Real inflation at 10%

[biaggio]

http://online.wsj.com/article/SB10001424052748704013604576104351050317610.html

"Why You Can't Trust the Inflation Numbers"

 

According to one rogue economist, John Williams at Shadow Government Statistics, if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%.

 

 

[prunes]

That article just cherrypicks examples of particular goods that have seen costs increase. John Williams has been arguing this for some time, at least two or three years. 10% inflation sustained over a number of years would lead to substantially decreased discretionary income during that time. Can anyone here truly say that they've seen 20 - 30% reductions in their discretionary income (holding salary constant)?

[ERICOPOLY]

Can anyone here truly say that they've seen 20 - 30% reductions in their discretionary income (holding salary constant)?

 

The way I think inflation is hidden is that some prices have not gone down like they should have (due to lower labor costs in China (vs US), advancements in manufacturing, and shipping for example).  I think the term for that is "productivity" gains -- why don't prices fall every year if there are truly productivity gains?  So, if a manufactured good doesn't fall in price despite it being produced for less costs, that's a form of inflation (when it is happening all over the place).  But in other things (like commodities), it's not as easy to hide the inflation from view.

 

But no, I don't think there is 10% cost increases right now for the typical household.  More like today's basket of goods that people purchase is different from how the CPI was weighted in 1979.

 

[scorpioncapital]

One thing is certain, you can't see a movie for a dime like in the good old days. It's about $10 bucks now. Whatever the rate of inflation is, it's there, and it gnaws away over time slowly and silently until you realize that things are quite a bit pricier than you remember when you were younger.

[vinod1]

 

 

The way I think inflation is hidden is that some prices have not gone down like they should have (due to lower labor costs in China (vs US), advancements in manufacturing, and shipping for example).  I think the term for that is "productivity" gains -- why don't prices fall every year if there are truly productivity gains?  So, if a manufactured good doesn't fall in price despite it being produced for less costs, that's a form of inflation (when it is happening all over the place).  

 

 

Say you buy a car in 2000 for $20K without ABS. Now, if you can buy the same make, model car with ABS for $20k. Then you would say there was 0% inflation. But in reality, you had deflation, price did fall, if you had considered the quality improvement. This had been the case in many goods and services. Thus BLS uses hedonic adjustments to account for quality improvements when calculating inflation. When we calculate inflation, we need to take the quality improvements into account.

 

We are increasing our standard of living every year. If you accurately calculate the inflation (without quality improvements) and only increase your expenses by that inflation measure, you would find that you would be falling behind the rest of the country in standard of living.

 

Vinod

[vinod1]

I wrote a short article on this for those returning back to India at http://vinodp.com/documents/nri/standard_of_living.html.

 

 

Imagine that you were living in America in year 1950 and earning as much as the median (50th percentile) American family did in that year. Suppose, in that same year you happen to receive a large inheritance, which your financial advisor then calculates would be enough for you to retire. His calculations shows that you can withdraw the same amount as you are earning now and adjust each year for inflation to maintain your standard of living. You decide to follow his advice and retire.

 

Fast forward to year 2005. You would be surprised to learn that your standard of living is now only marginally higher than that for a family living in poverty (poverty is around the 12th percentile) in America in 2005. By 1994, you would be having a standard of living around 20th percentile - poorer than 80 percent of the population. Most people would not consider this to be “maintaining” their standard of living!

 

Vinod

[ERICOPOLY]

 

 

The way I think inflation is hidden is that some prices have not gone down like they should have (due to lower labor costs in China (vs US), advancements in manufacturing, and shipping for example).  I think the term for that is "productivity" gains -- why don't prices fall every year if there are truly productivity gains?  So, if a manufactured good doesn't fall in price despite it being produced for less costs, that's a form of inflation (when it is happening all over the place).  

 

 

Say you buy a car in 2000 for $20K without ABS. Now, if you can buy the same make, model car with ABS for $20k. Then you would say there was 0% inflation. But in reality, you had deflation, price did fall, if you had considered the quality improvement. This had been the case in many goods and services. Thus BLS uses hedonic adjustments to account for quality improvements when calculating inflation. When we calculate inflation, we need to take the quality improvements into account.

 

We are increasing our standard of living every year. If you accurately calculate the inflation (without quality improvements) and only increase your expenses by that inflation measure, you would find that you would be falling behind the rest of the country in standard of living.

