Inflation: Official Rate vs. Observed Rate

[Gumby]

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?

To my mind, an important question is whether this is a net lease or not. If it is not a triple net lease, then the things that are excluded (property tax, property insurance and/or maintenance) need to be accounted for in determining whether the landlord is gouging his tenant. If it is a net lease, then the tenant will pay the extra costs that are included.
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[RetiredHappy]

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%.

The home which I bought in 1999 had property tax that was very close to 1%. It was in an "old money" well established neighborhood. No Mello-Roos. It was fairly painful to sell the home when we bought another home and gave up the low property tax. The new home which I bought was close to 2% in property tax with Mello-Roos added in.

 

[2177V]

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?

My wife is 20 years younger than me but she is a lot smarter than me in business since I am “only” a professional engineer. I have retired and I am now a house husband. She paused the price increase for now and let her competition raise their prices first. She decided to take a loss at first….but this also means her volume should increase. When the public is used to inflation, only then will she raise prices. Since she did not raise prices initially this should translate to a new and larger customer base. She also gather intelligence information from her competition which gives her a competitive edge. The source of her intelligence information is close friends of hers who works for her competition. I characterize her as a shrewd business woman. She understands inflation is happening but in business…timing and her competition are important factors.

 

[Running_Man]

Is this not correct?

One economic tool which has stood the test of time is the shelter component of the Consumer Price Index (CPI). Provided by the U.S. Bureau of Labor Statistics (BLS), the shelter index is a measure of the costs associated with housing, not including investments and upgrades. It’s a major component of CPI — making up 32.8% of total CPI — and has been included since its inception in 1913.

The two main components of the shelter index are the owners’ equivalent rent of primary residence (23.8% of CPI) and rent of primary residence (5.9% of CPI). The cost of shelter for renter-occupied housing is rent, while owners’ equivalent rent measures homeowners’ expected rent if they were renting their homes in the current market. The majority of the rest of the shelter index is made up of lodging away from home expenditures, such as housing at school and hotels.

https://arbor.com/blog/how-does-rent-factor-into-the-consumer-price-index-cpi/

Yes technically that is correct, although actual rent is only 16% of the rent component of the CPI and owners equivalent rent, which is literaly asking people who are not renting their home what rent would be if they charged it, the most inane measure of inflation I ever heard when rents of homes and apartments are posted everywhere in America and readily available. It was changed in 1983 just after the last time inflation registered over 6 percent in America. Also rents are only updated twice a year, because you know they rarely change - per the Bureau. So in most CPI reporting no rent change calculation is included, no matter what is actually happening.

The lunacy of the calculation is that if rent were to be up 10 percent inflation would be effected by .5%, when the Bureau decides to include it, despite the fact that 40% of all Americans rent their housing and the rent percentage is increasing not decreasing. Think about this, rent is usually up to about 30 percent of the take home pay of the renter to be approved, yet if the rent went up 300% to take nearly all of the income of the renter the CPI would increase 15%. So yes rent is TECHNICALLY included in CPI but not really.

 

[daylatedollarshort]

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%.

My property tax rate in the Bay Area is .3% (rounded up - it is actually a bit less). Some of our older neighbors are paying .07%. They bought their houses years ago when home prices were under $50K. It must depend on the neighborhood.

 

[Mulligan]

Yes technically that is correct, although actual rent is only 16% of the rent component of the CPI and owners equivalent rent, which is literaly asking people who are not renting their home what rent would be if they charged it, the most inane measure of inflation I ever heard when rents of homes and apartments are posted everywhere in America and readily available. It was changed in 1983 just after the last time inflation registered over 6 percent in America. Also rents are only updated twice a year, because you know they rarely change - per the Bureau. So in most CPI reporting no rent change calculation is included, no matter what is actually happening.

The lunacy of the calculation is that if rent were to be up 10 percent inflation would be effected by .5%, when the Bureau decides to include it, despite the fact that 40% of all Americans rent their housing and the rent percentage is increasing not decreasing. Think about this, rent is usually up to about 30 percent of the take home pay of the renter to be approved, yet if the rent went up 300% to take nearly all of the income of the renter the CPI would increase 15%. So yes rent is TECHNICALLY included in CPI but not really.

Yes, but in its various forms and whatever measurements it is be it good or bad, its still a third of the CPI. So its being measured and inputed into CPI being what it is. I certainly dont know the reasoning behind it. But it really cant measure successfully for any individual situation.
I dont rent and my mortgage is fixed, but whatever value they assign to it is important to me as I have a COLA pension and its determined by CPI.

