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

REWahoo, I see, don't change the religion. The guru's have spoken.
 
So how does one compute a personal inflation rate? Do you schedule out your expense categories line by line and apply an inflation rate to each one? Is the inflation rate for each cost category found by drilling down to find each component rate that makes up the total CPI-U? I think I recall seeing that info on some website.
 
My question is why people are willing to buy 10-year bonds yielding 3.78% when the CPI is running at 4%?

You don't have to believe the government is fudging the numbers to believe you're getting a negative return from bonds over the next few years.
 
Hamlet,
It doesn't make sense does it?
It must be because of the flight to safety (treasury notes) going on because of the huge insolvency mess that was primarily caused by the intentional under-reporting of inflation by our government.
It could be because of the huge demand coming from the fact that a treasury note is the only bond investment that is considered to be prudent by those who are afflicted by the ERF religion.

Kidding of course. I wouldn't buy it.
 
My personal CPI since I started keeping track of my expenses 9 years ago has been close to zero (in the noise). My annual expenses each year have been ...

1999 ($30,915)
2000 ($33,454)
2001 ($27,325)
2002 ($31,751)
2003 ($29,757)
2004 ($25,510) [plus 18K in veterinary bills]
2005 ($29,424) [plus 5K in veterinary bills]
2006 ($30,735)
2007 ($29,703)

I've made no significant lifestyle changes during this time. Unconsciouses adjustments, yes. Significant changes, no. Some costs have gone up (gas), some costs have stayed the same (mortgage), some costs have gone down (auto insurance dropped 15-20% from last year to this year.

For the general population, inflation is not 10-15%. Despite increases in some commodities, inflation is still relatively low. Also, keep in mind that housing costs have recently dropped. The doom and gloom media is a strong contributor to the idea of rampaging inflation. Especially at this election time, they focus on the negatives and ignore the positives.
 
rockon, I'm confused... you think the credit crunch is caused by the intentional under-reporting of inflation?
 
Shawn, that is great news, if I have that CPI-P when I retire, I will be well off. I do not know how you do it. I spend a lot more and all of my stuff goes up.

I am not saying 10-15%, but if it were 6% that would make a significant difference on TIPS and bond rates. The guy at ShadowStatistics (who may be a idiot I do not know) says inflation is around 12% if we calculate it like we did before 1990. Can he be off that far? Was everything that happened in the 70's just an illusion or this the illusion? "It's different this time", I remember something about that.

Marquette, yes to some degree I think it was. If the Fed was really watching inflation (even though it was pretty low) instead of acting like there was no inflation and that there never would be any inflation again, they would not have lowered rates to 1% for two years causing all types of subprime and leveraged buyout junk loans. Is that not possibly true?
 
cashflo2u2 said:
So how does one compute a personal inflation rate? Do you schedule out your expense categories line by line and apply an inflation rate to each one? Is the inflation rate for each cost category found by drilling down to find each component rate that makes up the total CPI-U? I think I recall seeing that info on some website.
Click to expand...

The way I would do it is the way Shawn implied -- I'd keep track of my spending over the years to determine what my actual rate of increase in overall spending has been in the past. I'd then try to guess if I thought my future would look like my past to determine my personal inflation rate.

I've been in a stable financial situation for about 13 months, and over that period of time my inflation rate has been negative, as I've mentioned on this board before. I also expect my overall rate to continue to be negative, although my planning spreadsheet uses 3%.

2Cor521
 
HWFR, I'm not really convinced it was "intentional" under-reporting. Lets just say it was sort-of-planned incompetence, I can live with that. I didn't want this to be a conspiracy theory discussion, it seems to be going that way.

Let's just say it was like when nothing was done to stop mortgage lenders from giving out those junk loans, or when Greenspan told us ARM's were the way to go at the bottom of the rate cycle, or when the stimulus package was passed giving away our own "borrowed" $150B while the economy was still doing "very well" according to the Treasury. That kind of incompetence.