 

Vinod

 

The car perhaps should have been $17k though including the ABS (due to technology and efficiency improvements) but it is being sold for $20k (due to inflation).  

 

It should be clear that if commodities go up and wages went up (rubber, steel, aluminum, leather) then the price of the car is actually higher than it ought to be.  However, it is officially counted as "no inflation" or "deflation" (for the reason you cited).

 

Technology improvements should make things even cheaper than they've become.  But it's not counted as inflation because the absolute price did not go up, and in many cases it fell.

 

To use an extreme analogy, if a road costs a certain amount to construct via pick and shovel, and then several decades later it costs the same amount to construct using heavy machinery, then something is wrong!  It's inflation, but it's not counted that way in the official numbers.

 

Back to cars though... they once had chrome bumpers.  I don't think a hedonic adjustment was made when they stripped out the chrome for cheaper materials.  On that note, we could replace diamonds on wedding rings with cubic zirconia -- would that hold the CPI steady?

 

 

[Guest broxburnboy]

"

Say you buy a car in 2000 for $20K without ABS. Now, if you can buy the same make, model car with ABS for $20k. Then you would say there was 0% inflation. But in reality, you had deflation, price did fall, if you had considered the quality improvement. This had been the case in many goods and services. Thus BLS uses hedonic adjustments to account for quality improvements when calculating inflation. When we calculate inflation, we need to take the quality improvements into account

"

 

 

The cost of cars would not be considered in a CPI calculation.. the monthly cost of transportation would however.

A car is part hedonistic depreciating investment as well as a monthly depreciation expense.

Better to use the cost of a monthly bus pass or the  combined monthly expenses for a standard 4 year old compact car...gas, depreciation, insurance parking etc... One quickly sees that a person on a fixed income (wages have not risen significantly lately) or no income at all (unemployment and underemployment has risen) is behind the eight ball over the last few years. Pick a number.. BLS or John William's... inflation is rising no matter how you cut it.

[vinod1]

Vinod - nice analysis of BRK and WMT in your web page. Do you have updated analysis of BRK?

 

Also - I heard the inflation rate in India is 10% or higher.

 

 

 

Thanks! Sorry that is the latest that I have. I only update my "inevitables" about once a year when the AR's comes out. Since IV of these companies do not change that much this works out for me.

 

Vinod

[vinod1]

 

The car perhaps should have been $17k though including the ABS (due to technology and efficiency improvements) but it is being sold for $20k (due to inflation).  

 

It should be clear that if commodities go up and wages went up (rubber, steel, aluminum, leather) then the price of the car is actually higher than it ought to be.  However, it is officially counted as "no inflation" or "deflation" (for the reason you cited).

 

Technology improvements should make things even cheaper than they've become.  But it's not counted as inflation because the absolute price did not go up, and in many cases it fell.

 

To use an extreme analogy, if a road costs a certain amount to construct via pick and shovel, and then several decades later it costs the same amount to construct using heavy machinery, then something is wrong!  It's inflation, but it's not counted that way in the official numbers.

 

Back to cars though... they once had chrome bumpers.  I don't think a hedonic adjustment was made when they stripped out the chrome for cheaper materials.  On that note, we could replace diamonds on wedding rings with cubic zirconia -- would that hold the CPI steady?

 

 

I think we differ in how inflation should me measured. To me the way BLS measures inflation seems reasonable.

 

You seem to be saying that productivity improvements should be considered - that is the cost to produce a good, must be incorporated into inflation. I do not think that should be the case.

 

Cost savings as a result of productivity improvements gets passed to consumers when the business does not have any competitive advantage. In your road construction scenario, those businesses do not have any competitive advantages and the cost savings are realized by consumers as a result. This issue is separate from how inflation should be measured.

 

Car companies might have a small competitive advantage as  result of brand preferences (but not much, although I am not that familiar with these companies), hence they might not have passed on all the cost savings as a result of any productivity improvements they might have made.

 

Vinod

 

 

[vinod1]

"

Say you buy a car in 2000 for $20K without ABS. Now, if you can buy the same make, model car with ABS for $20k. Then you would say there was 0% inflation. But in reality, you had deflation, price did fall, if you had considered the quality improvement. This had been the case in many goods and services. Thus BLS uses hedonic adjustments to account for quality improvements when calculating inflation. When we calculate inflation, we need to take the quality improvements into account

"

 

 

The cost of cars would not be considered in a CPI calculation.. the monthly cost of transportation would however.

