The Consumer Price Index is a scam at this point, as far as I can tell.
They regularly modify the list of items in the cart, meaning the data isn't reliable over time.
They also include caveats where they can modify the Scritsmier price differences. For example, they attention to adjust the new price to account for what they consider to be added value. Say a product is 15% more expensive one year after a new model is released. When calculated the CPI, they can decide that the new model added 10% more value or benefit to the user, meaning the price only rose by 5%.
I wish I could find the study now, but around 2013 someone compared the CPI listed price increase of magazines to the actual change in the price listed on the cover over something like 20 years. The true value change was around 130% but the CPI had adjusted for value 30%.
Most people seem to be feeling this now when they notice that process have risen much higher than the claimed 4 or 5%.
> The Consumer Price Index is a scam at this point, as far as I can tell.
The BLS goes into excruciating detail about their methodology, which is not something often find scams doing.
The Consumer Price Index is just that, an index. It seeks to distill the complexities of the consumer economy into a single number, and to do so reliably over time. It's impossible to do this without a whole bunch of compromises and trade offs. It's trivial to rip apart any such methodology because of these trade offs - just find a trade off you don't agree with and argue it should be the opposite.
If someone attempted to make a t-shirt using the weighted dimensions of every American, the result would be a t-shirt size that would not fit any individual. But, over time, that t-shirt could be used to understand changes to the American physiology over time.
> For example, they attention to adjust the new price to account for what they consider to be added value.
They cover this in their FAQ [1]. But again, this is a trade off. If laundry detergent becomes more concentrated, thus can do 20% more loads for 10% more price, then how should that be handled? If $1000 Nike shoes become popular, does that mean that the price of shoes increased 10x even if cheaper alternatives are still the same price?
The most successful scams actually do go into excruciating detail to appear methodical, that's how you get people to buy in.
While I do agree with many of the points you raised, for me those point to the uselessness of the CPI as a matric. If the dataset is so complex you can only boil it down so far before too much context is lost. The CPI is an attempt to create a single number of off the entire economy, a task that is impossible made only more clear by complaints over the obvious and egregious tradeoffs made.
Statistics can be useful, it can also be a pointless game of manipulating so much data that you can make it say whatever you want. I think you'd be hard pressed to find an average American that would feel like prices have only gone up by ~4-5% over the last few years.
> those point to the uselessness of the CPI as a matric
Unless you're setting federal policy, it probably is useless to you. For personal forecasting, you're better off using the CPI calculated for your state or metropolitan area. (If you're procuring at a national scale, you're looking at a producer index.)
CPI plays a huge role in our everyday lives though. From cost of living raises to entitlement programs, it all moves based on inflation numbers and the CPI. The Fed even considers these numbers when watching the economy and deciding on fiscal policy, setting the Fed Funds Rate and impacting interest rates across the board.
Except it's not. It's how we calculate inflation, which in turns drives how we measure GDP growth. It's also how we measure productivity and purchasing power variation over time. This measure has a very big impact, including on our assessment of policies and the evolution of the economies of nations.
Off course there can be no absolute value for such a thing, but the problem is that economists have been obsessed with “real” prices and disregarding “nominal” values (you'd notice the irony of naming the arbitrarily constructed thing as “real”), and so almost every economic analysis includes CPI and now everything depends on it so its measurement become included everywhere indirectly. And it is in fact a big problem.
'excruciating detail [...], which is not something often find scams doing'
Except for e.g. the small print in an EULA, or the XXXX pages Congress spending bills. There is definitely a bureaucratic technique of 'obfuscate through sheer volume of irrelevant information'.
Scoping to food CPI to simplify the conversation, provided a link to the actual raw data, e.g. prices & relative weights over time (do you have such a link?), how do I sift through it to answer elementary questions about the cost trajectory of the daily caloric intake, with geographic and socioeconomic breakdown.
On top of my head:
* basic breakdown: grains, meat, veggies
* processed vs. unprocessed
* grocery sourced vs. eating out, largely fast food
Your examples cover one of the problems: When the cheaper same old shoe is rarely on the shelf, then what? And are they as enthusiastic at removing value as they are at adding value (i.e. when then "same old" shoe is not same old but faster wearing)
They actually do describe this "If the BLS data collector is forced to replace a short-sleeve cotton/poly shirt in the CPI sample with a long sleeve 100% cotton shirt..." but they provide no answer aside from [well the one on the shelf now is better].
So that the buyer of the "common" shoe, shirt or TV pays more.
It's easy to argue that it's possible to dig deep and find that "older" cheaper item but that doesn't change that the "basic basket" is now more expensive.
The second problem is one of perception - and perception really matters in this case. And CPI doesn't solve that problem.
The BLS methodology is certainly “elaborate.” But as is pointed out down-thread, the CPI uses completely bizarre measures and makes little attempt to source data from the kind of places that would typically be used to do these analysis were more rigor being demanded or actual money was riding on them being correct.
A lof of actual money rides on CPI measures. For example social security payments are indexed. Which is one of plenty of strong incentives to keep the "measurements" low.
BLS is part of a large organization. Specifically it's part of the United States Department of Labor (DOL), one of departments of the executive branch. I haven't yet heard of a government with an incentive to find a high inflation number.
(And if it were an "independent" agency like statistics are in some countries, that would provide more shielding but not necessarily perfect either.)
Asking for specific evidence of a specific BLS personel filing a grievance or similar because of pressure is placing the bar way into the "blind" territory. This is not how influence works. I mean sometimes it is and we get to see it laundered in public, but that's not the common way. In the case of BLS it may be there, I haven't searched.
When people change their habits in life the CPI is changed to reflect what that life costs. Up here in Canada, the CPI is also adjusted from spending surveys:
Do you think coal and lard should be included, like they were in Canada pre-1956? Or do you think the CPI should try to model reality?
> […] meaning the data isn't reliable over time.
It is meaningful in that life now and life ten or twenty or more years ago was different in what people purchased. That should be reflected in measures that model consumer spending.
Spending habits are mitigated by inflation though. For example, I buy significantly less beef than I did five years ago because it is now too expensive. Putting less weight on beef prices because of the reduction in consumption would indicate that inflation is less than it actually is.
> For example, I buy significantly less beef than I did five years ago because it is now too expensive. Putting less weight on beef prices because of the reduction in consumption would indicate that inflation is less than it actually is.
If people spend on item X less or no more, why would it be included in the index at the old weight? For any given period of time being measured, the basket of goods and their weights should reflect what people are actually doing. Why would you run a model that samples the wrong things?
This is one reason why (e.g.) StatCan went from updating their basket every 2-3 years, to annually in the last little while: spending habits shifted drastically in over the course of the pandemic.
Substitution is a known source of (possible) error and there are attempts to take it into account:
> 9.22 The other potential source of error with respect to the basket weights is referred to as upper-level substitution bias. This bias arises because of the use of the Lowe formula, which is an asymmetrically weighted fixed-basket price index. Because the weights are obtained from a year that precedes the price reference period, the expenditures are not likely to be fully representative of consumer spending patterns in the price observation periods. This is because consumers tend to adjust their spending habits in response to changes in relative prices, buying more of the products whose prices have fallen or risen less rapidly, while reducing their purchases of products whose prices have increased the most. In other words, they substitute towards relatively cheaper products from relatively more expensive ones. The asymmetrically weighted fixed-basket formula of the CPI does not account for these types of changes in consumer spending until a basket update is performed.
> 9.23 Unlike the Lowe formula, there are five known symmetrically weighted price index formulaeNote which are theoretically free from upper level substitution bias. These index formulae use expenditures from both the price reference period 0 and the price observation period t and therefore account for product substitutions that consumers may make. In this regard they are representative of consumer spending for the periods in which price change is being calculated.
> If people spend on item X less or no more, why would it be included in the index at the old weight?
Say ten years ago, hypothetically, everyone ate steak and wine every day for $100/week and today everyone can only afford to survive on ramen and tap water and it costs $100/week.
If you change the basket to say people today only want ramen, you will conclude that there has been 0% inflation in a decade. Everyone still spends $100/week on food, no change at all!
If they didn't do those things, then wouldn't we just get a flagrant_taco from an alternate dimension who would instead argue about how CPI doesn't account for changes in consumer preference over time or how a cell phone in 2023 is different from one in 2003?
But then they would just have to make a list of each year's CPI basket and it's changes, and then have to calculate that going forward for forever.
Like, the differences in the 1991 basket to the 1992 basket are pretty small (please, someone, double check this). But the differences in the 1991 basket to the 2019 basket are larger, for example.
So it would seem to me to be a bit silly to have to update the prices of the 1991 basket all the way to today, especially when you're updating the 1992 basket as well, and every other year.
I'm not a CPI expert person, so if there is someone that really does understand these things in depth, please chime in!
But that IS part of the problem. Obviously without looking back 12 years for a day to day practical result (but still looking that far for long term economics concerns.)
A "normal TV" now is a smart (spit) TV which compromises privacy and viewing experience and durability - but which is sold massively cheaper than a plain TV as defined perhaps 6 years ago. You have to dig hard to find a plain TV and it's more expensive. Do you count "smart" as a positive hedonic feature? Or do you count the effort necessary to find a plain TV in the price increase of a plain TV? Do you compensate for much other price increases just because a "normal TV" is now much less expensive and (allegedly) more hedonic?
Not at all, they could simply report the real cost difference in the basket as well as the adjusted cost. Every year we don't see a matrix of GDP compared to both the real and nominal GDP of all previous years. We see those two numbers compared to last year and it's left to basic mathematics to do longer term comparisons.
Part of the challenge is with how frequently they decide to change the basket of goods. If the basket was largely stable over time we would have a pretty good estimate simply by aggregating annual data, especially if they focus on staple consumables that don't change drastically over time.
The question was about offering multiple versions of the resulting statistics summary. Based on various starting dates, theories and such - something like output that could be explored or dialed including dialing which CPI method to use. That would explode the amount of reporting. It's not about data collection.
They provide their raw data [1]. You can reconstruct the index however you want. There is an entire industry of consultants who create custom benchmarks for planners.
For personal purposes, your metropolitan area's CPI is a better metric to watch than the national number.
I think it is a bit of a scam but I do think it had good intentions. CPI is used to grade and since it is a scoring product it is manipulated. One thing you will notice with inflation is that goods that can be outsourced have been what is keeping CPI down. TVs, appliances, etc. Housing, Education, Healthcare are all things the US cannot outsource and there you will see a larger impact on CPI. Food is the on in this theory that I am not sure about. The US grows much of their own food so I wonder if it still fits even though you can outsource.
Food. The technique is to shift from 'locally sourced organic veggies' to 'dorritos made with mass produced GMO corn', because 'consumer preferences have shifted' and both have the same calorie payload. Note how 'preferences have shifted' also discreetly helps to insinuate a moral fault in the people themselves. Anything but 'healthy food has become too damn expensive for the majority of the population'.
