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What is the "real" inflation rate?

 
 
Chaplin
 
Reply Mon 4 Sep, 2006 04:37 pm
The feds have been telling us that inflation in the US is between 2.5% to 5%, but many people and financial pundits thinks otherwise. What do you think the "real" inflation rate for the majority of Americans?
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Type: Discussion • Score: 0 • Views: 8,380 • Replies: 24
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Thomas
 
  1  
Reply Tue 5 Sep, 2006 11:33 am
I believe the Federal Reserve Bank's consumer price index is the best available measure of the prices average Americans pay for their consumer goods and services. Over the last year, it has increased by 4.1 percent. (In your poll, I misclicked on "3-4 percent" though.)
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hamburger
 
  1  
Reply Tue 5 Sep, 2006 11:58 am
i think the three letters CPI are used by quite a few people - and even commentators - without really understanding what components go into the CPI .
the link below will give a brief overview - not much more . there are government publications given very detailed explanations .

from the linked article :
"Permanently excluding particular components

A standard core measure excludes food and energy from the overall CPI. This is often the one that receives the most public attention. There are, however, other variants that are readily available or in use: for example, there are versions for the euro area and the United Kingdom that exclude energy and unprocessed food; in Japan, fresh food is removed; and in Canada, the eight most volatile components, as well as indirect taxes, are taken out of the index. In the United States, in addition to the CPI-based measure excluding food and energy, the measure based on the private consumption expenditure (PCE) deflator, which is preferred by the monetary authorities, also has a core counterpart. What all these measures have in common is that the exclusions are permanent. "

imo CPI - or inflation - is what you see when you go shopping .
as one economist being interviewed on CNBC stated recently :
when he told his wife over dinner about the low inflation rate , she insisted that he go shopping with her . he said 'it was a rude awakening' .

imo the CPI is something economists and governments play around with to fool the unknowing public .
hbg


...C P I...
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Chaplin
 
  1  
Reply Tue 5 Sep, 2006 12:02 pm
hbg, I agree with your opinion; the CPI is misleading, because it leaves out food and fuel - two necessary components to live.

What do you think the "real" inflation rate is - including food and fuel costs?
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Thomas
 
  1  
Reply Tue 5 Sep, 2006 12:19 pm
hamburger wrote:
imo CPI - or inflation - is what you see when you go shopping .

Yes. And contrary to what your article implies, the CPI does include food and energy prices. For details, see the CPI page at the Bureau of Labor Statistics.
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hamburger
 
  1  
Reply Tue 5 Sep, 2006 12:33 pm
chaplin :
sorry , i really don't know waht the rael inflation factor is - perhaps i don't even care .
we are at that stage in our lives where we buy what we can afford and like .
if we find that the price for a certain item is unreasonably high , we try to find a substitute .
just to give a simple example :
we very much like good apricot jam ,
we've usually bought smuckers , but found the price increasing lately ,
we found a grocer that stocks quite a few items from the middle east and mediterranean area - greek and turkey ,
we found a very good greek apricot jam for half the price of smuckers ,
using that as an example - and eating nothing but apricot jam Shocked -
we can now say that our CPI for food has just dropped 50% Laughing .
(perhaps our governments are using similar statistics Rolling Eyes Question )
hbg
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Chaplin
 
  1  
Reply Tue 5 Sep, 2006 12:56 pm
hbg, We're sorta in the same shoes; we buy what we want without much concern for inflation, and buy the things we want - although with consrevatism learned from our past.

Example: My wife bought a Honda Civic earlier this year. She could have purchased any car that she wanted, but her past experience dictated for her that Hondas are reliable and energy efficient. I, on the other hand, always enjoyed luxury cars. I've owned a Cadillac and now own a Lexus. My car is now over 12-years old, but it still runs well without any problems, and I drive only 5,000 miles/year. Gas prices for me is not an issue, since I drive so little - and that's using Premium.

I'm looking at new cars now, but I'm in no rush to buy a new car at the moment. I'm considering another Lexus or a Acura TL.

I only brought up this topic as a good subject for discussing how our government uses CPI and the "real" inflation rates most must live by.

Many consumers bought more expensive homes during the past decade, and their mortgage payments must have increased accordingly. At the same time, we have recently learned that salaries have not kept up with inflation since Bush took over the white house - which translates into five years of lost purchasing power.

We now learn that the feds are considering increasing interest rates again even though consumer spending have been financed through home equity loans. We all know what's happening with the housing market and values.