 

[tb001]

My property tax rate in the Bay Area is .3% (rounded up - it is actually a bit less). Some of our older neighbors are paying .07%. They bought their houses years ago when home prices were under $50K. It must depend on the neighborhood.

I think it depends on how long you’ve owned your home. And the appreciation, so neighborhood as well. We pay 0.77%. We bought at a dip in 2011, then used the over 55 rule to sell and buy equivalent property while maintaining our lower tax basis. More appreciation (though not as much as if we had stayed in the Bay Area) and now our tax rate is quite low.

Given the capped increases in property taxes, I’ve been looking at it, along with our mortgage, as a bit of a hedge against inflation. Property taxes and our mortgage make up ~15-20% of our spend.

We’re seeing large increases in household services and groceries. We gave our housekeepers a 30% raise and will likely end up doing much more than that for the landscapers. Our HOA fees are expected to increase about 10%.

Groceries here are also increasing a lot. Meat seems to be the big one. We usually buy at a big warehouse supply store. Chicken thighs have increased 30%. Similar increases for beef. Fish up 10%. When it’s one or two items, it gets lost, but those across the board price increases make a decent dent in our budget.

We’ve put off purchases for the home (furniture, etc…) because between wait times and price increases it was hard to see the value. One set of patio furniture we were looking at increase prices 6% and then another 10% in the weeks we were trying to decide. Delivery estimates last July were for June 2022.

 

[daylatedollarshort]

I think it depends on how long you’ve owned your home. And the appreciation, so neighborhood as well. We pay 0.77%. We bought at a dip in 2011, then used the over 55 rule to sell and buy equivalent property while maintaining our lower tax basis. More appreciation (though not as much as if we had stayed in the Bay Area) and now our tax rate is quite low.

Given the capped increases in property taxes, I’ve been looking at it, along with our mortgage, as a bit of a hedge against inflation. Property taxes and our mortgage make up ~15-20% of our spend.

We’re seeing large increases in household services and groceries. We gave our housekeepers a 30% raise and will likely end up doing much more than that for the landscapers. Our HOA fees are expected to increase about 10%.

Groceries here are also increasing a lot. Meat seems to be the big one. We usually buy at a big warehouse supply store. Chicken thighs have increased 30%. Similar increases for beef. Fish up 10%. When it’s one or two items, it gets lost, but those across the board price increases make a decent dent in our budget.

We’ve put off purchases for the home (furniture, etc…) because between wait times and price increases it was hard to see the value. One set of patio furniture we were looking at increase prices 6% and then another 10% in the weeks we were trying to decide. Delivery estimates last July were for June 2022.

We have pretty low overhead so haven't seen a big increase in our expenses, at least so far. We do our own yardwork and housework. I have a robotic mopper and a few robotic vacuums. I don't mind doing laundry and like to cook, and DH helps with the rest. My last patio table looked pretty new and came from a Freecycle type site and we did our own pick up and delivery. Our mortgage went down when we refinanced last year. Property taxes don't go up much due to Prop 13. There are still a lot of cheap local entertainment options like college events, seat filler tickets and annual passes for parks, museums and gardens. Groceries have gone up a bit but the prices at store like Grocery Outlet are still pretty low so the annual budget impact is pretty small. Gas is up but we're old enough now for discount senior ride share and train passes so I don't think our transportation costs will go up much. We'll probably do more events we can take the train to now. Our clothes usually come from Costco or Amazon and those still seem pretty cheap. Overall the extra we'll get from SS next year looks like it will more than cover any increases in our ongoing expenses due to inflation.

We have some home remodeling planned so I assume those costs will be more but those are one time expenses. Even if those costs comes out to $30K or so more that is not going to be a big deal in terms of our long term retirement plan, since they are not recurring expenses.

 

[Magus]

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.

The Federal Reserve and Fed govt have thrown $6-7 trillion in 18 months on top of normal spending. That is a far larger amount than we've ever seen, which is why the money supply is up massively.

And if these vaccine mandates continue, you aint seen nothing yet on inflation - the cost of labor is going to skyrocket.

 

[Magus]

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.

 

[Magus]

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.

Strange that every adjustment they've made to CPI in the last 50 years has reduced the rate then, eh?

The dumbest thing in CPI is Owner's Equivalent Rent. Once you adjust for real rent prices, CPI is nearly 10% today. How many homeowners have any clue what their house would rent for?

 

[2177V]

Inflation, according to inflation data.com, is 2.62% starting in March and the monthly inflation trend are 4.16%, 4.99%, 5.39%, 5.37%, 5.25%, 5.39% and finally at 6.22% for the month of October 2021.