That is not even remotely how the food components of the basket work. You're just making things up and obviously haven't read through the detailed list of items or the methodology for how those are updated.
I'm curious about how the housing crisis is measured here. As homelessness booms, people are "choosing" to not pay rent. Does that zero out their housing expenditures in a survey?
Although I'm sure that outsourcing made some difference, are we sure most of the benefits didn't just rise to the investor class?
TVs dropped in price due to the benefits of adopting moores law. Look into a modern TV and you see a symphony of integration and cost reduction thanks to moores law. I'd imagine the same applies to anything else that jumped on the moores law bandwagon. We need to measure appliances that benefited from this vs appliances that didn't.
The size of transistors has very little to do with TV prices. They are cheaper now because they are built with outsourced exploited labor and because they are full to the brim with ads and stalkerware.
It absolutely does make a difference. As I mentioned in my original comment, it enables consolidation of components and functions. Take apart an old CRT and a modern LCD screen and in the new TV you will see a single IC doing the job of multiple separate boards in the old TV. This is where a lot of the cost has come out of. All thanks to the capabilities of modern ICs...powered by Moores law.
The CPI is reliable over time. When the basket of goods is changed to reflect what consumers actually purchase the index is normalized to maintain continuity.
But on longer time scales it becomes a bit meaningless. Lifestyles were so different 50 years ago that very little is directly comparable beyond certain staple foods. People tend to interpret the CPI numbers based more on their preconceived notions of how things are going than on any objective reality.
> They regularly modify the list of items in the cart, meaning the data isn't reliable over time.
Please show me an economy where the list of goods stay stagnant and don't constantly change.
Unless your CPI is comprised of raw commodities like Iron Ore and Salt and Copper - then you're not going to be able to keep a stagnant list of items.
If x% of consumer food spending was on milk in 1920 and now it's 1/10th x - it doesn't make sense to keep milk with the same weight as it did in 1920.
It's pretty hard to tell if people are drinking less milk now because they're poorer or because they just prefer almond milk (which is more expensive) instead.
So, please, find a better & more cost-effective way to measure inflation. If you do, the government will use it.
Contrary to popular belief, we don't live in the USSR - where our government provides us with blatantly crap data. We just have shill politicians that spin everything into a lie.
> Unless your CPI is comprised of raw commodities like Iron Ore and Salt and Copper
In which case it won’t be a Consumer Price Index at all, as those things in their raw forms (well, salt is close, I guess) aren’t exactly consumer goods.
Of course, we already have industry-specific Producer Price Indexes which cover the raw materials and other inputs used in those industries.
> They regularly modify the list of items in the cart, meaning the data isn't reliable over time.
It may not be reliable over time, but it is reliable over shorter time periods. If the basket is not changed for a few years, then the month-by-month changes in CPI are generally judged as reliable, or as reliable as what is out there. It is when you try to look over a 10, 20, 30 year period where you begin to run into trouble.
According to the article, $1 in housing in 1999 is equivalent to $1.86 today. That's... incredibly hard to believe. The Case Shiller is up over 300% for the same time period.
And $1 in food is $1.84 today? I don't have an index to reference, but also hard to believe.
Restaurant and packaged food (e.g., cookies, frozen meals) prices up an average 30% since 2020 is what I usually think too, but I also think bargains have disappeared, which is probably harder to capture.
It feels like far fewer restaurants have lunch specials than in 2020, for instance, and a lot of cheap restaurants have either raised prices to the norm or closed. Bars and casinos having discounted or free food to get you to drink has gone out the window (even where legal). And looking back 20 years, it feels like far fewer restaurants have small and simple orders available.
For instance, you used to be able to go into a diner or other casual restaurant and get a hamburger or other sandwich with no fries or side. That’s harder to find now. So is cheap, unremarkable coffee and cheap breakfast items, like small pastries or two-egg plates.
Similarly, it’s harder to find a small car, a house or apartment without central air, a 15 inch TV (though TVs have gotten cheaper), etc.
I think the big one is the people who produce inflation statistics struggle to capture increases when products change, particularly shrinkflation.
The ONS (Who produce the UK inflation statistics) specifically noted limitations in their methodology because when a particular product (whether that's a particular brand, or specific size) is discontinued, they replace it in their subsequent basket with a similar item for measuring inflation but don't measure the change in inflation from the change in product.
For example a 25p can of peas may be withdrawn from sale by the manufacturer, so the next month ONS would switch to checking the price of a 30p can of peas (the next cheapest can). The fact that people who were buying that can of peas now have to pay 5p more for peas is never captured in inflation.
This is definitely part of the problem, and another issue is quality decrease. Sure, maybe a given item has only increased 80% in price, but perhaps now the quality has decreased so that ultimately you are comparing apples to oranges.
The fun thing with quality is that statistics agencies are in fact trying to include quality change in their inflation calculation (it's called hedonic adjustment) but AFAIK they only do it for “objective quality” increases (like when CPU clock frequency increases or Disk Size increase), not when actual quality decreases.
BLS personnel don't "struggle" to capture shrinkflation. They are well aware of the issue and always normalize prices by actual weight or volume. Have you read their documentation?
Yeah - I distinctly remember back in 2006-2007 (My early college days) getting a 2 for $2 deal at McDonalds - 2 bacon, egg and cheese biscuits for $2. Now one biscuit (normally) is $3.89 and they run 2 for $5 specials, but seemingly way less often. Back in the day, the special was ran literally all the time, but even still the cost of the biscuit was under $2. And this is 7 years past 1999.
The Big Mac Index shows the price of a big mac in 2000 at $2.24, and now at $5.58, so that would put $1 in 2000 at $2.49 in 2020 which feels a lot closer to the actual number...but still low because everything "around" the entree has also increased similarly, if not more.
In about the same period Taco Bell had the .79/.89/.99 menu options. You could feed a family of four for about $10. Now even the $5 combo box is becoming rare.
One thing that happened since 1999 is the rise of price discrimination at fast food restaurants (well price discrimination in general, but fast food is easiest to see). If you have the App, you can get that $5.59 big Mac with a free fry and drink. Without the app, the meal is probably close to $10. (Just a made up example, but in general app coupons seem to often save 30-50% over not using coupons).
yeah, people are being forced to buy features or addons, which adds to the cost. this is another way to pass on inflation to the consumer marketed as a 'good deal', when it isn't. instead of an economical small car, you have to buy a bigger car which gets worse mileage and full of unwanted stuff.
It’s not anecdotal, search online for old copies of menus from popular chain restaurants.
Inflation has been retconned (i.e “Burgers were always $15, what are you talking about?”) They don’t want you to notice as your wealth is slowly stolen through the loss of purchasing power.
The gp used poor terminology. Inflation doesn't impact wealth nearly so much as income. The idle rich draw their income from capital gains on investments in the things that are becoming more expensive and are largely non negotiable. People must spend wages on shelter food energy and probably transport. They will pull back on things they enjoy but cannot afford now. The wealthy will continue to purchase what they want when they want. That is why selling high end luxury goods is a much more stable option than selling thebthings that are luxuries for those who get their income from wages.
> The idle rich draw their income from capital gains on investments in the things that are becoming more expensive and are largely non negotiable. People must spend wages on shelter food energy and probably transport.
Wages have gone up in real terms (how the fed measures inflation). Food, energy, & transport have slightly under-performed inflation.
i.e. there's no way to slice it - the average laborer can afford more food & labor now than in the past.
The linked site differs from Case Shiller - saying that housing has also under-performed inflation. I'm interested how they arrived at that.
Housing is the real problem - and the vast, vast majority of housing in the US is owned by individuals and mom-and-pop investors, not corporations & billionaires.
The idle rich cannot be blamed for our problems in housing - though they can be blamed for other things. On housing, we can only blame ourselves, voting aggressively to curtail development at every opportunity.
I'm suspicious of the food numbers too. The CPI substitues things like hamburgers for pot roast. The price of a healthy diet has increased, the price of a dose of Soylent green is less than the price of what a healthy diet used to be. And I think that is what they are reporting.
Energy is cheaper, but we need more of it with years of back to back escalating extremes for both heating and cooling. Moving somewhere that isn't an impact gets into the housing issue.
And then medical and education are out of control.
Edit: to clarify, I am not laying all this at the feet of the idle rich, nor do I think idleness or wealth are bad things. They are great things we should all strive for for ourselves and others. I lay it at the feet of all of us who have made bad decisions, but some are more responsible than others, and many of those that shaped the policies that lead to these issues are wealthy as a result.
You are living in such a society. People who bought BRKA shares 55 years ago and just sat on their asses have done immensely better than those who worked their asses off.
Wages have not stagnated. It's been a defining feature of our COVID inflation that inequality stats have gotten better.
Specifically in HCOL coastal cities, we've seen increases to minimum wage, adjustments to the "tipped minimum wage" laws that mean business needs to cover more of the wage, and finally.. labor shortages causing restaurants to pay over even those increased minimums.
It wasn't long ago NYC minimum wage was under $10/hr, with "tipped minimum" being $7/hr.
Now you have some restaurants paying $20/hr to get staff.
The Whataburger I got way-too-frequently for just under $6 in 2001 is like $10 bucks now.
MSRP of a 99 M3 = 46k; 2023 stating at $74300.
Outside of housing and gas I'm hard-pressed to think of anything that's more than double the cost. GPUs, I suppose, but that's a weird hobby transition + a lot more industrial uses.
That said, housing+gas == huge parts of people's day to day lives, obviously.
The big mac has more than doubled since 2000 according to the Big Mac Index: $2.24 -> $5.58. I think the issue is the high end didn't rise nearly as much as the low end. Your BMW is a good example..a 2000 Honda Civic: $10,750, 2023 Civic: $23,750.
Yeah, but the fast food example has a large price discrimination component. Only those not using the app pay the high prices. Last Big Mac I bought was $2.50 (earlier this year).
Civic is more interesting, since the 2023 base-model Civic has far more technology, far better safety features, automatic transmission, and is quite a big larger than the 2000 model. Wouldn’t be surprised if the 2000 base model Civic didn’t even have power windows. That being said, if all you want is basic transportation, then your choices are much more limited than they were in 2000.
It's an artifact of how the measurement is made, as it accounts for insurance profits. While a good proxy in normal times, corona sent this measure into a wild rollercoaster-ride. However, it is generally a good idea not to change the method of measuring because you do not like the measures in the short term. The most important measure is the headline number (and MoM is more informative than YoY in these times), as it is the basis for actual politics. The headline number absorbs a lot of craziness in the underlying measures.
It's included in CPI, though, right? If so, doesn't that mean this "artifact" has improperly affected the CPI making it look like inflation hasn't been as bad this year as it actually was?