Marquette, purge the word "intentional" on that under-reporting. I can live with irresponsible, or incompetent, or "not knowing what the affects would be of changing how they calculated it", I decided intentional is over the line.
 
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RockOn said:
HWFR, I'm not really convinced it was "intentional" under-reporting. Lets just say it was sort-of-planned incompetence, I can live with that. I didn't want this to be a conspiracy theory discussion, it seems to be going that way.

Let's just say it was like when nothing was done to stop mortgage lenders from giving out those junk loans, or when Greenspan told us ARM's were the way to go at the bottom of the rate cycle, or when the stimulus package was passed giving away our own "borrowed" $150B while the economy was still doing "very well" according to the Treasury. That kind of incompetence.
Click to expand...

You seem to be meandering a bit...first you post info. about 12% inflation and then try to make it a little easier to swallow with discussion of 6. There are entire threads on inflation and I am still not convinced that you are making a new ground breaking argument...
 
Marquette said:
rockon, I'm confused... you think the credit crunch is caused by the intentional under-reporting of inflation?
Click to expand...

Might go like this:

Gvrmt understates inflation justifying foolish rate-cutting.
Low rates stimulate the great unwashed to buy lots of crap, including houses, which they can't really afford. House as ATM.
Even though Ben is throwing money at them, bankers belatedly acknowledge many loans will never be paid off and turn off the tap.
Bernanke, terrified of displeasing Crammer, pleads with banks to make loans on houses overvalued by 300%.
Bankers refuse. Bernanke cuts rates to 50 basis points by May '08.
Bankers realize something wicked this way comes and really clam up. They got lotsa bad loans on the books and are frantically trying to hide 'em.
Credit crunches.
 
cashflo2u2 said:
So how does one compute a personal inflation rate? Do you schedule out your expense categories line by line and apply an inflation rate to each one? Is the inflation rate for each cost category found by drilling down to find each component rate that makes up the total CPI-U? I think I recall seeing that info on some website.
Click to expand...

Keep detailed records of what you spend. Compare the increase every year. We happen to use Quicken but a simple spreadsheet would work too. Details are dependent on the user.
 
LATE TO THE PARTY! I have been accused of tracking everything dealing with personal expenses. But this personal CPI has me confused. If one tracks expenses over time and calculates a personal CPI based on the increases or decreases (deflation) should not the increase or decrease in income be factored in? Seems if expenses go up 10% but income increases 10% your personal CPI would be 0. Maybe I am missing something, but using this method my personal CPI has been negative the past 30 years, i.e, increases in expenses have been more than offset by increases in income (deflation).
 
you are probley the only one i know that had their earned income rise the last 2 years. besides unless your investments and savings rose too your income may be only a small amount. everything else will have less purchasing power . in good years our investments out perform our income

while you may be staying even on your outlay right now its important your nest egg does the same. even at the 2-3% range overall prices will be doubling every 20 years. we sure know the things we use daily are up way more than 2-3%. even earning 7 or 8% right now may leave some of us behind last year. just having a pay check rise 3% is not the end of the computation. between rent, fuel , utilities and health insurance im up around 8%.. only thing that went down is my auto insurance. i can think of nothing else off hand
 
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Notmuchlonger said:
Keep detailed records of what you spend. Compare the increase every year.
Click to expand...

Then in 2006 (after Katrina), my personal inflation rate went up roughly 33%. In 2007, it went back down about 14%. So, my personal inflation rate has been highly affected by the local, not national, economy, and was negative last year.

My salary in 2006 went up only 2.8% compared with 2005, though by now (mostly due to a substantial promotion) it is 25% more than in 2005.

These numbers don't do much for me. Basically, I earn as much as I am able to earn and save as I go along, and do the best I can. I think we all do that. Local inflation has been wicked, and the federal government yearly salary increases are not considered to be cost of living increases so we have not received any extra for local inflation. But you know how life is - - you just bumble along and bad things and good things happen. My promotion has allowed me to continue saving at a good rate, and all has worked out well in the end.

