Inflation over long periods of time

[GenXguy]

That's where you seem to mix them. CPI and PCE measure different things. PCE is generally lower than CPI because it reflects substitution of goods, for example. So a CPI that is equivalent to the PCE at the same point will be several tenths higher. For this reason, wishing CPI would tack closer to the target for PCE strikes me as a bit of nonsense.

I'm very well of the difference between them, and I have referred to both in the past. You also left out that you have CPI core and PCE core inflation. Yes, I wish CPI to track lower than the high inflation we have had in recent years - most people agree with me.

And inflation averaging 3% or so is pretty normal. This is what most of us assume in our retirement planning.

That's actually 50% above the target inflation rate that the Fed uses. Do I need to specifically say PCE again? lol

And if you notice, CPI runs at 2% or below only quite rarely. And when it does, it usually is reflecting poor economic conditions.

No, it is not rare. From 2012 through early 2020, U.S. CPI inflation averaged about 1.6% per year. Yet during that same period, the U.S. experienced the longest economic expansion in its history, with steady GDP growth and unemployment falling to a 50 year low. Low inflation did not prevent a strong economy.

So when you hope for such low inflation figures you are in essence hoping for a very weak economy. Overall, that is viewed as highly undesirable by policy makers and most people.

So while it is fair to wish for lower inflation, and I think we will get that, 1-2% is probably not in the cards at least not for long.

You're asserting a relationship that isn't supported by the evidence. A weak economy can produce low inflation, but low inflation does not necessarily indicate a weak economy, as I showed above. Your comment about most people is especially weak because it's another unsupported assertion that people don't desire lower inflation.

 

[Markola]

Yes, I feel like we got an extra decade.

Well, we did “benefit” from that little deflationary speed bump called the Great Financial Crisis, followed by years of low inflation, though a repeat is maybe not recommended.

 

[pjigar]

I calculated our "personal inflation" just for fun over the last 17 years for which I have the data. It turned out to be 5% annualized. This will obviously include the lifestyle inflation as well.

 

[audreyh1]

Well, we did “benefit” from that little deflationary speed bump called the Great Financial Crisis, followed by years of low inflation, though a repeat is maybe not recommended.

Regardless it was a blessing when you look at investment growth after spending and taxes over the same time period.

 

[Montecfo]

No, it is not rare. From 2012 through early 2020, U.S. CPI inflation averaged about 1.6% per year.

Yes. And all it took was the longest and deepest recession since WW2.
Most of us would not like to see a return of the Great Recession to support your low inflation nirvana.

Yet during that same period, the U.S. experienced the longest economic expansion in its history, with steady GDP growth and unemployment falling to a 50 year low. Low inflation did not prevent a strong economy.

Just need another great recession and Fed funds rate at 0- 0.25% for a few years. You were probably complaining about low CD rates then.

And the economic growth for that period was quite tepid. Not even 2% GDP growth.

And you even included the Covid year of 2020 in your "model" of low inflation and economic growth!

But that for helping make my point for me.

Now, I suggest we move to a new topic as this one is exhausted as I think we are seriously boring our compadres.

 

[GenXguy]

Yes. And all it took was the longest and deepest recession since WW2.
Most of us would not like to see a return of the Great Recession to support your low inflation nirvana.

I was just proving my point and showing you were wrong with an example. No need to back-pedal.

Just need another great recession and Fed funds rate at 0- 0.25% for a few years. You were probably complaining about low CD rates then.

No, I only complained about the low CD rates when they were LAGGING inflation significantly.

And you even included the Covid year of 2020 in your "model" of low inflation and economic growth!

No, I compare prices to pre-pandemic, not the full year of 2020 as we were already well into the pandemic early that year. Early in 2020, things were fine.

But that for helping make my point for me.

LOL. That will be the day, but I agree, let's move on.

 

[ncbill]

Don't forget secular trends.

Globalization was hugely deflationary for consumers.

Now that the world is de-globalizing that's another inflationary headwind.

Independent of domestic fiscal or monetary policy for any nation.

 

[Koolau]

I calculated our "personal inflation" just for fun over the last 17 years for which I have the data. It turned out to be 5% annualized. This will obviously include the lifestyle inflation as well.

Oh, goodness! If I include lifestyle inflation in my "personal inflation" calculation, I'm guessing my personal inflation would exceed even 5%. Thinking what I spend now vs what I spent 21 years ago (retirement) it's gotta be 3X (based on increased AGI over that period).