Taco bell is the most ridiculous now. If I eat there I will only order a $2-$3 "value" burrito. The moment you order any kind of combo, you are out $10+.
> I ate a meal with a drink at Taco Bell for $2-3.
Taco Bell in particular has gone mad, I don't see how they can survive with current pricing. I used to go often, knowing it wasn't good quality but it was oh so cheap.
Today their prices are so high that I can go to a local taqueria and get a giant burrito with far better and fresher ingredients and friendlier service for less money than a few mystery meat tacos from Taco Bell.
So on the positive side, I now only frequent the local business with good quality food.
Compounding is the 8th wonder in the world for this reason. It's amazing how in the span of a few decades how much prices have gone up. Except for clothes and electronics, everything seems to have gotten way more expensive compared to cpi. but even iPhones still cost a lot. The situation seems out of control for things like tuition .
Compounding interest on savings for most of us is much less than inflation, so the purchasing power of work done gradually dwindles to nothing over time. Pretty depressing.
The really depressing thing is it's not just a diminishment of purchasing power, it's a transfer of purchasing power to those who first get to spend the newly created money (which tends to be financial institutions and people with the wealth/connections to gey big loans). Which needn't necessarily be the case, if the inflation occurred via evenly distributed "helicopter money" rather than the current approach.
This is maybe true if you only store money in cash equivalents. If you bought stocks, housing, or almost any other productive asset you'd easily beat inflation over your working lifetime.
I think we’ve finally hit the point where compound interest on savings is outpacing inflation (at least in the US). Savings accounts at 5%+ interest are now widely available as long as you avoid the big banks like Chase and BofA. Meanwhile inflation is still elevated, but at least its well below 5%.
OTOH, the prior 10+ years even when inflation wasn’t very high, 1% or so interest rates meant savers were falling farther and farther behind.
This probably varies from place to place. A high-quality double cheeseburger in my area can be had for $6.19, and adding tomato is only a little extra. (I checked prices a minute ago, so these numbers are fresh.)
Carl's Jr./Hardee's even advertised "The $6 Burger," which sold for about half that, as a way to say, "Look, you can get a restaurant-quality burger at our fast food chain for leas money."
We plan out meals and so we have dozens of recipes that we rotate through. Keeps things not quite boring while also keeping everything in the minds of everyone in the family so that when we ask what everyone wants for suppers this week they can think of something. Anyway, this is all to say that our grocery habits are fairly consistent. Our bill is up, in the past two years alone, between 30 and 40 percent. I haven't gone back to the old receipts to confirm exactly, but looking back at some old statements confirms that range.
It feels like "covid" and "supply chain issues" were a great excuse to wildly reshuffle prices, item availability, item quality and packaging quantity. ... And yet it doesn't seem visible in corporate profits. It's not very visible where that price difference is going. So I don't know yet. I'm open to useful data (which the current CPIs really are not.)
By this I mean, corporate profits have increased but are still most often (never mind Apple) a small fraction of price in the retail world.
Not that this explains all of the discrepancy between official statistics and what we see in reality, but the average size home has gone up over time, so if you're looking at price per square foot instead of price per home it would account for some of that. The increase in average home size is especially striking given that the average family size is declining.
Real estate prices are only indirectly included in CPI via owner-equivalent rent. Really, CPI is a joke for measuring broad inflation. It measures a specific basket of goods. Treating that basket of goods as the true value of the dollar is absurd.
CPI is ok for specific categories but the basket weighting is absolutely trash. That being said somehow healthcare indexing got messed up and it was down significantly which is silly because healthcare never goes down
So the average CPI is what an average consumer spends spread nationally. You may personally have different weightings, and so what you 'feel' inflation is like may be different than the average.
There should be an attempt to calculate inflation separately from changes in productivity. Tech, for instance, has largely been deflationary due to technological improvements. Real estate, on the other hand, has been inflationary due to monetary policy. CPI doesn’t capture that at all. They should also add real estate and other assets to the inflation calculation. Stock valuations have been historically high. Put another way, $100 today buys you less future cash flow than in past years.
> There should be an attempt to calculate inflation separately from changes in productivity.
Two questions:
1. What does that even mean?
2. For what use?
> They should also add real estate and other assets to the inflation calculation.
There is plenty of tracking of asset prices. Why should it be part of generic (i.e., consumer) inflation, other than to break all the processes that depend on that measuring consumer prices as distinct from producer prices, asset prices, etc.?
Medical care should be weighted at 20-30% to reflect how much of a burden it’s become. Childcare is severely underweighted as well. Housing is underweighted in rents and overweighted in owner equivalent rent. Those are just the obvious ones
Childcare is the average amount spent by all households, not only by the households which have childcare expenses. I spent essentially $0 on childcare now that my kids are old enough to stay home alone if my spouse and I go out. I expect to continue to spend $0 for the next 3-4 decades.
> Housing is underweighted in rents and overweighted in owner equivalent rent.
About 2/3 of Americans "own" their home. The owner-equivalent rent also happens to be about 2/3 the sum of (owner equivalent rent plus rent). That is not an accident, but rather is causally linked.
I would agree on that but compare weighting on college. Presumably not all kids make it to college but annual childcare costs in any licensed facility costs as much as college tuition so it still seems low.
Also though you may not notice it but your taxes are probably going up every year to cover additional public child care costs even if you aren’t paying directly.
Medical is probably one of the biggest mismatch categories though
These "price comparisons" really need to be divided into specific categories.
$1 from 1999 would be worth a lot more for buying a house, since house prices have gone up insane.
$1 from 1999 would be worth much less for technology: a modern-day phone would be essentially priceless, but if you only care about specs, it could be replicated in a supercomputer, albeit for >$100 million (https://news.ycombinator.com/item?id=21977330)
Even within a category it depends: certain food items (junk food) seem to have gone up in price considerably more than others.
I saw a YT vid that referenced a research paper that used a particular basket of goods to define the quality of life for a peasant in the Roman Empire.
I think the trick is to build your personal consumption basket for essential unchanging goods and use that for comparison. Certain things like the types of food I eat have been reasonably consistent over the past 20 years. So something like "how many calories & grams of protein could I buy in 2003 vs 2023", and then compare that my hypothetical wage growth over that timeframe. Or wow much is a quart of oil? I needed to do oil changes 20 years ago, and still do my own today, etc...
> $1 from 1999 would be worth much less for technology
This is expected given technology is advancing but pricing hasn't changed much if you factor in relative costs to relative performance / outcomes.
For example in 1999-2000 you could have gotten a really solid machine capable of playing Quake 3 (the latest and greatest FPS game of that time) getting a rock solid 125 fps on a CRT monitor capable of doing 120hz for around $650-700.
Realistically a solid machine nowadays with a mid-grade GPU is likely going to run you $1,000 to $1,200 and that could easily be more if you wanted a higher end GPU.
All in all you're talking about a little under double the price which is roughly what an inflation calculator says (1.85x) for the same relative outcome.
> For example in 1999-2000 you could have gotten a really solid machine capable of playing Quake 3 (the latest and greatest FPS game of that time) getting a rock solid 125 fps on a CRT monitor capable of doing 120hz for around $650-700.
In 1999, a CRT with a 20" viewable area cost $999 [1] with reviewers saying "The price point on this monitor is fantastic"
> In 1999, a CRT with a 20" viewable area cost $999 [1] with reviewers saying "The price point on this monitor is fantastic"
Not all monitors were that expensive back then.
I got a 21" 1600x1200 NEC for $150 around that time (1999-2001) that could do 120hz at the resolution I played Quake 3 at. That was shipped too even though it weighed almost more than me.
The funny thing is that $70 22" monitor you linked is 1080p which has been around for almost 20 years. I hope it's dirt cheap by now. A 1080p LCD used to be really expensive when they came out too, and most LCDs were bad back then where "good" could be categorized as having a high refresh rate, good color range and fast response times / low input latency.
Perhaps not “random farm towns”, but most “old” towns outside significant metro areas have certainly had a rough time. These places grew when population was more distributed and have been bleeding for a long time as people have consolidated in fewer cities. For example, basically everywhere in Pennsylvania outside Philly and Pittsburgh.
It is shocking to see 30, 40k homes in perfectly safe areas, albeit in what feels like a ghost town. These tend to be small and run down but they’d still be 200k+ in a large metro and who knows how much somewhere like SF or NYC.
Between 2000 and today property in the rural area I grew up in has gone from 1k/acre for non-prime farm land to 7k/acre for the same kind of junk property. Its an insane jump and has mostly happened since the pandemic (it was creeping up before that, but it really jumped during the last few years)
Even before these price increases in property there was no money in being a farmer. My grandfather had 100 acres of asparagus (bought when property was cheap in the 60s) and even with migrant labor doing all the real work, him and my grandmother had to have full time jobs. It brought in a profit don't get me wrong, but not enough to make it worthwhile as a full time pursuit. The root problem as I see it is that farming scales very, very well. The bigger you are, the cheaper your inputs become and the better you're able to negotiate sale prices. For example to farm 80/100 acres, my grandfather had to have a big Case tractor just to run the various implements that are necessary. That thing cost 100k+ and would have been just as happy doing the work on a thousand acre farm as a hundred acre farm.
Home values have gone up on paper due to real estate speculation, which CPI doesn't care about. It instead measures how much you would need to pay to rent an equivalent apartment year over year.
Plus it's shorter than saying "skyrocketed to an irrational extent, similar to what happened in the crypto market craze" and hence more expressive. Now, you might not agree that it quite did that to the same level as dogecoin, but that's a different matter than whether or not "mooned" is a good choice of words here. Personally I think hyperbole is useful and fun sometimes.
I wanted to comment with a similar sentiment, particularly about housing. I think the Case Shiller index is a solid reference. My own anecdotal experienced had me buying a house and selling it 2.5 years later (in 2022) for 72% more than what I paid for it.
I think that’s actually the big problem with the CPI - it treats a house purchase as a speculative investment, rather than a separate category of housing on equal footing with rent. I think the median housing payment (mortgage + interest) should be included in the CPI.
As someone who is looking to start a family, renting vs owning is not simply a financial question, they are totally different goods which are not interchangeable
Do you live in a slow real estate market? In the area I'm in, rent is basically equal or slightly higher than a 30 year mortgage with 20% down - if you can find a house to buy in the first place.
In Toronto, our mortgage is ½ to ⅔ of the equivalent rent these days. The startup costs for it, though, are killer — and most people's mortgages starting today would be closer to ¾ to ⅞ of rent, not counting the cash downpayment required.
Its owners equivalent rent i believe, which makes sense academically but not practically. When you are using it to gauge whether your monetary policy is causing inflation you should be looking at asset prices at least as hard as consumable prices and you shiuld be extremely wary doing substitutions.