In ER I plan to relocate to a quiet midwestern town with a stable, thriving economy. How novel.
 
RockOn said:
The tinfoil comments, does that mean you don't want to hear it? I'm not sure how to take it but it comes off as being rude.

Independent, I haven't said it's been 6% for 10 years, it might be 6% for 2 or 3 years though. Factor that in with the housing ATM and I think it could be that people are getting behind that much. If BLS would have calculated inflation was 2% instead of zero (or negative) in 2002, the Fed wouldn't have lowered the fed rate to 1% and we'd be better off.
Click to expand...

We may be mis-communicating. I took your original comment to be that you thought the annual CPI as reported by the BLS has consistently been 3% below the "real" CPI. I said that if that happens for 10 years, actual average prices at the end of 10 years will be about 33% higher than the average prices that the BLS computes.

Maybe you're saying that the compound "error" over 10 years is 3%, so today's average prices are 3% higher than the BLS says. (Maybe you're thinking there was one unusual year when their method didn't work well.) I wouldn't debate that. I don't think any calculation like this can have that level of accuracy.

Of course, if it takes ten years to get a total drift of 3%, then I don't think there would be any big macro effect.


BTW, I did follow the "shadowstatistics" link. He makes an issue of the "geometric mean" which is designed to reflect substitution. This BLS report says that they compared the two methods in the early 90's and determined that the geometric method produced annual numbers that were 0.34% lower. Experimental CPI Using Geometric Means (CPI-U-XG)
 
maddythebeagle said:
You seem to be meandering a bit...first you post info. about 12% inflation and then try to make it a little easier to swallow with discussion of 6. There are entire threads on inflation and I am still not convinced that you are making a new ground breaking argument...
Click to expand...

If you read the entire thread I have never said 12% so that is not fair, I did point out someone who thinks it is 12%. I didn't know a new thread had to be new and ground breaking so sorry about that. My intent was to discuss how under-reporting of inflation might be causing a temporary overvaluation of TIPS, bonds, and maybe stocks right now. I keep centering on TIPS because that is where the rate of inflation is most obvious. It might make sense to either have a portion of a portfolio in an inflation hedge (for those that have none) or possibly increase the inflation hedge % if inflation is being under-reported (by even 2 or 3%), that is my point.

On the conspiracy theory, we can not know for sure if it was a scheme. I do think it is "possible" that in the 90's Clinton called the Department of Labor (BLS) and said "do what you can on keep a lid on inflation I want to say I balanced the budget and future SS increases are killing me", or for Bush to have said something similar to fund the war. Isn't the Secretary of Labor a politician hired by the Pres? It does seem strange that it took to the 90's before somebody came up with idea that we will all started eating chicken when steak prices go up. Maybe the person that came up with that got a big promotion. ;)

Independent, I am saying the real rate could be 3% low per year, not 3% in 10 year. I wasn't saying 6% per year for 10 years running as I thought you were using in your 73% example. I suppose you think being 3% high per year is way too much, I may be off at 3%, would you buy 1.5%? I think there are lots of people who would believe 3%. On the ShadowStatistics, I have no idea if he is correct. I doubt it. However, when he gets 12% a year and says he is calculating it like it would have been done before 1990, if he were to be correct, that would be amazing. It would mean we didn't really have 10% inflation in the 70's (because we were dumb then and did not know how to calculate (or fudge) it) and everything that was done then to stop it was misguided. Wasn't chicken available in 1978?
 
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If you wanna know what the real general inflation rate is for a "regular" retiree, sidle up to someone thats been taking social security for 10-20 years and ask them how much buying power they've lost in that time period.

Then add in your increased medical insurance costs that non medicare people have to ante up.

My dad seems to think his social security payments have lost around 30% of their buying power in the 15 years he's been retired. While he's had COLA adjustments based on the CPI, the extra medicare seems to eat that up.