A car is part hedonistic depreciating investment as well as a monthly depreciation expense.

Better to use the cost of a monthly bus pass or the  combined monthly expenses for a standard 4 year old compact car...gas, depreciation, insurance parking etc... One quickly sees that a person on a fixed income (wages have not risen significantly lately) or no income at all (unemployment and underemployment has risen) is behind the eight ball over the last few years. Pick a number.. BLS or John William's... inflation is rising no matter how you cut it.

 

You are probably correct, I just picked up a random example.

 

Vinod

[beerbaron]

Tough this would be on subject:

 

http://www.paulvaneeden.com/The.Actual.Money.Supply

 

BeerBaron

[ERICOPOLY]

 

The car perhaps should have been $17k though including the ABS (due to technology and efficiency improvements) but it is being sold for $20k (due to inflation).  

 

It should be clear that if commodities go up and wages went up (rubber, steel, aluminum, leather) then the price of the car is actually higher than it ought to be.  However, it is officially counted as "no inflation" or "deflation" (for the reason you cited).

 

Technology improvements should make things even cheaper than they've become.  But it's not counted as inflation because the absolute price did not go up, and in many cases it fell.

 

To use an extreme analogy, if a road costs a certain amount to construct via pick and shovel, and then several decades later it costs the same amount to construct using heavy machinery, then something is wrong!  It's inflation, but it's not counted that way in the official numbers.

 

Back to cars though... they once had chrome bumpers.  I don't think a hedonic adjustment was made when they stripped out the chrome for cheaper materials.  On that note, we could replace diamonds on wedding rings with cubic zirconia -- would that hold the CPI steady?

 

 

I think we differ in how inflation should me measured. To me the way BLS measures inflation seems reasonable.

 

 

We aren't differing in how it's measured.  I don't think they should measure it in a different way, because it would be nearly impossible to track in the way that I've describe it.

 

We are differing in how we think of inflation.  I think that if I hold cash, for example, it should buy more and more goods every year because of the productivity advances.  But it doesn't.  It buys less.  And we should be able to buy more in a 0% CPI environment (with productivity gains), but we can't due to inflation.

 

 

[JEast]

One sees inflation where they look is the general rule.  I would agree that food and energy are generally up, but the WSJ attempts to poo-poo the hedonics Mac example.  Would anyone really want to pay 50% off for an '03 computer model?

 

As a side note: I find it truly amazing that I am buying airline tickets these days for lower prices than I was back in the late '80s!!  That is even with fuel surcharges.

 

Zero coupon bonds anyone?

 

 

Cheers

JEast

[Uccmal]

I dont buy the 10% inflation argument.  It is simply not reality.  This implies that a basket of goods that I am buying is double the price it was 7 years ago.  There is not an electronics device, or a manufactured product in existence that has doubled in price since 2004.  Housing has not doubled.  Heating has not doubled - if you use gas it is actually cheaper for you if you had pay increases of 2.5% a year since 2004.  Even Petroleum (Crude) is within historical norms on a 3% inflation adjusted basis - at the high end of normal but still rangebound.  I know that oil and gas are taken out of the basket of goods but they are indicative of the underlying bias toward inflation.  Other commodities are doing their see- saw thing and hitting the high end of the cycle.  Food inflation exists but there is no way my food bill has doubled in 7 years in North America. 

My Starbucks coffee is up perhaps 25% - alot of that due to taxes in Canada.  Taxes is another thing entirely but they have certainly not doubled in 7 years. 

[vinod1]

 

The car perhaps should have been $17k though including the ABS (due to technology and efficiency improvements) but it is being sold for $20k (due to inflation).  

 

It should be clear that if commodities go up and wages went up (rubber, steel, aluminum, leather) then the price of the car is actually higher than it ought to be.  However, it is officially counted as "no inflation" or "deflation" (for the reason you cited).

 

Technology improvements should make things even cheaper than they've become.  But it's not counted as inflation because the absolute price did not go up, and in many cases it fell.

 

To use an extreme analogy, if a road costs a certain amount to construct via pick and shovel, and then several decades later it costs the same amount to construct using heavy machinery, then something is wrong!  It's inflation, but it's not counted that way in the official numbers.