I generally agree with the implied point that goes with this question - people who make vague claims that the CPI is inaccurate don't understand the CPI and don't have specific complaints. However, if you read through the explanatory material in that link (which, let me just say, is a fun way to spend an afternoon although I haven't any time recently) there are some complaints to be had.
It is remarkably challenging to follow what that index is measuring in real terms and whether it is measuring it accurately. It is hard to follow what biases the as-implemented sampling process might be subject to, there are several layers of weighting where it is hard to see how they were come up with and then 25% of the index is Owners' equivalent rent.
So the question is not just can people level specific complaints, but also where are we supposed to draw confidence from that this is a useful number? "Men with suits spent a lot of time coming up with it" isn't a satisfying answer. I don't want to use it for discounting my investments, if my money isn't keeping up with the M2 monetary aggregate I'm shuffling my portfolio around (even gold pretends to have real returns if you discount it using CPI, which is ridiculous). And it isn't especially useful for my personal life because my weightings are not the weightings in this table. And if wages go up based on the CPI... that just reflects workers getting screwed. We've all seen what productivity and profit trends are doing.
It looks like a baffle-them-with-bullshit con to distract from government spending and money printing by pretending that because this particular index doesn't go up everything is fine. The politicians have made the process of figuring out who is paying for the spending complicated enough that it is hard to do. That isn't a strategy that people should accept. Just because the logic is too complicated to understand doesn't mean that they've built a perpetual motion machine. Someone is losing out. This involved index is more of a distraction from the monetary aggregates at this point.
I believe they look at what people actually spend their money on to determine the basket of goods. All their data and methods are on the bls.gov website.
Do you think coal and lard should be included, like they were pre-1956? Or do you think the CPI should try to model reality?
> CPI is structurally biased to report lower inflation.
Quite the opposite. In the 1990s the Boskin Commission found that CPI was too high:
> The Boskin Commission, formally called the "Advisory Commission to Study the Consumer Price Index", was appointed by the United States Senate in 1995 to study possible bias in the computation of the Consumer Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled "Toward A More Accurate Measure Of The Cost Of Living" and issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.
I don't think the calculation/definition makes sense to capture inflation though. The idea seems to be to measure the quality-of-life-impacting inflation and not just inflation. Which can make sense.
So if people can elude inflation of certain goods by buying differents and if that happens, inflation exists but doesn't actually impact quality of life. That seems to be the theory and foundation of the calculation logic.
The problem is that it's not necessarily true. If people completely stop buying product A (which's price increased 100x) and switch to product B (with the same price as before) then by the above calculation there is no inflation at all. However it could be that B is actually an inferior solution to their problem and while it works, they would prefer A over B when they cost the same.
So for the above calculation to be meaningful, the loss of quality-of-life would have to be measured in the case where one product is replaced by another one. And that is of course extremely difficult to do.
Therefore I would say that the above calcuation generally underestimates inflation.
It would probably be more honest to project inflation by defining a static consumer's basket and following it's price into the future. When done so, it will overestimate inflation the more time passes. So it can be combined with the method above. And the real inflation is somewhere in between.
> If people completely stop buying product A (which's price increased 100x) and switch to product B (with the same price as before) then by the above calculation there is no inflation at all.
If people completely stop buying product A and switch to product B then the model should do that as well because the model should try to match reality.
The CPI is about measuring prices of what consumers buy: the P and C in CPI.
> It would probably be more honest to project inflation by defining a static consumer's basket and following it's price into the future.
But that is not the purpose of the Consumer Price Index. There are other statistics available that may be useful:
The CPI was setup for a particular purpose and it is good at that purpose. If you want to measure something else don't try to shoehorn it in, setup a metric for what you to measure rather rather than wreck what works.
Ok, but inflation is not cost-of-living and the CPI doesn't measure either of those directly.
Its often convenient for government to conflate the two; cost-of-living is a very flexible concept and so there are lots of way to get an answer you like, but they are distinct concepts.
Surely you can understand why a changing basket of goods makes for deceptive year-to-year comparisons.
> If people completely stop buying product A and switch to product B then the model should do that as well because the model should try to match reality.
Yeah, but it doesn't and it cannot. Because it's hard to measure if people reallt "switch" and if so, why and what it means to them.
In almost a century of economics, still no one has any precise definition of inflation, or how to calculate it. How inflation is calculated and measured or even what it means, is a hotly debated topic to this day. The observation that it seems to exclude a lot of things is part of the debate.
Inflation is not simply an increase in the money supply.
Like everything else in a market, a dollar has a value. Like everything else in a market, that value changes based on supply and demand factors. An increase to the money supply will decrease the value of a dollar, so that's still correct. But you can't just ignore the demand side. For example, if the population increases, then that creates more demand for dollars, driving the price up; in such an environment, you can experience deflation even if you increase the money supply, if that increase to the money supply isn't enough to offset the increased demand from population growth. Conversely, if the population were to decrease, that would result in inflation even if the money supply was static. And population isn't the only factor driving demand, of course. It's more than just the money supply.
If you print 10% more dollars all dollars are 10% less valuable, all things being equal.
Other changes in the economy may occur that would effect price levels of various goods, prices change all the time, but one thing is certain those dollars are 10% less valuable than if you hadn't printed any.
You can claim your growth in the economy balanced it out, but dollar holders were entitled to deflation in that case but instead got higher prices. It's still a tax even if prices don't go up, beacuse they could've went down, that's what happens in competitive industrialized economies, prices fall to slightly above the cost of production and then the cost of production starts falling.
> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
> If you print 10% more dollars all dollars are 10% less valuable, all things being equal.
Prices don't change immediately when the money is printed, prices begin to change when the money actually enters the market and starts bidding up prices.
This means that if you print money and add it to bank reserves or put it in a vault, that would probably have less of an effect on prices than if you threw wads of cash out of helicopters into crowds who would immediately spend it.
> Prices don't change immediately when the money is printed, prices begin to change when the money actually enters the market and starts bidding up prices.
That is a symptom of inflation, it isn't inflation itself. Playing games with timing and guessing how much the economy grew only really serves people who want to print more money as opposed to raising taxes for political reasons.
If your wages don't keep up with monetary growth but keep with CPI you'll see your standard of living decrease. Contrast the home ownership rates of your parents generation to yours to see this in action. On the other hand if your wages grew with the money supply you'd be richer than your parents due to the fact it got much cheaper to produce many of the goods you buy.
Anyone disagreeing with this should consider the opposite claim: that someone could counterfeit and spend a significant sum of money without having any negative effect on other people's purchasing power, not even over the longer term.
"and spend" is the key part. Lots of the money from QE just sat around as bank reserves and was never in the real economy being spent. That's how you can print money without causing runaway price inflation - just don't spend it.
> According to the article, $1 in housing in 1999 is equivalent to $1.86 today. That's... incredibly hard to believe. The Case Shiller is up over 300% for the same time period.
Case-Shiller is index of homes-as-an-asset buy prices, the housing component of CPI is housing-as-a-consumed-service rent prices. 1999 was pretty near historical lows for the buy:rent price ratio, today is just off the all-time high, so, yes, now:1999 for buying a home as an asset is very different than now:1999 for consuming housing as a service.
I think many areas saw a significant fall in prices in the 2009 crash, but some hot areas didn't. Those hot areas are probably 3 times as high compared to 1999, but the areas that were more normal might be closer to 1.86.
Sample of one. The house I once lived in sold for $193K in 1999, I sold it for $300K in 2007 (before the housing crash), it's Zillow estimate fell to $230K in 2010. Today the Zillow estimate is $454K. So that is 2.3 the cost.
It’s doing one to one comparison of the comparable homes. Schiller looks at average home price without adjusting for newer homes being much larger and better furnished than the ones built 25 years ago
it is appropriate here to question these numbers carefully -- and, this fits very well to lived experience over 25 years in a place with very high rate of change.. one might say an epicenter of these changes.. the SF Bay Area in California.. from what I read, Los Angeles metro is very similar... Seattle also.. these places I know well and these numbers are real from the ground view.
That's the hard to believe part, it would imply housing costs on average are only up by 86%, but that doesn't seem to be anywhere near accurate in at least large parts of the country (all the ones I looked at least when we considered moving).
Far more than SF and NYC have had housing prices more than double over the last 20 years. Hell, doubling over that timeframe would barely be over 3% inflation.
but maybe this is true if you factor in cheaper mortgages, lower rates . financing options were worse in 1999 vs 2019. Homes were very cheap in 1970 but way harder to get a good mortgage, too. much more was paid upfront.
Oh, you're assuming that CPI is computed in a rational scientific way. And that "housing" means housing. Neither is true.
Let's take a deep dive into how CPI housing is computed. You would think it could just be "track the price of every home sale in the US", or "track the price of every new rental". Ah, my naive friend, the US Bureau of Labor Statistics lives in the year 1900 as if data, electricity, compute, and statistics don't exist. Anyway, those numbers would be too scary and too objective.
First, the real kicker, CPI housing doesn't measure the cost of a house! At all. Their rationale is that the a house is an investment. So it has no relationship to the Case-Shiller index at all.
What do you measure if you don't measure the cost of housing? Well, you're left measuring rents, but that's not satisfying when a lot of people buy a home. So.. why don't we measure the imaginary rent that someone thinks that their house that they bought 30 years ago might be able to fetch.
3/4ths of the housing index is computed from a single quantity called the "Owners’ equivalent rent of residences". They ask people in a survey: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
Let that sink in for a moment. People who aren't renting their home. Who aren't real estate agents. Who have no idea what the cost to rent their home is. Who are homeowners and haven't rented a home in decades probably. "Bob, what do you think this would rent for?" "Ugh, $1400/month" Great! Let's base our entire understanding of the economy on the random answers of clueless people.
But, remember, the Bureau of Labor Statistics needs to do everything like we're in the pre-electricity era cruising around on the latest model of horse. So they can't ask too many people. Only a few thousand people, and they keep asking the same people over and over again. Seriously, they ask the same few thousand people every 6 months what their rent is and what their imaginary rent is. They even admit this doesn't change much. And they admit this means all the data they get is garbage, it's too skewed by the particular properties of those few thousand people they randomly selected once.
They could just ask 100,000 people or at least pick a different group of a few thousand every time? And then everything averages out eventually.
Doing that with your horse and buggy is way too hard. Instead they adjust the junk responses they get for the type of housing, quality, etc. With a whole bunch of magic numbers that come from yet another survey of clueless people, the Department of Energy’s Residential Energy Consumption Survey, which was last run in 2020 (although I think housing CPI is computed with the 2015 run) and asked about 5000 households a bunch of questions + got some billing info from their utilities.
They compute monthly CPI with an amazing formula that I think is the only use of a 6th degree square root I've ever seen in statistics (and I have CS/math degrees and do ML research; it's probably legit, but I'm not working backwards to figure out how they derived this).