Losing a percent or two may be non fatal when you retire in your 60's or 70's and only have 15 or 20 years to experience it. I'm thinking its a little worse if you retire in your 40's or 50's and get to enjoy that for 40 years.

Interesting watching how "hedonics" is striking areas like the fast food industry. I saw an article a little ways back about how Quizno's came out with a line of $2 sandwiches. Unfortunately it didnt help their business much because their customers who had been paying $4 just started buying the $2 versions. Which the company was quoted as saying are made with cheaper cuts of meat that they "dress up a little on the sandwich so you dont notice".

Of course, when you hit rock bottom, theres nowhere to go but raise prices. Anyone think that product quality and customer service have a lot more cost reduction left in them?
 
RockOn said:
On the conspiracy theory, we can not know for sure if it was a scheme. I do not think it is impossible that in the 90's Clinton called the Department of Labor (BLS) and said "do what you can on keep a lid on inflation I want to say I balanced the budget and future SS increases are killing me", or for Bush to have said something similar to fund the war. Isn't the Secretary of Labor a politician hired by the Pres? It does seem strange that it took to the 90's before somebody came up with idea that we will all started eating chicken when steak prices go up. Maybe the person that came up with that got a big promotion. ;)

Independent, I am saying it could be 3% per year, not 3% in 10 year. I wasn't saying 10% per year as I thought you were using in your 73% example. I suppose you think being 3% high per year is way too much, I may be wrong but I think there are lots of people who would believe that. On the ShadowStatistics, I have no idea if he is correct. I doubt it. However, when he gets 12% a year and says he is calculating it like it would have been done before 1990, if he were to be correct, that would be amazing. It would mean we didn't really have 10% inflation in the 70's (because we were dumb then and did not know how to calculate (or fudge) it) and everything that was done then to stop it was misguided.
Click to expand...

We should at least agree on the math. If the BLS said that prices went up at exactly 2.7% per year, then the compound increase over 10 years is 30.5%. If someone else says that the actual increase was 3.0% higher, that would be 5.7% per year. That compounds to 74.1% over a ten year period.

If you divide 1.741 by 1.305, you get 1.33 - that means that average prices at the end of the 10 year period are 33% higher than the BLS says.
If you divide 1.305 by 1.741, you get 0.75 - that says that someone whose income grew exactly as fast as the BLS CPI would have to cut his actual spending by 25% to buy the same stuff.

Regarding the politics, in the early 90's economists thought that the BLS methods overstated inflation. One well-reported estimate was 1.1% per year. I think most other estimates were lower. There was talk of explicitly subtracting some amount from the BLS CPI for use with social security. That didn't happen.

However, the BLS has changed their methods, and at least some of the changes are bound to reduce the CPI they report (i.e. the geometric mean which represents substitution). Their claim, of course, is that they are always trying to get more accurate. Other people will say it's all political. Regardless of the motivation, the geometric mean by itself seems to be moving the rate by significantly less than the 1.1%.
 
I agree with your math, we were not on the same page. So prices in 10 years went up 30.7% according to BLS and if they were off 3% per year prices went up 74.1%. That does seem exessive doesn't it? It's hard to remember prices 10 year ago, some things did go up 74%, but probably not on average. I am sure my health insurance went up more than 74%, gas more than 74%, the price of a house (I know that doesn't count) more than 74%, but not everything, ok, I'll buy that. Let's say that inflation might be under-reported 1.5% now, can you go there? It still makes TIPS 25% overpriced and puts GDP below zero.

BTW, so ShadowStatistics isn't calculating inflation like it was done before 1990? Do you have solid proof for that? I understand the geometrics, but he could be eliminating the chicken verses steak substitution (or value added adjustments) going on, I do not see how geometrics handles that.

Edit: I missed cute fuzzy bunny's comments, she/he/it says her/his/it's father lost 30% purchasing power in 15 years after getting his SS which was adjusted to inflation. That seems to confirm the 3% I was talking about. Maybe I should have said it could be off about 2% or 2.25%, how about that?
 
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