If inflation hits 7% or 8%, the FED has no choice but to raise interest rates. They better do it sooner than later to avoid a snowball effect. If they are slow to react…then we may hit double digit inflation before the effect of interest hikes can stabilize inflation. Powell is not doing a good job and should not be re-elected. His statement that inflation is transitory will now mean inflation is transitory but only after double digit inflation has occurred.

At that point, I will sell my inflation hedge fund VCMDX to lock in my 50% return.

 

[Magus]

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.

Do you really think the Fed Reserve is going to not only stop adding money to the system but actually drain the $5T they've added in the last 20 months? Cause that's the only way you're going to see a big reversal in prices. Most of the major supply chain issues haven't started to hit CPI yet - that is coming soon though - you can see that with PPI up higher than CPI. Inflation expectations, a huge driver of inflation itself, continue to rise.

I think folks waiting hoping for things to drop in price are going to be very disappointed. Look at 1976-1983 as a roadmap here.

 

[Magus]

Some of the inflation might be delayed. For example, rental costs are shooting up but until more rental agreements are re-signed next year rental costs in 2021 I suspect are only slightly up when compared to 2020 when the "spot rate" of rents clearly shows that costs are rising rapidly. It will just show up in CPI next year.

Not necessarily. BLS uses "owners equivalent rent" to calculate rent by asking random homeowners how much they thinktheir home would rent for - that's 25% of CPI and is only showing up ~3% even though spot rents are up well over 15% from a year ago. In a LSD inflation rate, using OER was fine but not currently. This is understating CPI by around 3%.

 

[youbet]

Do you really think the Fed Reserve is going to not only stop adding money to the system but actually drain the $5T they've added in the last 20 months?

Well Powell said they'd begin draining some of it by reducing their bond purchases and holding less on their balance sheet.

I think folks waiting hoping for things to drop in price are going to be very disappointed. Look at 1976-1983 as a roadmap here.

Generally I agree.

Some prices will recede when broken supply chains mend. Others will continue upwards. Many will just stabilize. But, in aggregate, price increases are not transitory and, as you say, will remain with us going ahead.

This bout of inflation will likely turn out to be "transitory." But the price increases, in aggregate, driving the current rising inflation metrics will not retreat. Only their rate of increase will diminish.

The area where I've been somewhat disappointed in Chairman Powell is his, I think, purposeful neglect in defining terms. He has mentioned "transitory" inflation frequently but the media has often used the term as though it means that prices would be receding. A really dangerous misconception. Powell is likely very aware of this, likes it that way, and hasn't made much of an effort to clear things up. People who think prices, in aggregate, will recede after the inflation rate has moderated are in for a surprise!

 

[Magus]

Well Powell said they'd begin draining some of it by reducing their bond purchases.

No, The Fed Reserve is not starting to drain the money, simply reducing how much they are adding.

And as I said, the supply chain issue prices haven't even really started to hit yet - that is coming soon. Look at how much higher PPI is than CPI currently and its rising rapidly. Eventually that PPI will be passed onto the consumers. Every corporate board room in America is discussing this right now with planning for 2022 well under way. My company raised prices 3% in January, 3% in September and is about to raise them 6% in December.

 

[youbet]

No, The Fed Reserve is not starting to drain the money, simply reducing how much they are adding.

There are various measures of "money supply." I'll take the time to go back and review later. But, for now, I do believe that Powell is saying their intention is to reduce the assets on their balance sheet. I think that means they'll be purchasing bonds at a slower rate than bonds are maturing creating a net negative.

 

[Magus]

There are various measures of "money supply." I'll take the time to go back and review later. But, for now, I do believe that Powell is saying their intention is to reduce the assets on their balance sheet. I think that means they'll be purchasing bonds at a slower rate than bonds are maturing creating a net negative.

I'll believe it when it happens. They didn't start after 2008-2009 until Trump was elected and only marginally then. And some of those bonds won't mature for a long long time at any rate so they'd have to sell the bonds and then retire the money to get it out of the system quickly.

I agree there are various measures of money supply, but M2, the most tracked -is on going to be up 11.5% this year after increasing 25% last year (in contrast, M2 grew ~5% each year the preceding 3 years to the pandemic). The only reason inflation isn't higher than we've seen is because the Velocity of money dropped at the start of the pandemic and hasn't returned yet. If that picks back up, look out double digit inflation!

 

[2177V]

This bout of inflation will likely turn out to be "transitory." But the price increases, in aggregate, driving the current rising inflation metrics will not retreat. Only their rate of increase will diminish.