Oh, we're done yet! Housing also gets older all the time, we need to correct for this. That's a whole pdf. That I've never read. And I'm not sacrificing my sanity for HN. https://www.bls.gov/cpi/quality-adjustment/updating-housing-... But it has a model from January 1997 with 110 degrees of freedom. That's not confidence inspiring to say the least.
Ok, so we ask clueless people to give us meaningless numbers that we then adjust based on complex largely meaningless formulas to compute an imaginary rent that doesn't exist instead of just looking at the actual cost of housing. How could this get worse? With the magic of "imputation"! A beautiful word from statistics that means "Oh, we didn't collect enough data and we have no idea what the actual number should be, so we're just going to make a number up and pretend like it's a data point we gathered based on some idea of what we think it ought to have been". Because the best data is the data you make up according to your gut.
No one with two neurons to rub together would ever adopt this methodology in the modern world.
Of course none of these numbers match any of the reality that anyone experiences. Their documentation on how anything is computed reads like standup comedy.
It's surprising how much you discount something you don't take the time to understand. Clearly your single set of experiences is superior to the century of work by thousands of professionals, probably all with far more knowledge in this area.
You should start your One True CPI and license it; you'd be rich.
I took a few seconds to understand why the 6th riot was used; it's clearly correct and if you took a moment to understand instead of discounting it, youd learn. Hint: it's 6 things multiplied together - ever hear of geometric means? Similarly I looked at the paper you discounted because the degrees of freedom somehow offended you. It too is a good model. And, as credentials go, I have a PhD and decades of modeling experience. Even so, I'd expect someone with your claimed expertise to be able to understand these.
If there were some vastly better method, traders could make money on the difference. They look at it, and cannot. There's lots of papers and research on this.
Multiple other actors,like the MIT Billion Prices project started, and others followed, measure it, and get equivalent numbers.
So, if you're so sure the BLS is stupid and wrong, there should be some group getting it right. Care to find them?
Another simple experiment you can do (and I've done) is to take a reasonable set of monthly purchases, weight costs like that, go back 40 - 50 years, and pull up ads for those goods. Pop it all in excel, and compute compound inflation over that time. Do it honestly. Then check BLS over that time. TADA! Guess what? It's pretty good. I've even gotten several friends to do this when they claim all this nonsense. They've all been surprised how well it works.
> Clearly your single set of experiences is superior to the century of work by thousands of professionals, probably all with far more knowledge in this area.
You're behaving like I am alone in criticizing the BLS for this insane methodology. There are countless papers out there about how crazy the CPI is, and specifically CPI Housing.
> You should start your One True CPI and license it; you'd be rich.
Predicting CPI and corrections to it is an established enterprise. As is predicting better inflation numbers.
> Multiple other actors,like the MIT Billion Prices project started, and others followed, measure it, and get equivalent numbers.
We're talking about housing yet you're quoting a project that specifically excludes all housing? How is this relevant? Why do I feel like you haven't read their paper?
They very explicitly show that their benchmark doesn't work outside of goods. Like they look at medical costs and show that they aren't predicted well. Sadly they don't look at housing. The project also ran at a time of very low inflation in the US so there's not much to see. It's easy to have agreement with CPI when the numbers are all fairly low, not much room to disagree at all. We can also argue how much agreement their numbers actually have with CPI.
> I took a few seconds to understand why the 6th riot was used; it's clearly correct and if you took a moment to understand instead of discounting it, youd learn. Hint: it's 6 things multiplied together - ever hear of geometric means?
Ok, I was having fun at that point. But, let's be serious. It's still stupid. And I stand by my statement, never in my life would I take a geometric mean here.
You're telling me that you would do this today? You wouldn't say set up an actual Bayesian model and compute its posterior to estimate all of these quantities? You would compute all of these indices and corrections separately? All of these little errors add up, you have no idea what's going on with them. You wouldn't want to get some confidence interval out? You wouldn't want to be able to see how variations in your assumptions can change the results? You would impute the missing numbers with whatever felt good? Come on. This isn't acceptable methodology in any field that I've ever been a part of.
> Similarly I looked at the paper you discounted because the degrees of freedom somehow offended you. It too is a good model. And, as credentials go, I have a PhD and decades of modeling experience. Even so, I'd expect someone with your claimed expertise to be able to understand these.
You're telling me that the best you can think of model wise is a linear country-wide model with an R^2 of 0.5? After decades of modeling experience that's all you've got? And that one R^2 is enough to make you believe this is a good model? That's the standard of evidence you use before you commit trillions of dollars to a model? Give me a break! This is the initial analysis an undergrad would make in a mediocre course project they didn't put much effort into. Even our undergrad courses have far higher standards than that paper.
> Well, you're left measuring rents, but that's not satisfying when a lot of people buy a home.
It's perfectly satisfactory when the accepted rationale for many, many home purchases is as an investment vehicle, rather than as just as home (which is what rent covers).
> No one with two neurons to rub together would ever adopt this methodology in the modern world.
You're seriously making the claim that the BLS has nobody with your intelligence in a powerful position?
> You're seriously making the claim that the BLS has nobody with your intelligence in a powerful position?
It has nothing to do with intelligence. And of course statisticians at BLS know that this is trash.
Any economics or statistics student could do be a better job. And certainly, no statistician worth their salt would compute anything with the methodology that BLS uses. I cannot imagine a paper being published based on this methodology. It's not that reviewers would reject it, it's that no one in a position to submit such a paper would ever do so because of the shame associated with doing such shoddy work. I'm not sure I'm doing a good job of explaining how incredibly subpar this is.
BLS has other priorities. Changing the methodology isn't easy at all. All of your old numbers don't make any sense anymore. You can't go back and recompute them. And people would fight over what methodology to use.
Everything they do follows this insane totally outdated approach, it would be really confusing to have parts that are modern and parts that are ancient; perhaps even more confusing than the current mess.
There are no incentives to change anything. Who will make them change something? Congress? They have a worksheet, they run it, they get numbers, garbage in/garbage out, people use the numbers regardless.
Hardly anyone knows how these numbers are computed. Hardly anyone cares that they are unscientific trash. Pretty much everyone stops at the title associated with the number.
> Any economics or statistics student could do be a better job. And certainly, no statistician worth their salt would compute anything with the methodology that BLS uses.
So every bond trader, Fed observer, academic economist, investment bank economist, pension fund, union, etc, are all aware of this bad methodology in the BLS CPI, and are saying nothing? All these people with heaps of money on the line in one of the most looked-at statistics published are… ignoring the problem?
> Hardly anyone knows how these numbers are computed. Hardly anyone cares that they are unscientific trash. Pretty much everyone stops at the title associated with the number.
Really? Because MIT's Billion Prices Project (BPP; an index of internet prices, scraped daily) found the CPI and the BPP are very tightly intertwined:
> So every bond trader, Fed observer, academic economist, investment bank economist, pension fund, union, etc, are all aware of this bad methodology in the BLS CPI, and are saying nothing? All these people with heaps of money on the line in one of the most looked-at statistics published are… ignoring the problem?
No, they make money off the problem by computing better numbers internally. And there are countless papers out there criticizing the BLS for their shoddy methodology.
> Really? Because MIT's Billion Prices Project (BPP; an index of internet prices, scraped daily) found the CPI and the BPP are very tightly intertwined:
Funny someone else brought that up. That's "true" as long as you don't look at any of the details and don't read their publications.
They don't measure housing for one thing, and that's what we were talking about here. Only goods. They even show that services aren't well estimated at all. And even some categories of goods aren't. And they unfortunately ran at a time of historically low inflation. It's much easier to predict a number that is very low and has very small range.
So.. the MIT project is about the wrong category of goods. Computed in a totally different way by the BLS. Nothing in my post applies to it. And they explicitly show that they don't agree with CPI on categories like it (simply because their project isn't relevant to them).
There is no internationally agreed upon method for housing/shelter, with pros and cons for each:
> International statistical agencies have unanimously adopted the net acquisition approach for durables, but there is no consensus about the best approach to the treatment of OA in the CPI16 (Table 1). Rental equivalence is the most popular approach among countries belonging to the Organisation for Economic Co- operation and Development.17 Johnson’s (2015) recent review of the U.K. CPI proposes using CPIH, which includes the costs of OA and is based on a rental- equivalence approach, as the U.K.’s main measure of inflation. Several countries in the European Union have refrained from incorporating OA into their CPI, although Eurostat is currently conducting a pilot study for the euro area based on the net acquisition approach. Australia and New Zealand use a net acquisition approach, while Sweden and Finland—like Canada—are using a partial user-cost approach. No country has adopted a full-fledged user-cost approach.
People also often confuse the price of the asset (e.g., land) with the price of the home/structure.
> The [US] BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. [...]
> Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs.
The house (home) is not being sold for one million dollars. The land is being sold for $950K, and the buyer is getting $50K worth of structure.
Similarly if you are a home owner your home/structure depreciates over time so you have to do maintenance on it over time. And because of various shortages (e.g., lumber, plumbing fixtures) the cost of upkeep has gone up. Upkeep is a part of the CPI: the "C" in CPI stands for consumer.
And why the component is called Shelter and not Housing, at least in Canada:
Canada has always had far better statistics than the US. Both for CPI and for unemployment. This often leads to Canada looking worse, for example, by having a higher unemployment rate, when instead, Canada just has a much better way of counting who is actually unemployed.
> There is no internationally agreed upon method for housing/shelter
Agreed. But, I think that we can also agree that basing most of the number on asking people what the imaginary rent of their home might be is totally worthless.
> In the Canadian CPI paper there is some explanation towards the complexities of shelter / owner accommodation:
And you'll note that Canada doesn't use Owners' Equivalent Rent, never mind making it the majority of the index. Instead it actually computes what it would likely cost to rent that dwelling: mortgage, replacement cost, property taxes, maintenance, and other costs. That's a far more rational way of doing it.
And plenty of folks in Canada think like you do: that the official way Is Wrong and Some Other way should be used—often pointing to the US as the way it should be done. And yet here is someone in the US saying the Canadian way should be the way. ¯\_(ツ)_/¯
At the end of the day, you have some things that are a huge component of the CoL for some people (housing, car) that are fairly modest for others who have a paid-off mortgage or live in a LCoL area and either don't own a car or drive a paid-off old one.
Assuming the inflation of those items differ significantly from a broader basket of goods, there's no way to have a single measure that reasonably represents price increases for the two groups.
Owners equivalent is an insane, distortionary metric here when you can just look at the market data for similar sized properties. No one who was going to rent their house would do a survey of what their neighbors with similar sized homes think they should charge for it. They’d look at what the market rate is for their neighborhood. This is, of course, what property management companies actually do on behalf of owners.