Increasing interest rates now will be a disaster for our economy - IMHO.
It will only increase consumer debt.
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hamburger
 
  1  
Reply Tue 5 Sep, 2006 02:08 pm
thomas : of course , you are right !
the "total cpi" (commonly called cpi) does include the total basket of goods and services ; it's the "core cpi" that excludes the so-called volatile items .
from the 'bank of canada' link :
"Core CPI: The CPI excluding the eight most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components ".

btw the 'bank of canada' displays both the 'total cpi' and the 'core cpi' side-by-side .
hbg

...CANADA - CPI...
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Chaplin
 
  1  
Reply Tue 5 Sep, 2006 02:33 pm
hbg, Thanks for posting the link to Canada's CPI. I learned sometning new; the Total CPI and Core CPI are not that far different. I though it would be at least one point difference.
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Thomas
 
  1  
Reply Tue 5 Sep, 2006 02:41 pm
Chaplin wrote:
hbg, Thanks for posting the link to Canada's CPI. I learned sometning new; the Total CPI and Core CPI are not that far different. I though it would be at least one point difference.

That's true in canada, but not in the US. In the US, the CPI has been up 4.2% over the year, but the core cpi only by 2.7%. No idea why that should be so.
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Chaplin
 
  1  
Reply Tue 5 Sep, 2006 03:11 pm
Maybe, Americans eat more pork bellies. Wink
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Ragman
 
  1  
Reply Tue 5 Sep, 2006 03:16 pm
Middle class takes a hit
Let's see...my note is an informal discussion on the topic that also includes a discussion on not just consumer prices but also includes wages and the items/services too:

My unoffical best guess is the real rate of inflation is over 7% in the northeast USA


I've taken an informal poll. Most that I know at work and where I live barely get a raise. Those that do, let's say, typically get about 3% - 4% per year. Middle class takes the hit again (this is a recording). Many people now are pressured to work more than 45 hours either to be perceived as a valued employee and/or to help pay for the extras. Those whose partners who weren't working get p/t or f/t jobs, or, those that worked p/t or f/t, now work more hours than ever.

Price increases:
The cost to the consumer of gasoline has gone up a bit higher in the last year. As for energy in general, the increases in electricity and gas heat also are much higher. Some folks now pay for higher water and or sewer over last year. especially now that in our area, the downstate NY-ers came up from NYC and caused the demand for municipal services to icrcease.

Housing - Real Estate cost to consumer (for a middle class 2-3 b/r non-luxury home) has gone up typically about 10% in a year. Apartment rents have gone up 8%-10%. Taxes - many have experienced small increases there, too or have lsot some muincipal services in cutbacks.

Commodity prices:
Hurricane/bad weather damage to crops have temporarily shifted prices, but sometimes they don't go down again long after the effects are over.
China's demands for commodity (gasoline, copper, timber) seems to be spiraling prices upwards.

Items Price Decrease or price-static:
Food and clothing prices on the whole haven't gone up appreciably or, in the case of clothing, not at all. Most of us filter out the increases in food items by not buying those items until they drop down again. Same thing applies with vacations. Many take short trips or none (families) and discretionary purchases are minimized.

Economy for businesses:
Many retailers are having trouble staying afloat. Those that are struggling, close stores, consolidate, or move. When you read the trade mags, many furniture retailers are folding or getting absorbed by competitors. Chinese competition in the industry abounds and big fish swallow smaller fish. Companies only lower their prices when they can supply a lesser cost and/or lower quality furniture item. This happens often. check they origin of the furniture and the amount of wood contained and compare this with what existed 5 years ago. big change. China, Vietnam, Indonesia, Brazil, India are often where the furniture is made. very little is made in USA (some items are shipped here from china and possibly assembled here to keep their label appropriate).
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Chaplin
 
  1  
Reply Tue 5 Sep, 2006 05:20 pm
Ragman, Very good personal observations on income and expenditures of the "average" consumer in the US.

I also see the lack of salary increases that do not keep up with inflation in an environment where interest rates, energy and housing costs continue to rise has to effect a negative impact on the "average" consumer even though we can purchase cheaper food and/or clothing. Those home equity loans that's been keeping our economy growing is beginning to dry up for most, and those loans still have to be paid out of a decreasing income value.

Something is broken, and I'm not sure what it is. There's a leak in the dike, but my finger won't help it any.
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Ragman
 
  1  
Reply Tue 5 Sep, 2006 06:07 pm
job market
Also, back to the job market, the net outflow of moderate paying hi-tech jobs to China, India and Far East continues. Call any tech support number and ask where they are located. Ask any EE (electronics engineer) or software developer what happened to his/her last 2 jobs and you'll be shocked. Job dislocation is rampant. I'm a former tech writer with 10 yrs experience and I can't BUY a job doing that since 2002. Hence, I'm in sales now. and NOT in hi-tech, either. Sad
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parados
 
  1  
Reply Tue 5 Sep, 2006 07:37 pm
Latest press release on CPI for US is here

http://www.bls.gov/news.release/pdf/cpi.pdf

The big reason for the difference in CPI at 4.1 vs core CPI (minus food and energy) at 2.7 is the 20% increase in energy costs from July to July.

Interesting list of how much different items count for CPI is here

http://www.bls.gov/cpi/cpiri_2005.pdf

Main page with lots of info is here
http://www.bls.gov/cpi/#data
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Thomas
 
  1  
Reply Wed 6 Sep, 2006 12:20 am
parados wrote:
The big reason for the difference in CPI at 4.1 vs core CPI (minus food and energy) at 2.7 is the 20% increase in energy costs from July to July.