The area where I've been somewhat disappointed in Chairman Powell is his, I think, purposeful neglect in defining terms. He has mentioned "transitory" inflation frequently but the media has often used the term as though it means that prices would be receding. A really dangerous misconception. Powell is likely very aware of this, likes it that way, and hasn't made much of an effort to clear things up. People who think prices, in aggregate, will recede after the inflation rate has moderated are in for a surprise!

Alan Greenspan famously stated: " if you think you understood what I said, then I wasn't being vague enough".

This interesting link below may help clarify why the Fed is so vague.:

https://en.wikipedia.org/wiki/Fedspeak

My opinion: Transitory in my view means inflation will happen but this does not define how long inflation will last or how severe it will be. It does implies inflation is temporary but everything is temporary when you think about it.

The FED can control inflation by simply raising interest rates which was done in the past. However, raising interest rates can have a side effect of causing higher unemployment, a market decline and possible recession.

If the interest rates increases are small then I think the market will like that because this should minimizes the potential for a recession. Shock therapy does not work well. I belong in the camp that raising interest should start now...rather than later because time is needed for the medicine to take effect.

 

[GenXguy]

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.

OOPS! Sorry, that was supposed to say "have". That should make more sense.

Yeah, I'm already seeing double digit inflation over the last year just paying for the same expenses I did the previous year.

It may take a few years before inflation returns to a more reasonable level, but the worst is yet to come, and very few prices will actually drop. They will keep going up, but just not as quickly in a few years.

 

[youbet]

.

The FED can control inflation by simply raising interest rates which was done in the past.

Well sorta.......... I'd say it this way: the FED can influence inflation by simply raising interest rates.........

 

[Koolau]

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.

Yeah, I've been whining about local inflation LONG before it was recognized globally. Much of our inflation is "blamed" on fuel costs which go up and down just like any place else. Sine most of our consumer goods and food are shipped in, fuel costs are certainly an issue. Funny, but when fuel costs go down, prices of shipped goods do not go down. It's been that way in the 14 years I've lived here. YMMV

 

[2177V]

Well sorta.......... I'd say it this way: the FED can influence inflation by simply raising interest rates.........

According to investopedia link below...the government has 3 tools to control inflation:

https://www.investopedia.com/ask/an...hods-can-government-use-control-inflation.asp

Tool #1: Raise Interest Rates
Tool #2: Make the banks increase their reserve requirements
Tool #3: Reduce the money supply

When you think about, all three tools are what I called "reverse stimulus" and this has the tendency to suppress growth.

I prefer to get it over. Once inflation is under control, we can get into a stimulus or growth phase again. Inflation is like sick person, if you do not provide the medicine soon, the sick person (or inflation) may be worst.

The Fed appears to be more worried about the side effects of negative growth than inflation.

 

[Koolau]

According to investopedia link below...the government has 3 tools to control inflation:

https://www.investopedia.com/ask/an...hods-can-government-use-control-inflation.asp

Tool #1: Raise Interest Rates
Tool #2: Make the banks increase their reserve requirements
Tool #3: Reduce the money supply

When you think about, all three tools are what I called "reverse stimulus" and this has the tendency to suppress growth.

I prefer to get it over. Once inflation is under control, we can get into a stimulus or growth phase again. Inflation is like sick person, if you do not provide the medicine soon, the sick person (or inflation) may be worst.

The Fed appears to be more worried about the side effects of negative growth than inflation.

It's as if they have forgotten that inflation is job one. YMMV

 

[MichaelB]

According to investopedia link below...the government has 3 tools to control inflation:

https://www.investopedia.com/ask/an...hods-can-government-use-control-inflation.asp

Tool #1: Raise Interest Rates
Tool #2: Make the banks increase their reserve requirements
Tool #3: Reduce the money supply

When you think about, all three tools are what I called "reverse stimulus" and this has the tendency to suppress growth.

I prefer to get it over. Once inflation is under control, we can get into a stimulus or growth phase again. Inflation is like sick person, if you do not provide the medicine soon, the sick person (or inflation) may be worst.

The Fed appears to be more worried about the side effects of negative growth than inflation.

A few comments. One, those measures are all Central Bank monetary policy tools, not “the government”. The Central Bank is an independent authority. Two, the Fed has other tools, most importantly trying to influence “expected inflation”, followed by quantitative easing. Finally, and also very important, our elected representatives in Congress also have tools to influence the rate of inflation, by increasing or decreasing public spending and taxation. That has considerable impact on GDP growth and inflation.