Of course, the "life-style" creep is on me!

 

[pjigar]

Thinking what I spend now vs what I spent 21 years ago (retirement) it's gotta be 3X (based on increased AGI over that period).

If you use a compounding calculator, you will realize 3x over 21 years is about 5.4% annually. Compounding IS magical.

 

[Mulligan]

Yes, I recognized it as nonsense, which is why I showed the result of your equation? lol Anyway, let's just hope things can get under control, but in the meantime, I'm paying these huge increases in homeowner's insurance for far less coverage and much higher deductible, and it appears I'm not alone from seeing many others post about these increases. Gas is still about $3.85/gal here, well above where it was some months back.

It's no surprise people are seeing inflation double over 20 years. I think it's even faster with my personal inflation, which is not to be confused with personal spending.

Im definitely getting smacked around on home owners insurance also. And as you mentioned the rate of inflation is significantly higher when one factors in the increased deduction variable. I accept the fact its not all on the “greedy insurance companies”. Increased home value and higher input repair costs including wages are huge factors. What burns my ass is the chronic over inflated home value they assign for my house, that I can never get reduced. Or the mandatory add on costs. Such as having $40,000 coverage for outbuildings. I dont even have a measly dog house and yet I am paying in effect for “ghost coverage”.

 

[Koolau]

If you use a compounding calculator, you will realize 3x over 21 years is about 5.4% annually. Compounding IS magical.

Heh, heh, I was sure someone would do the compound calculation for me. Thanks!

 

[dickoncapecod]

We are probably in the minority but we find our costs of living to be reduced.

Clothes: we now mainly wear shorts, T-shirts and tank tops, buy them at places like Kohl’s for less than $10.

Food: we mainly eat at home because it’s healthier and we like our cooking. A typical dinner is we split one chicken breast and some vegetables which is really inexpensive.

Gasoline: we only drive one car and not very far. So a tank of gas last us a long time.

Healthcare: ACA/ free.

It seems like the primary expenses that are increasing for us are real estate taxes and the cost of vacations.

Even if we very occasionally need to buy electronics like a TV, we can often buy better technology for less cost. And we usually keep TVs, phones and laptops for quite a few years.

Yes. And there's little doubt that government inflation MEASURES are significantly overstated. Hopefully a push toward something like the Fed Dallas trimmed mean PCE will be successful. All that is trimmed is outliers. For example, when fillet mignon or fresh sea scallops jump to $30/lb, 1) the prices are fed into CPI the CPE and 2) after a few days the manager throws the unsold items away. It applies to high and low outliers and IMO helps better reflect costs borne by most of the population. Last seen 2.3%
Regards, Dick

 

[Koolau]

Yes. And there's little doubt that government inflation MEASURES are significantly overstated. Hopefully a push toward something like the Fed Dallas trimmed mean PCE will be successful. All that is trimmed is outliers. For example, when fillet mignon or fresh sea scallops jump to $30/lb, 1) the prices are fed into CPI the CPE and 2) after a few days the manager throws the unsold items away. It applies to high and low outliers and IMO helps better reflect costs borne by most of the population. Last seen 2.3%
Regards, Dick

I see the logic in "trimming." But the assumption implied is that nothing actually sells at those "outlier" prices, right?

I think that's an iffy proposition for some things (like heating fuels, electricity, food staples and virtually anything else that falls into the "inelastic pricing" category).

Just thinking out loud here.

 

[latexman]

I see the logic in "trimming." But the assumption implied is that nothing actually sells at those "outlier" prices, right?

Idk, if I found filet mignon at $1/lb, outlier on the low side, I’d load up on it!

 

[dickoncapecod]

I see the logic in "trimming." But the assumption implied is that nothing actually sells at those "outlier" prices, right?

I think that's an iffy proposition for some things (like heating fuels, electricity, food staples and virtually anything else that falls into the "inelastic pricing" category).

Just thinking out loud here.