Further, there is no internationally agreed upon method for housing/shelter, with pros and cons for each:
> International statistical agencies have unanimously adopted the net acquisition approach for durables, but there is no consensus about the best approach to the treatment of OA in the CPI16 (Table 1). Rental equivalence is the most popular approach among countries belonging to the Organisation for Economic Co- operation and Development.17 Johnson’s (2015) recent review of the U.K. CPI proposes using CPIH, which includes the costs of OA and is based on a rental- equivalence approach, as the U.K.’s main measure of inflation. Several countries in the European Union have refrained from incorporating OA into their CPI, although Eurostat is currently conducting a pilot study for the euro area based on the net acquisition approach. Australia and New Zealand use a net acquisition approach, while Sweden and Finland—like Canada—are using a partial user-cost approach. No country has adopted a full-fledged user-cost approach.
Seems like any particular system has pros and cons. Someplace else in this thread someone mentioned that Canada's system for Shelter is better, but even StatCan recognizes limitations of what they use:
And plenty of folks in Canada think like you do: that the official way Is Wrong and Some Other way should be used—often pointing to the US as the way it should be done. And yet elsewhere in the thread someone in the US saying the Canadian way should be the way. ¯\_(ツ)_/¯
You’re completely missing my point: we already have firms who do what the BLS claims to be doing that have greater predictive power and determinative impact on what people play for housing. Ignoring that reality to shrug and go “lots of countries measure things in ways that don’t make any sense so what can you do” is not a refutation of anything.
> You’re completely missing my point: we already have firms who do what the BLS claims to be doing that have greater predictive power and determinative impact on what people play for housing.
I agree that what the BLS is doing is not predictive. Because that's not the point of the CPI: it's measuring what happened in the past.
That's why the numbers that were released on October 12, 2023 were for what happened in September 2023, not November 2023.
See also determinative, which is what the BLS is trying to measure, i.e. what would be actually paid were the housing made available as a rental. No firm trying to calculate rents for a new rental would do what the BLS does, which is why their number are bullshit. If you can’t acknowledge this, it seems like you’re just being intentionally obtuse.
> Sometimes I feel like people read some econ 101 and the admittedly intuitive idea that inflation is “always and everywhere a monetary phenomenon”, but didn’t stop to think that it might be a lot more complex than that.
This is the case with almost every armchair economics comment. The same thing happens with the complexity of affordable housing: “It’s all just supply and demand! Econ 101!”
The graph is referencing the Consumer Price Index.
I think that the official inflation numbers given are low to the point of absurdity. Time to dust off criticisms of the CPI... Most likely, no doubt, there's some political deflation of the numbers.
These graphs are just lies based on lies based on lies.
Food prices have basically doubled in a couple of years. Prices for McDonald's have gone from about $5 for a breakfast meal combo to almost $9. I can't go out for dinner in the Bay Area for 2 adults and 2 kids for less than $100.
In 9 years up to 2021, my house price almost tripled. That is inflation that no one talks about. My new house price that I bought in 2021 is down 15%. This is deflation that no one talks about... yet.
The government skews numbers because they allow consumers to "trade down" to lower quality, cheaper products so that inflation doesn't look like it's going up. This doesn't capture the fact that the product is much, much lower quality. If you compare a real Big Mac to today's Big Mac, it's a pale comparison. Same goes for just about everything else. What use to be "regular" is now considered premium, and that inflation doesn't get captured over the decades.
The Bay Area is not America. In Philadelphia, for example, entrees at a nice restaurant downtown are about $15, while I fed three adults at a bar in the suburbs for $40.
The government isn't lying to you with CPI, you just live in an outlier city.
No, same meal cost much less before. We go to the same restaurants and know how much prices went up. The restaurant owners of the ones we visit often all say the same thing, they had to cut down on quality while still raising prices over the last couple of years, and some had to drop menu items because they were getting too expensive and the risk of wasting food because no one ordered it was too high.
You seem to think that the cost of eating at restaurants would/should not reflect the cost of housing in the general vicinity of the restaurant.
The other example you were quoted was from Philadelphia which is a (relatively) cheap east coast city with fairly stable house prices. Nobody is denying your experience, they are pointing out that your experiences come from an "outlier" location.
Inflation numbers are nationwide, but bay-area housing prices are not. And high housing raises the costs of all labor-intensive services (like your McDonalds), since employees need somewhere to live.
I work at a convenience store. We have a penny jar. Except about four months ago people starting leaving dimes, nickels and quarters. It was not a gradual change, people hardly ever left more than pennies. And it is not just one or two people.
My take is that nothing less than a dollar bill is worth much anymore. Part of this is could be the issue of cash vs card, but my uneven sample says that ratio is not really changing.
And what can you buy for $0.25? Nothing. $0.50? Nothing. Not a cheap drink, not a cup of coffee. For a dollar? Still nothing.
The US used to have a half penny but it was eliminated when it had more purchasing power than a modern dime. There’s been talk of getting rid of the penny my entire adult life, but we don’t really seem to make improvements anymore, so I imagine it will remain.
The US seems to have entered a stasis of coinage (and bill) denomination since before I was born (a long time ago). Besides getting rid of the penny, pretty much every attempt to introduce new currency (like $1 coins) have failed. And I wouldn't count on being able to use anything bigger than a $20 bill at a random location.
And, at this point, cash use is in sufficient decline that I can't imagine any serious effort to make changes.
Canada no longer has pennies. Canadians now seem a little surprised that we still have them. Comically, US banks accept Canadian pennies so people are using them up as much as possible.
I believe the (plausible) conspiracy theory is that the zinc industry lobbies to keep them going. Somewhat ironically, it's long cost more than one penny to make a penny. I believe 1982 was the last year they were made entirely from copper, but eventually even the cost of zinc (often known as "pot metal") outpaced the value of the penny.
Really, that's a real shame if it is. I havent been back the US since late 2014. I remember walking around Manhattan near Times Square I think, just exploring and seen so many signs for $1 slice of Pizza, I think it tad more with some sales tax thing applied when I had one, another breakfast time I got bagel with cream cheese from one of the vans I think near one of the big banks near wall street I think $1.50-$2.00. I was staying in a top-end hotel courtesy of a company I was interviewing with but unsure of expense policy I just got the food around and about myself and found it extremely cheap if you were a little careful. How much has this changed? My memory of facts could be a little off, but I always had US down for cheap plates of mountains of food, and takeaways that were next to nothing price wise.
It didn't really got more expensive because salaries have increased as well. Maybe for a tourist coming from a country that hasn't seen that much inflation (Japan?)
I'm almost surprised that many people carry coins any longer. I have a few bills in my mini-wallet but any coins I end up with get tossed in the coin bucket at home to maybe get redeemed someday. Even quarters aren't generally useful for tolls or parking meters any longer.
There is a coffee shop in SE Alaska that was still selling $0.50 coffee as of Aug 2023. God bless their hearts. -- total anecdote, your point is overwhelmingly true.
That's still a good price. I found a similar thing in Spain for the staple drink of coffee was e1-e1.50 everywhere you went in the Valencia region, didn't matter if high-so or not, arty farty restaurant or workmans cafe, if you wanted a black coffee with a little biscuit on the side it would be under $2 anywhere you went.
Do you all still hand out pennies? I found that pennies were effectively killed off in the COVID coin shortages. I've noticed that some smaller places don't hand out coin change at all.
Yes, I often take the non-pennies out. Not for that reason, but because when someone comes in and doesn't have enough to pay for something basic - like milk, I can use some of the two or three dollars in quarters, dimes and nickels to make up the difference.
I find it fascinating that thirty years ago, the sort of "default" unit of paper currency was a $20 bill — like, ATMs never output tens or fifties, it was always twenties, so you'd probably have a few andrew jacksons in your pocket — but today that's still the go-to.
Walk into any convenience store and try to pay with a fifty dollar bill, you're lucky if they even take bills that large, they won't want to make change, they'll pull out a highlighter to make sure it's real. But it's only worth about twenty bucks to anyone who was around for Nirvana.
A $40 tip is wild unless you’re talking about taking the entire family out to a nice restaurant, lol.
I remember 20 years ago, the general rule was to tip at least 10%, then at some point it changed to 20%. I abide by that. If it was great service, I tip 20%, if it wasn’t very good, I tip 10%.
> The Consumer Price Index (CPI) is like a yardstick that helps us understand how much the cost of everyday things, like groceries or rent, has gone up or down over time.
It is a sign of the madness of monetary policy that raw changes in price are an unsuitable for measuring whether the value of something has gone up or down. Cutting a bit off the yardstick each year doesn't help. They just make it harder to figure out what is happening in the economy.
A house isn’t. Healthcare isn’t. A lunch isn’t. A child’s daycare isn’t. Energy isn’t. Heating isn’t…
Even a car is safer and nicer but the utility is the exact same.
You're right. Healthcare is more cautious and more expensive. Housing is built to higher standards but with poorer quality materials, and uses more of the available lot area for covered square footage, but is still more expensive on a per square footage basis despite using poorer materials.
Neither are remarkably different in utility, but both have seen astronomical increases in cost.
Healthcare is somewhat different, but also many things (if not most) haven't changed at all and have seen their price increase nonetheless.
As for housing, only new housing has changed, old one mostly hasn't. Also if it's a somewhat bigger house but it's more remote from city center where people work, leading to higher commute times and expenses, is that supposed to be better or worse, how do you quantify that?
A house from 2020 is different than once from 2000, is different than one from 1980. I used to live in a house that was originally constructed in 1890: it not only had residual disconnected knob-and-tube electrical wiring, but piping for gas lamp lighting. Some homes in the neighbourhood had small doors for milk deliveries and also coal chutes.
Sure, but even today more people live in houses from the 80s than in house from 2020, so comparing the average house price in 2023 with the house standard from 2020 doesn't really make sense, because the average house is much older than this.
Imagine you need 200 of bricks to fix a wall. You may say that modern brick is 50% better, more insulating whatever. And now your inlation number is 10% instesd of 60%
But I still need the same number of bricks to fill in the hole on the wall. And I have to pay 60% more for it, not 10%. So when it comes to cost of living and surviving in the world, this argument is pure fantasy.
My upfromt cost is still higher, and the wall cannot be less than 1 brick thick so I cant use fewer bricks. Maybe I am a construction company and someone else gets the befits of better insulation, or maybe fuel costs went up, you have to isolate discussion to the item itself.
I hear you, and I am trying to grapple with this myself.
So the cost of bricks went up by X, and maybe the cost of electricity also went up by Y, and the labor costs are also higher by Z, but adding them all up, my costs are not up by X + Y + Z, but something less than that. Should that be part of CPI? Is that part of CPI? Is that part of something else? Very interesting in knowing an official economist take on this.
Can you achieve the same level of insulation for less, by using traditional insulating materials and techniques instead of insulating bricks?
Does the law mandate that your bricks have a certain R-Value?
How much heating and cooling is required in the climate where the building is located?
As usual there is no simple answer.
