Inflation Actually Near 10% Using Older Measure

pinqy

“This account has been banned or suspended.”

ha ha ha ha ha ha !!!!!!!!!!!!!!!!!!!

--and who knows what numbers are being made up?

--the shadow knows....

... This may or may not be the complaint we're getting from "The Shadow", but even if it is there's more to it then quality (BLS faq here). ...

In addition to separating out the cost of food and energy from core inflation, there are several biases understating inflation that have been built into the CPI.

Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment in relation to inflation, and to be able to accurately measure how the standard of living one can afford on a given income stands in relation to inflation.

The CPI has been corrupted by the addition of hedonics, the substitution effect, and weighting, soft metrics that are open to political manipulation and artificially lower inflation. The CPI has changed from measuring inflation in relation to a set standard of living to measuring inflation in relation to a declining standard of living.

Corruption of the CPI is important because it is used by the Federal Reserve to justify its money printing policies, to set the interest rate on inflation-adjusted bonds known as TIPS, and by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security). The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported. In addition, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year

In the early 1990’s the ‘substitution effect’ was introduced as a result of the Boskin Report which deemed the fixed basket of goods was irrelevant. For example if the price of steak went up ‘too much’ the price of hamburger, chicken, or Spam was substituted. The CPI morphed from the cost of maintaining a certain standard of living to the cost of maintaining a declining standard of living.

Information about using substitution is found here (Boskin Commission Report). The example used is chicken vs beef.

The actual steak vs hamburger is found here (Panel Sees a Corrected Price Index as Deficit-Cutter). In the same article you'll see references to substitution and quality change.

Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting which automatically gives a lower weighting to CPI components that are rising in price, and a higher weighting to those items dropping in price. Weighting works in conjunction with the substitution effect.

Hedonics aka quality adjustment is my personal favorite. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from modifications to those goods, e.g. if you pay more for gas because of federally mandated additives, the additional cost does not count toward the CPI because of your increased pleasure in breathing ‘cleaner air’.

A Hedonic Price Index for Airline Travel:

Re: Hedonics and Quality Adjustment - QUALITY ADJUSTMENT FOR GASOLINE

"A quality adjustment has been made to gasoline prices used in the January CPI to account for the effects of the mandated introduction of reformulated gasoline in selected areas of the United States. The gasoline index rose 0.4 percent in January, following seasonal adjustment. Without the quality adjustment, it is estimated that this index would have increased 1.1 percent. In those areas required to sell the reformulated gasoline, virtually all of the January price quotes were for reformulated gasoline."

From the 1999 Economic Report of the President: " reason for the slowing of reported price indexes has been methodological changes to both the CPI and the indexes used in the national income accounts ".

Intervention analysis is an enhancement to seasonal analysis; it tones down severe upswings resulting from outliers and level shifts that are not seasonal in nature.

... We also substitute by ...by availability (buying strawberries when blueberries are out of season), by location (California oranges when Florida frosts) ...

Routine seasonal adjustments would handle your out of season strawberries and Florida oranges. Your Florida oranges would undergo additional intervention analysis if the price was determined to be an outlier or a level shift.

We also substitute by fashion

One's defunct Nehru jacket would drop out of the market basket during one of the BLS's periodic surveys. However, if the new jacket bought to replace the Nehru jacket were analyzed and deemed to contain a quality enhancement, the use of the hedonics index would kick in as your link demonstrates for the replacement of a CRT TV with a flat screen.

In the case of the new flat screen TV the price is adjusted downward - this is geometric not straight arithmetic pricing. To put it another way the CPI no longer reflects the full price of buying a new TV to replace your dead one. If you want to watch TV, and your old CRT dies, you pay the full price of a new flat screen not the 'hedonics' adjusted price.

When the price of housing goes down, the Fed assumes a reduction in the CPI. That’s because “Owners Equivalent Rent” is based on recent selling prices, NOT WHAT YOU ACTUALLY SPENT on your house.

So, your net worth is in the toilet, you’ve lost your shorts on your housing investment, don’t have the money to spend on anything else, and as a result Voila! The Fed tells you prices have declined.

Neat trick, but totally not of this world. Your mortgage payment didn’t change, but the Fed presumes it went down.

Cool /sarc Thanks for the info. this is one I missed.

... We also substitute by ...by availability (buying strawberries when blueberries are out of season), by location (California oranges when Florida frosts) ...

Routine seasonal adjustments would handle your out of season strawberries and Florida oranges. Your Florida oranges would undergo additional intervention analysis if the price was determined to be an outlier or a level shift.

We also substitute by fashion

One's defunct Nehru jacket would drop out of the market basket during one of the BLS's periodic surveys. However, if the new jacket bought to replace the Nehru jacket were analyzed and deemed to contain a quality enhancement, the use of the hedonics index would kick in as your link demonstrates for the replacement of a CRT TV with a flat screen.