I understand that -- but Canadians pay the same crude oil prices as the United States. So why is the difference between core CPI and CPI so much lower for Canada than it is for the US?
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BernardR
 
  1  
Reply Wed 6 Sep, 2006 02:31 am
Thomas- You may be interested in the following conclusion made in the Congress of the United States-

IX. Conclusion

While the CPI is the best measure currently available, it is not a true cost of living index. It suffers from a variety of conceptual and practical problems as the vehicle for measuring changes in the cost of living. Despite important BLS updates and improvements in the Consumer Price Index, it is likely that changes in the CPI have substantially overstated the actual rate of price inflation. Moreover, revisions have not been carried out in a way that can provide an internally consistent series on the cost of living over an extended span of time. More importantly, changes in the Consumer Price Index are likely to continue to overstate the change in the true cost of living for the foreseeable future. This overstatement will have important unintended consequences, including overindexing government outlays and tax brackets and increasing the federal deficit and debt. If the intent of such indexing is to insulate recipients and taxpayers from changes in the cost of living, use of the Consumer Price Index has in the past, and will in the future, substantially overcompensate (on average) for changes in the true cost of living.

This report has laid out a variety of issues to be addressed in developing a more accurate measure of the cost of living. It has also presented a series of recommendations to the agency responsible for the nation's price statistics and to the elected officials who are funders, supervisors, and consumers of those statistics. We have no doubt that implementation of our recommendations would greatly improve the accuracy of the nation's price statistics. This in turn would lead to more accurate measurement of everything from cost-of-living adjustments in private contracts and public programs to information for the Federal Reserve to improved inputs to the nation's national income and product accounts. These improvements in turn would better enable citizens and policy makers alike to measure economic progress over time, among groups, and across countries.

While the commission's best estimate of the overstatement of changes in the cost of living based on changes in the consumer price index is a little over one percent, our broader point is that even small differences compound over time and matter a lot. This was evidenced in Section II when the improvement in the treatment of owner-occupied housing was introduced early in the 1980's. The same is true of the recently corrected formula bias issues which added an additional bias of about 0.24 percent per year for 1979-95. The cumulative ramifications are substantial.

While subsequent analysis, research, and economic events may result in a slight change in these estimates -- at least as likely to be up as down in our opinion -- some care in their use is warranted. While the analysis in this report represents our best judgment, this Commission did not have the substantial resources that the previous major effort to examine the nation's price statistics, the so-called Stigler Commission, had in 1961. The Stigler Commission was able to commission and produce substantial original research, while this Commission did not have the time or resources to do so. Nevertheless, this report incorporates new information from a wide variety of sources, both within the government and from outside the government. We are gratified by the tremendous outpouring of suggestions, advice, and assessment of individual issues that have arisen in the course of the committee's investigation.

The readers of this report need some time to digest and understand the results, analysis, and recommendations. This includes the BLS, the Congress, the Executive Branch, the private sector, and academe. We very much hope that careful and thoughtful consideration will be given to the findings presented in this report in the spirit in which they are offered: an attempt to provide some guidelines on how to improve the production and use of the nation's price statistics and the continuous process of improving them in a complex, dynamic economy.
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Chaplin
 
  1  
Reply Wed 6 Sep, 2006 10:55 am
parados, Thank you for your links to the CPI. Those numbers seems to mirror what is reported in the business sections of our newspaper and business mags.

BernardR, That's the first time I have seen that report by the congressional committee. The cumulative impact of the CPI on our economy is staggering - especially when combined with the actions of the feds with interest rates. Interesting article.
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Thomas
 
  1  
Reply Wed 6 Sep, 2006 12:07 pm
BernardR wrote:
Thomas- You may be interested in the following conclusion made in the Congress of the United States

That's an interesting opinion, Bernard, but it doesn't explain the mystery that puzzled me: The rise in oil prices was the same for Canada and the US; so why is the difference between inflation and core inflation so much smaller?
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parados
 
  1  
Reply Wed 6 Sep, 2006 12:45 pm
Thomas,
2 things probably contribute to it.

1.)
Because the gas increase as a % in Canada is not as large as it is in the US.

Canada has a higher gas tax so they are starting from a higher rate.

Canada appears to have a gas tax of about 30 cents a liter
The US average tax on gasoline is 42 cents per gallon. Since there are roughly 3.8 liters in a gallon that means that the Canadian tax is 1.14 per gallon. (I am ignoring exchange rates) Gas without tax is $2 that would mean a 20% increase from 2.42 to 2.90 would mean an extra .48 cents per gallon. Now we add that 48 cents to a Canadian gallon 3.14 + .48 gives us an increase of only 15%

2.) CPI is based on the average usage that a commodity is in the person's budget. I posted the breakout for the US. It is possible that the urban Canadians don't drive as much as urban US does; better public transportation, smaller cities so shorter commutes.
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