Bricks are OK as an analogy, but very poor as an example: as far as I'm aware modern bricks are no more insulating than old bricks, and neither are any good at the job. If there is a modern and insulating brick, then I don't think it's really caught on very much yet.
You can buy dumbphones (the old sort of bricks, in your analogy) for less than $20. They have basic cameras, small screens, and 2G connectivity. As I understand it, a similar phone would have cost $100 in, say, 2007.
No one is stopping you from buying the $20 phone with the 2007-era features. You will still be able to text and call just fine. You just want the features of the smart phone. That's why I think it's fair to say that the cost of mobile phones hasn't gone up.
This is the case across many categories, the big exception being cars - automakers simply refuse to offer basic/inexpensive cars in the North American market for whatever reason.
You can't just use old products today and claim they are adequate For example I cannot work from home with a dial-up connection. You need a few megabits to do a video interview and get a job, to work from home, etc.
So your CPI might say internet is cheaper, but that is a fantasy, because in real life I pay 2x as much for a 50 mb connection.
Likewise I cannot use a 20 year old phone - those frequencies have been shut down.
There are several sitations where I was legally required to have a smartphone - one of them was registering a birth.
So again your CPU will claim that phone got better, but in real life I have to spend more money to remain an functioning member of society.
You couldn't have used your dial-up to work from home in the 90s either. Your internet is doing more for you, so it's not fair to call it's higher price "inflation."
Companies are making new feature phones today that will connect with cell networks. And are you really required to have a smartphone to register a birth? Was there not a workaround for feature phones? State governments have to be able to let indigent people register births, so there must be a workaround.
> Your internet is doing more for you, so it's not fair to call it's higher price "inflation."
It's not really doing it for me, is it? The requirement that I pay for modern internet is forced on me against my will.
Employers require that they can see my face when conducting an interview, the government requires that I apply for a visa online and upload 300 mb of documents.
The hospital demands that I register online and work with their system.
If you don't want to be homeless, you must pay for the modern service. And if it is more expensive, then inflation went up, your budget is less today than it was before.
Everyone brings up cell phones but imho they are not that important when looking at rising prices to consumers (technology is deflationary in nature). Food, energy, and housing are what impact consumers the most.
> Food, energy, and housing are what impact consumers the most.
And both food and energy are very chaotic (especially due to geopolitical events: thanks Russia!). A couple of years ago there was much rending of garments over gas prices in the US: now, not so much.
So that is why inflation is often also looked at without those two components because they can vary so widely, even month-to-month (anyone else remember when oil went negative in 2020?).
I still hear a lot about gas prices today to be honest. They are still quite high relatively.
But I think that is the largest failure of Core CPI to the point it makes it almost worthless. Is it more stable? Sure, but stability isn't great if it doesn't measure the right thing.
> But I think that is the largest failure of Core CPI to the point it makes it almost worthless.
It's not: if policy was determined on non-Core, then one month the Fed would have to raise/lower rates, and then the very next month it would have to do the opposite.
The point of Core is to removed the gyrations of commodity (traders). See Chart 1 of:
> if policy was determined on non-Core, then one month the Fed would have to raise/lower rates, and then the very next month it would have to do the opposite.
Well, except Fed policy doesn’t really use CPI (Core or otherwise) at all. The Fed's evaluation of prices that informs monetary policy centers on the PCE, not CPI.
And while that's their key indicator, their actual analyiss underlying policy decisions isn't just applying a fixed function of current top-level indicators to get a monetary policy as output; there is considerable analysis of trends and what is going on below the top-level indicators, etc.
You don't need to board consisting of multiple Senate-confirmed officers with large supporting expert staff to apply a simple function of headline indicators from other agencies to produce an output, so the BLS not separately calculating and publishing core CPI wouldn't effect the Fed doesn't use CPI, and does a level of analysis with the indicators it does use that if it thought something like the particular aggregate used for “Core” was necessary and not in the publication, they’d just recreate it from the lower-level components.
Core CPI isn’t headline CPI. Its an additional measure that is published alongside the headline CPI; the removal of components with a high non-seasonal volatility [0] is thought to potentially make it more useful in providing early indication of changes in longer term trends; literally no one presents it as a better measure of current inflation.
[0] the components involved also have a high seasonality, but that can be addressed via seasonal adjustment, but the high non-seasonal volatility means that fluctuations in those components can drown out early trend indications in ways that seasonality adjustments can’t compensate for.
> A cell phone from 2 decades ago is an entirely different product from a cell phone today. That needs to be accounted for.
A cell phone indeed, but for personal computers, the gain we got from the technological advances isn't as clear from a consumer's perspective. Sure there are niche activities like video processing or graphic editing, where the performance improvements allows for things barely imaginable 20 years ago, but for most use case people have, there isn't that many significant difference:
- boot time: despite SSD, consumer PC still take minutes to boot when they aren't brand new with a fresh install.
- web browsing, not even faster.
- Word and Excel, barely changed over the period.
- video games: sure they have more realistic graphics, but that doesn't make them more enjoyable otherwise.
The average house computer is now a laptop that's permanently plugged to the socket (with a long dead battery) instead of a desktop. It takes less room in the house, but also has a much smaller screen, a worse keyboard and no mouse. Is that a net gain?
Let's make a 'tech CPI' separate from 'cost of living CPI'. Most people don't need the latest gadget, and we are starting to realize that most of these gadgets are downright detrimental to our mental, emotional and social health.
That should absolutely not be accounted for. Things are supposed to become cheaper and better every year, except for in situations of massive war or natural disaster. Technological progress and worker education has made the production of goods and services extremely more effective than two decades ago.
Workers for sure have not seen their wages go up, and consumers haven't seen prices go down. Who's stealing the wealth of the world?
It's very pretty but having a stacked graph is really inappropriate.
We don't spend equal amounts on those categories and stacking the graphs obscured the relative changes. There is no analysis worth anything in the text.
Whether the proportion among them is correct is a valid point, but since the extra cost of the different categories is cumulative to the household budget, there is an argument for stacking them. It would make more sense if it were proportional to household spending between categories, but I suppose then some of the categories would be too thin to see the increase.
Exactly my point. If a category becomes 3x more expensive but it only takes up 1% of my expenditure then a stacked graph without proportions is very misleading.
It also assumes that in 2000 you spent exactly the same amount on each of these categories, which is very weird. It would be much more interesting to know the relative amount of need for each category.
I'm confused how this visualization is meant to work.
I would expect I can compare today to an arbitrary time in the past. But the visualization actually shows 2000 vs an arbitrary time in the future. How is that a useful comparison? What is special about 2000?
I don't care about the buying power of a dollar from 2000 in 2015. I do care about the buying power of a dollar from 2015 in 2023.
but there's no mention of what incomes did over the same period? the recent inflation was caused by cheap money policies (probably around covid) which flooded the market with spending, driving up prices.
also, isn't inflation always calculated on a 12 month scale? each month they publish how much prices have increased from 12 months before. This means that if there is a lot of inflation for a few months, each succeeding month after that will show high inflation till that bulge in the snake works it's way through. The numbers are a valid comparison to a year earlier, but misleading if you think "omg we've had month over month of high annual inflation numbers!"
Likely related to Medicare policies and reimbursement rates, upon which many other insurers base their rates (e.g. reimburse up to 200% of the Medicare allowed rate).
Like some other commenters, what is actually being represented here is hard to understand. Which is usually what nice visualizations are supposed to clear up over [CPI documentation].
Say you have $100. You pay $30 for gas, and have $70 left for other expenses. Let's say the oil cartel raises the price of gas to $40. You now have $60 left to pay for other things.
Because you now have less money, demand for other goods and services is lowered, and because of the Law of Supply & Demand, those other prices are forced down.
Now, suppose the government prints an extra $10, and gives it to you. Now you have $80 for other expenses. Your demand for other goods and services goes up, and so because of the Law of Supply & Demand, those other prices go up.
---
Another way to think about it. Money is affected by the Law of Supply & Demand just like everything else. Printing more money means there is more money (!), and more money chasing the same value of goods and services means the individual dollar are worth correspondingly less.
> So the government has boosted demand for groceries, thus causing them to be more expensive?
Increased demand results in price increases. The Law of Supply & Demand. Crazy, I know, but it is The Law.
> How did more money get into the hands of consumers aside from that one-time $1500 paycheck?
The deficit money got spent into the economy. It first flows into the hands of the voters being bought with it. Then, those people spend it, and it flows into the rest of the economy. It's like dumping a barrel of paint into a pond. It takes a while for it to spread out evenly.
Imagine you took out a loan for $1000 in 1980. In today’s dollars, the $1000 to repay is much less in relative terms than it was in 1980, because of inflation.
I'm aware of the implications of inflation and the passing of time. Let me be more direct. The "correspondence" between federal deficits and inflation Walter implied existed was almost certainly pulled from his cushions. A deficit that _purchases_ an increase in the money supply certainly _can_ lead to inflation, among other deficit sources in varying degrees. But the implication that we pay for deficits specifically with inflation is a gross oversimplification, all in service of being pithy.
Seems self-evident to me that increasing the supply of dollars does not automatically increase the supply of goods and services that people actually consume.
> Is running a federal deficit and an increase in the money supply the same thing?
No. The money supply will naturally increase as the value of goods and services in the economy grows. (This creation is done by the banks loaning money against collateral, it's a rather complex subject.) If the money supply increases faster than that, we have inflation.
The way it increases faster than that is via the fiat money printing press.
Here's another way to look at it. The US had a net zero inflation from 1800-1914. Everything the current government blames as a cause of inflation happened all over that time period, but no net inflation. From 1914 on, we've had endemic inflation.
Any explanation of inflation has to account for that.
The creation of the Fed accounts for it. It was given the power to arbitrarily create money, and so they did, to fund the deficits. Every other country saw the magic of this, and switched to fiat money and inflation.
Correct.
I don't see it mentioned much in this thread.
Everyone wants to blame the government for over supply of dollars.
Not much mention that on the production supply side, we have record corporate profits.
On earnings calls CEO's just come right out and say 'because of covid, we are able to raise prices, and man it's great'.
A lot of inflation is in the supply side just raising prices and making more profit.
If there really was a supply chain issue, then the suppliers should also be squeezed, then themselves have lower profit because their source prices were higher.
But it is really just the consumer facing prices that go up. A lot of inflation is profit taking on the corporate side.
> But it is really just the consumer facing prices that go up. A lot of inflation is profit taking on the corporate side.
The US CPI went up 21.9% over the past 5 years[0]. The PPI went up 27.3% over the same timeframe[1]. So it's untrue that it's just the consumer-facing prices that have gone up; the producer-facing prices went up even more.
Corporate profit margins are high compared to historical averages, and total corporate profits went up by 40.7% over the past 5 years[2]; but the money supply went up by even more, by 47.1%[3]. So perhaps it's fair to say that businesses have been good at capturing the bulk of the additional money supply. Real (as in inflation-adjusted) personal incomes went up 9.4% over the same timeframe[4].
