's prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period. It is also the best measure to use to translate retail sales and hourly or weekly earnings into real or inflation-free dollars.

 

[RockOn]

TIPS don't pay out daily. They pay every 6 months. The principal is adjusted by whatever the CPI change is over the period.

If you just want to see "6%" printed someplace, here you go:

ETFConnect - Fund Quick Facts - iShares Lehman TIPS Bond Fund - TIP

That shows that the annualized payout for the TIP ETF is 6.26% YTD. But I'll caution you that the number is meaningless.

Funds try to pay out the inflation adjustment, while bonds adjust the principal. So the funds have to play some games to get the distribution just right, and that means that the YTD distribution is not very predictive of forward payouts. The yield will vary with the change in the CPI, as it should.

Thanks, that makes sense. Just to check if I got it, if I buy an TIP bond at an auction today (assuming there was one) my current yield would be 4.1% (in added principal) +1.97 (of bond yield) or 6.07%. (Assuming CPI-U remains constant at 4.1% for the year). Correct?

So the people who bought the TIPS at a yield of 3.5% awhile ago would be getting 7.6%?

 

[twaddle]

Yes, that's pretty much how it works. Just one more complicating caveat. The way the market usually looks at higher coupon bonds is to view them as having the current market yield and adjusting the price of the bond to reflect that yield.

For example, a new issue 20-year TIPS with a 2% coupon would be priced at 100. And an older bond with a 3.625% real coupon maturing in 20 years would be quoted at the same 2% yield, but at a price of 127. The two ways of looking at them are equivalent.

 

[RockOn]

Thanks. I understand how bonds price to equivalent yields, just never really thought about how TIPS pay the CPI part. If TIPS would ever get back to a 3.5% (I might win the lottery too) they'd be interesting regardless of the fact the USA CPI is fudged. I can't stop!

I like Marquette's idea that CPI-P is really the best measure. I'm going to do some figuring in that area and see what I really think it will be in a few years. That idea was helpful. Hopefully my CPI-P is 2% less than the 2 to 3% fudged CPI-U.

 

[cute fuzzy bunny]

I think the BLS says it best:

They do make the best claims.

Specifically:

Does the CPI measure my experience with price change?

Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the U and W populations on the experience of the relevant average household, not on any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.

and

Is the CPI a cost-of-living index?

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living.

 

[RockOn]

Marquette, here is my CPI-P, can you help me please

I pulled these categories out of my multi-year projections, easier than I thought, this is what I'll be looking at in about 6 or 7 years, it's worse now because I have one in college (14% increase last year) and 1 about to go:

Catagories:
Property Tax
Property Insurance
Home maintenance
Utilities, gas, elec, phone, cell, internet, CTV
Car Insurance
Health insurance
Food
Clothes
Entertainment
Travel
Auto expenses
Presents/Holidays
Charity
Income tax
Keeping my spouse and my two young adult children happy

I'm screwed CPI-U plus for me. They almost all look like losers.

Oops forgot a big one, Medical/Dental bills that are not covered by insurance. Do you know how much 1 dental implant and crown costs and that it is not covered at all?

 

[RockOn]

Thursday Outlook: The Inflation Con Game - Seeking Alpha

I couldn't resist. David Fry is not my brother.

I wish someone could verify the Williams claims, if he is correct, then either there was little inflation in the 70's and the Nixon Price Controls, the Paul Volker pain, and treasury rates at 12% should not of happened and the stock market should not have suffered for 12 years; or else TIPS should be paying much more than 6% right now. Inflation is inflation, one cannot just redefine it! "This time is different" once again!

 

[honobob]

The REAL rate in Honolulu

Honolulu inflation rate hit 4.8% in '07 - Pacific Business News (Honolulu):

 

[barbarus]

Wage growth over the last 25 years was a bit less than 5%/year.

Do you think that number is also manipulated?

 

[spazz]

how would it be possible for us to have a higher standard of living if prices went up faster than wages?


Don't forget increases in both human (education) physical capital (infrastucture), technology / innovation, and a higher labour force participation rate (more working peeps in the country -15 to 65) all contribute to a higher GDP/cap for the U.S

 

[RockOn]

Quote {how would it be possible for us to have a higher standard of living if prices went up faster than wages?}

More simple answers to that question, the average Americans standard of living has not been rising lately (let's take a poll of working Americans or retirees and find out); and, it's called debt.