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.