That's right. Fed Dallas has a nice one-page explanation of the process. I'm talking through my hat here, but I suspect inelastic prices that go wild one month --- like electricity for a/c during a heat wave are "trimmed" rather than eliminated. If my interpretation is correct, then volatile ineastic prices "trimmed" will trend rather than jerk inflation expectations and Fed policy around by the nose. (?)
Regards, Dick

 

[Earl E Retyre]

Yes. And there's little doubt that government inflation MEASURES are significantly overstated. Hopefully a push toward something like the Fed Dallas trimmed mean PCE will be successful. All that is trimmed is outliers. For example, when fillet mignon or fresh sea scallops jump to $30/lb, 1) the prices are fed into CPI the CPE and 2) after a few days the manager throws the unsold items away. It applies to high and low outliers and IMO helps better reflect costs borne by most of the population. Last seen 2.3%
Regards, Dick

This is helpful. I also wonder if, when you have a paid off mortgage, then that is another reason personal inflation becomes so low. I assume a large chunk of CPI is housing.

 

[Flieger]

This is helpful. I also wonder if, when you have a paid off mortgage, then that is another reason personal inflation becomes so low. I assume a large chunk of CPI is housing.

I see that changing cash flow, but unless you have a variable rate mortgage....?

Flieger

 

[Earl E Retyre]

I see that changing cash flow, but unless you have a variable rate mortgage....?

Flieger

I guess I meant relative to renters.

 

[GenXguy]

Yes. And there's little doubt that government inflation MEASURES are significantly overstated.

That's the funniest thing I've read today. It's the exact opposite. Just because someone is getting their ACA for low cost due to subsidies, doesn't mean the true premium cost paid (by other taxpayers) isn't actually a lot higher. My insurer is requesting up to 30% premium increases for 2027 after big increases in 2026, more than double the CPI figures. That's just one example. Inflation is easily double what it should be, even with the gub'ment figures.

 

[meierlde]

A way to get real long term inflation predictions compare the price of gold in 1932 roughtly $20 per ounce, with it today being between 4500 and 5000 so between 200 and 250 time or 20000% to 250000 % since 1932 or any time before that after roughtly 1800

 

[Mr. Tightwad]

Filled up truck at $3.05/Gal yesterday evening. First time in almost 3 weeks! Have big 4th Party at the Brewery so heading that way in a few to get things ready! Stay hydrated everyone, it's Hot out there!

Flieger

Stop driving that Neanderthal vehicle and drive the best car in the world instead.

 

[Montecfo]

This is helpful. I also wonder if, when you have a paid off mortgage, then that is another reason personal inflation becomes so low. I assume a large chunk of CPI is housing.

It is. But the calculation is on a delay.

 

[GenXguy]

This is helpful. I also wonder if, when you have a paid off mortgage, then that is another reason personal inflation becomes so low. I assume a large chunk of CPI is housing.

My house is paid off, but my personal inflation is high. Directly related to housing, property tax has gone up 12% or in consecutive years for far less coverage, property tax jumped up about double CPI, and home services (maintenance/roof/HVAC) have really skyrocketed.

 

[Koolau]

That's the funniest thing I've read today. It's the exact opposite. Just because someone is getting their ACA for low cost due to subsidies, doesn't mean the true premium cost paid (by other taxpayers) isn't actually a lot higher. My insurer is requesting up to 30% premium increases for 2027 after big increases in 2026, more than double the CPI figures. That's just one example. Inflation is easily double what it should be, even with the gub'ment figures.

GenXguy, your take on this made me think of a few questions:

1). How are taxes treated when it comes to inflation? Taxes go up and down for many reasons. Changes in tax code may affect one's tax bill. Creeping brackets due to the effects of inflation requiring higher income can increase your tax bill. I don't even know if taxes are line-item in the costs that the gummint tracks. They certainly should be since they can make a huge difference in how much you have (left) to spend.

2). How IS the example that you bring up handled when it comes to inflation? Let's say you get a really good ACA subsidy this year because your income dropped just enough to increase the subsidy. In "theory" taxes take care of that increase that goes to your benefit. But in reality, a good chunk of gummint costs are borrowed. How does that all get accounted for in inflation numbers? Does the amount borrowed simply disappear from the "apparent" subsidy cost the gummint faces on your behalf? I'm guessing this is either very complicated or else the gummint inflation numbers ignore it.

Anyone know how taxes are handled in CPI and other inflation numbers? I'm totally ignorant on the subject.

 

[audreyh1]

Anyone know how taxes are handled in CPI and other inflation numbers? I'm totally ignorant on the subject.

CPI only includes sales and excise taxes according to a search - i.e. taxes associated with purchases.