Consumer behavior was in turbocharged spending mode, fueled by rock-bottom interest rates and fiscal largesse. When supply remains constrained and demand goes through the roof, prices rise. Nothing too mysterious there.
Various other sources give much higher numbers, like up 179% from 1999 to 2020 [1] or up 110% from 1998 - 2018 [2]. So I'm not sure what's going on with the article. It could be that they're deflating by wage increases, or showing the change relative to overall inflation, or something like that.
This was the part that was most surprising to me as well. Most other reports seem to indicate that education is among the fastest rising costs compared to inflation, similar to healthcare. I'm surprised to see that number so low in this report.
Technology is a dramatic counterexample. 1999's ASCI Red 1-2 teraflop supercomputer cost $46,000,000 1999 dollars. A 2 teraflop 2022 iPhone 14 costs $800. Even if you nitpick the computation comparison, there's still a 5 order of magnitude reduction in cost.
Tech is the exception that proves the rule, rather, advancing so fast that the concomitant price deflation outpaced inflation seen in other sectors.
There's an interesting chart that shows how inflation has been distributed very unequally in the economy over the last 20 years. Things like healthcare and housing where the supply is legally/artificially constrained (thus preventing natural price deflation) have seen the biggest increases.
Things that are hard to produce or rare typically keep pace with inflation. Tech becomes easier to produce over time due to improvements so it does not keep pace with inflation and typically deflates.
Not only that, but I believe the USD is tied to Energy, not Gold. When I was young you could by a lot with just 25 cents. Plus I know people used less energy back then.
But the Oil Embargos hit the US twice in the 70s, during that period inflation spiked and only settled down when the price of Oil stabilized. USD had adjusted to the new prices.
Then in the last 20 years, a few times we had some relativity minor shocks due to OPEC decreasing production among other things. Thus inflation.
People like to point to other things, but to me, our economy is directly tied to the price if energy. And maybe that is why trying to get off of fossil fuels seems almost impossible.
And not counting the price of Energy in our inflation numbers skews our real issues.
Oil was a big driver of inflation in the 70s, but another factor which tends to be overlooked is population growth: while the US population had been rather stagnant during WW2, the post-WW2 baby boom led to the 70s being filled with the now-adult Baby Boomers entering the workforce and demanding housing, transportation, etc. which really didn't help things. If there was no WW2 (or if there was no baby boom because people kept having kids like normal throughout WW2), inflation would have been much less pronounced during the 70s.
The value of the USD, like anything else, depends on the amount of it. If you create a lot of it out of thin air, eventually it's going to be worth less once that money gets into circulation, unless you also created a bunch of goods and services out of thin air so its relative worth (dollars in circulation per good/service in the economy) didn't change.
Most apparel has gotten ridiculously worse than it was in 1999, adjusted for cost.
I have a J. Crew shirt from 1999 I can still wear, which cost $49 in 1999. Equivalent shirt today will be $98, the buttons and stitching will be horrible comparatively and it will die a faded death after a couple of years.
The new shirt, however, will photograph really well online.
Inflation isn't a scalar, which is the main point of the article. The problem is that capturing all prices at all times in all locations is effectively impossible, so it's generally oversimplified out of necessity.
On the other hand, the value of a Dollar...
The Morgan Silver Dollar from 1901 that I keep with me as a reminder, is worth about $17.50 in melt value.[1] The folks my age and younger generally don't appreciate the value of hard money.[2] It's almost always bought about 4 gallons of gasoline, or a meal for one. Say what you will about the inefficiency of a commodity backed currency, it won't shrink to zero value over time.
You know, the Spanish once found a whole country made out of silver, they called it Argentina (argent == silver). And they brought a lot of this silver back to mainland Spain.
While the value of silver coin did not shrink to zero during that time, it did shrink quite a bit, all across Europe. Historians like to write about 150 years of massive inflation.
Prices rose on average roughly sixfold over 150 years. This level of inflation amounts to 1.2% per year compounded
Prices have risen far quicker than that since the Nixon shock. Perhaps the reason we haven't gotten upset is that most people don't remember the value of hard currency?
To really measure inflation, you need to find some good or service that hasn't changed in quality in decades. iPhones keep getting better. Houses keep getting better (mosty). What's left? Tax preparation? Polo shirts? Airline flights?
Clothing manufacture is really only bottlenecked by labor. It’s one of the areas where if someone puts up the capital, and the factory is located in a city with low-cost labor, a profit will be turned. It’s a great example of what economists call “comparative advantage.”
You can see clearly that the categories with the most inflation are those that can’t be traded: housing, education, medical care are all dependent on American regulatory cartels.
Sure, but alternatively you could just as easily say, "you can see clearly that all the categories that are regulated are those with nearly vertical demand curves: housing, education, medical care are all easy to exploit by corporate cartels without regulation"
The top level visualization is deeply misleading. By stacking all the categories with an initial equal weight at $1 you are visually showing your own personal weighting of goods for total CPI.
Someone always says that, but the calculations are available. And there have been very detailed reviews of the 'its all fake' side, that have shown the published rates really aren't that far off from what the detractors say is happening if you use the various 'alternate methods'.
Would the gold standard have prevented or slowed any of this inflation runway?
I’m not one of those libertarian types who believes the fed is a giant conspiracy, however there is something to be said for mechanisms that cap the ability to print money
The CPI is calculated by the US government. They have every incentive to understate inflation and zero incentive for it to be accurate.
The US government is the biggest debtor in the world. Inflation is good for debtors. The US government is controlled by monied interests. Inflation, as a wealth transfer from poor to rich, is good for monied interests.
Academic economists as always exist to provide air cover for the regime.
These are probably real numbers, but the government lies deliberately to keep inflation adjusted payments down. Costs such as social security are fixed to inflation. A site I follow is called ShadowStats that uses the old government accounting measures to calculate inflation, and its interesting to see the difference.
Unfortunately the shadowstats guy doesn’t actually do the calculations. He just takes the official number and applies an “adjustment”. He has said as much. It’s all bullshit.
> long-term discouraged workers, who were defined out of official existence in 1994
The labor force participation rate, defined as the percentage of people 16 years of age or older who are working or seeking work (minus "institutional", aka military) currently sits around 63%. The US population is roughly 17% over 65. Those three numbers roughly add up to 100%.
Roughly 20% of the us is under 16, which makes your 17% go up to like 21%. Also that's still ignoring full-time students in treating housewives as unemployed.
Yes, because I enjoy an economy 4 door twice as much now that they cost twice what they used to. Now I have Bluetooth, a rear view camera, increased fuel economy and improved crash protection. Today, if I get t-boned by a lifted F-350, I'll die in a hospital instead of on the road, and you can't put a price on that.
> But if we take away the outlier 2020 data points, the average real annual GDP growth from 2010-2019 was 2.3%. The inflation rate in that time averaged roughly 1.8% per year.
> If you’re one of the conspiracy people who believe inflation has actually been running at 5-6% per year, that would assume the economy has been contracting by 1-3% per year over the past 10 years.
> And if you’re a full tinfoil hat person who assumes inflation is actually 10-12% per year[2], that’s like saying we’ve been in a full-blown depression and the economy has lost 80% of its value.
As much as you can call it a "methodology" of taking the official CPI number and adding your own, which the author of the site admits to:
> I’m not going back and recalculating the CPI. All I’m doing is going back to the government’s estimates of what the effect would be and using that as an add factor to the reported statistics.
So even though there is supposed to be very-high inflation per this site, the site itself (and all the staff that have cost of living expenses) has not experienced this very-high inflation over the last fifteen years? Really?
But you don't have to pay that amount because here's the formula in how they determine their 'inflation rate'
Of course you don't have to take anyone else's word for it, but do your own analysis:
> Compare the government statistic to what MIT's Billion Prices Project (an index of internet prices, scraped daily) found. CPI and the BPP index are very tightly intertwined, whereas SGS would be way, way off.
Very understated, so probably driven from government deliberate statistical/interpretational manipulations.
Also: inflation is NOT fundamentally about price changes. Inflation is purely the result of arbitrary expansion of government fiat money supply.
A simple example drives this home. One could say that a $1,000 computer of say 10 years ago was much less powerful than a $900 computer of today, and be right. One could say that inflation hasn't affected computers, and they would be wrong. Without the expansion of fiat money, that $900 computer would be, say, $500 or less. The final price is not how inflation can or should be measured.
This view is known as (or extremely closely aligned with) Monetarism, originally championed by Friedman. It was very popular at the time but when the velocity of money became more volatile in the following decades the assertion that the growth of the money supply is the only factor in inflation did not seem to hold which cast severe doubts on these types of claims, despite the simplicity of the argument.
I.e. that other methods of measuring inflation try to capture the advances in technology for a basket of goods is something done intentionally and not in error (or maliciously... by the majority of economists at least). Capturing this accurately is very difficult since quality can change, the basket of goods that makes sense to measure itself can change (what's a computer?), consumer behaviour can change, and so on. I don't think anyone has a perfect model but "ignore it all, just look at the money supply" didn't turn out to be a great model either. At the same time, in my understanding of most models (including the basket of goods CPI approach), monetary supply remains a key influence on the changes found in measurement.
> This view is known as (or extremely closely aligned with) Monetarism, originally championed by Friedman.
And even Friedman recanted this view in an interview: (Financial Times (UK), June 7, 2003):
> The use of quantity of money as a target has not been a success. I'm not sure that I would as of today push it as hard as I once did.
During the 1980s, the heyday of right-leaning economic thought, not even Reagan and Thatcher (or Volcker) bothered with money supply during in the high-inflation days: see the book Samuelson Friedman: the battle over the free market by Wapshott for a good history.
> Also: inflation is NOT fundamentally about price changes. Inflation is purely the result of arbitrary expansion of government fiat money supply.
What's more important is what the money is doing; having just a pile of money tells you nothing. Cullen Roche has a good explanation:
> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
Some of the gizmos were useful in my opinion: Central locking, power windows, navigation (before our phones did it), power steering. Lots of engine efficiencies reduced fuel usage.
They regularly modify the list of items in the cart, meaning the data isn't reliable over time.
They also include caveats where they can modify the Scritsmier price differences. For example, they attention to adjust the new price to account for what they consider to be added value. Say a product is 15% more expensive one year after a new model is released. When calculated the CPI, they can decide that the new model added 10% more value or benefit to the user, meaning the price only rose by 5%.
I wish I could find the study now, but around 2013 someone compared the CPI listed price increase of magazines to the actual change in the price listed on the cover over something like 20 years. The true value change was around 130% but the CPI had adjusted for value 30%.
Most people seem to be feeling this now when they notice that process have risen much higher than the claimed 4 or 5%.