In the case of the new flat screen TV the price is adjusted downward - this is geometric not straight arithmetic pricing. To put it another way the CPI no longer reflects the full price of buying a new TV to replace your dead one. If you want to watch TV, and your old CRT dies, you pay the full price of a new flat screen not the 'hedonics' adjusted price.

More, if you are interested:

http://www.freerepublic.com/focus/news/2703730/posts?page=23#23

Absolutely untrue. Why do people need to make stuff up? You clearly have no idea what you’re talking about, so why comment? Do some research with actual documentation and technical papers instead of just reading blogs.

Look Here. The BLS made it up!

FYI:

http://www.freerepublic.com/focus/news/2703730/posts?page=23#23

Thanks. I’ve followed the CPI metrics for years now and have found they play games more and more, say more about what they do in the number of words they say, but they hide more and more about how they actually calculate CPI.

The more that is known the more secretive they are. They do not publish the actual products from the actual stores or distributors that they use.

Thanks for researching the background for your concerns about the CPI along with handy reference links. You said:

Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment...

Actually, the CPI came into being during the first World War when the BLS was needed to work with inflation for the military buildup (from the BLS website). Gov't contracts had to keep track of the wildly swinging prices of the gold standard era so wage costs could be met. There was never an attempt to have a permanent "fixed basket of goods" because measuring consumer prices meant tracking the prices of what consumers bought. Consumer buying habits have always been changing and the 1998 revision you take issue with is the sixth such major revision.

The Shadow's inconsistency with allowing five overhauls and not the last is a dishonest ploy to sell bogus newsletters.

hedonic regression equation:

(1)

So what's not to like?

Inflation Actually Near 10% Using Older Measure

If only someone had used the older measure and published the results.

Another nice try. Once again, your post is at best disingenuous. You do get an A for creativity.

The direct quote from Chapter 17 of the BLS Handbook of Methods which you referenced:
The CPI was initiated during World War I, when rapid increases in prices, particularly in shipbuilding centers, made such an index essential for calculating cost-of-living adjustments in wages.”

There is no mention of the gold standard, government contracts, wildly swinging prices, or meeting wage costs.

There is however, mention of rapid increase in prices and cost-of-living adjustments in wages.

Quote continued:
“To provide appropriate [arithmetic] weighting patterns for the index, so that it would reflect the relative importance of goods and services purchased by consumers, studies of family expenditures were conducted in 92 industrial centers from 1917 to 1919.” …
“Periodic collection of prices was started and, in 1919, BLS began publication of separate indexes for 32 cities. Regular publication of a national index, the U.S. city average, began in 1921, and indexes were estimated back to 1913.1” [F.Y.I. WW I lasted from 1914 to 1918]

Now back to cost of living adjustments. When one is concerned about ‘cost-of-living adjustments’, a declining standard of living is not what is implied.

The cost-of-living is defined as: The cost of maintaining a certain standard of living. or Price of goods and services required for maintaining an average level standard of living.

A proxy for certain standard of living is a ‘fixed basket of goods’, not one in which the consumer substitutes downward secondary to price increases. In other words, a cost-of-living index = a consumer price index = ‘set basket of goods’ = a set standard of living.

If you peruse the BLS site you will notice the transformation of the CPI from representing the cost of a set standard of living over time to the cost of a declining standard of living over time.

Per the BLS Handbook of Methods, Chapter 17: The Consumer Price Index (CPI) is a measure of the average change over time in the prices of consumer items—goods and services that people buy for day-to-day living.

In the BLS’s ‘Addendum to Frequently Asked Questions’: “Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in buying or consumption patterns that consumers would make to adjust to relative price changes.” Note the introduction of the concept of substitution in response to increasing prices.

If you go to the BLS’s Glossary – cost-of-living-index the transformation is complete:
“ A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same city (or in the Nation).”

The definition of a cost-of –living index has been changed:
“A cost-of-living index measures differences in the price of goods and services, and allows for substitutions to other items as prices change. … The CPIs are not true cost-of-living indexes ….”

The issue of changes in consumer tastes is a red herring. Changes in tastes were always accounted for in the BLS’s on going surveys using arithmetic weighting. The transformation of the CPI to representing a declining standard living open to blatant manipulation by the political power that be required the soft metrics of hedonics, quality adjustment, substitution, and using geometric weighting introduced during Clinton’s administration.

Remember the BLS is from the government and they are there to help you. LOL

Another nice try. Once again, your...

Looks like we're done here, but thanks for the exchange. Your earlier post/links was great because when you described the history of the cpi it got me to go look it up. I'd always wondered why inflation was handled by the labor department and not say, the treasury but now I've learned a few things. Ping me if the topic comes up again.

Thanks and cheers!