 

Back to cars though... they once had chrome bumpers.  I don't think a hedonic adjustment was made when they stripped out the chrome for cheaper materials.  On that note, we could replace diamonds on wedding rings with cubic zirconia -- would that hold the CPI steady?

 

 

I think we differ in how inflation should me measured. To me the way BLS measures inflation seems reasonable.

 

 

We aren't differing in how it's measured.  I don't think they should measure it in a different way, because it would be nearly impossible to track in the way that I've describe it.

 

We are differing in how we think of inflation.  I think that if I hold cash, for example, it should buy more and more goods every year because of the productivity advances.  But it doesn't.  It buys less.  And we should be able to buy more in a 0% CPI environment (with productivity gains), but we can't due to inflation.

 

 

 

Perhaps bad terminology on my part. I do not think I disagree with you. In my own calculations I always factor inflation + increase in living standards (a close proxy to productivity increases) as the minimum growth needed to protect the purchasing power of my assets.

 

Vinod

[treasurehunt]

What do you guys think of Michael Ashton's articles on inflation? He posts under the moniker "Inflation Trader" on seekingalpha.

 

A couple of articles where he explains why the CPI is a good measure of inflation and dismisses shadowstats as not being credible:

http://mikeashton.wordpress.com/2010/02/16/oh-yeah-canada/

https://mikeashton.wordpress.com/2010/06/17/another-reason-to-not-hate-cpi/

 

Another article on why inflation feels higher to most people than the official CPI measure:

http://www.safehaven.com/article/17871/the-real-feel-inflation-rate

 

Personally, I don't see any way the shadowstats inflation calculation can be correct. Looking at their charts, inflation has supposedly averaged better than 8% over the last fifteen years. This implies that a standard of living that required say $30K to support it in 1995 now requires $100K! That doesn't make sense to me at all.

[Guest broxburnboy]

In light of officially reported rising inflation in the UK and the realization that food prices in the US are surging upwards... here is a good article on investing tactics in such a scenario:

 

http://gonzalolira.blogspot.com/2011/02/inflation-hyperinflation-and-real.html

 

 

 

[JEast]

A thread bump:

 

Keeping cursory tabs on the 'expectations' of inflation and that this item on Europe from Bloomberg interesting.

http://www.bloomberg.com/news/2013-11-14/euro-area-recovery-fizzles-as-germany-slows-france-contracts.html

 

Many talk about inflation, but I just do not see it (at least in my small circle).  As a quick example, nearly 20 years ago I bought an airline ticket from Atlanta to Orlando for $140.  I remember this because I could hardly afford the $140 at the time.  Today, I see that you can buy a ticket from Charlotte to Orlando for $87 round trip, no joke and not a special.  Maybe this is self selection bias, but I see similar stuff all the time.  One place I don't see it though is at Whole Foods!

 

Cheers

JEast

[oddballstocks]

A thread bump:

 

Keeping cursory tabs on the 'expectations' of inflation and that this item on Europe from Bloomberg interesting.

http://www.bloomberg.com/news/2013-11-14/euro-area-recovery-fizzles-as-germany-slows-france-contracts.html

 

Many talk about inflation, but I just do not see it (at least in my small circle).  As a quick example, nearly 20 years ago I bought an airline ticket from Atlanta to Orlando for $140.  I remember this because I could hardly afford the $140 at the time.  Today, I see that you can buy a ticket from Charlotte to Orlando for $87 round trip, no joke and not a special.  Maybe this is self selection bias, but I see similar stuff all the time.  One place I don't see it though is at Whole Foods!

 

Cheers

JEast

 

James,

 

I know amongst my circle of friends who are all early 30s professionals we're all experiencing inflation and wage stagnation.  I've had countless conversations with friends, who are all conservative pay cash don't have debt types who have said they are shocked at how living costs have shot up on them.  Groceries, insurance, everything has gone up, and raises have been in the 1% range.

 

A big cost increase has been healthcare.  My company is very generous, well, at least they were in the past with healthcare.  Four or five years ago we had an all expenses paid PPO for about $250/mo, that plan now costs $700+ a month, or they offer a plan for $275/mo that requires employees to foot the bill on the first $3500 out of pocket.

 

I agree that some things have stayed flat.  I recently purchased a Macbook Air, the price was slightly less than what I paid five years ago for a Macbook.  The new computer is much more powerful and better all around, and in real terms much cheaper.

 

Airfare is highly city depenant.  Back in 2006/2007 we used to fly from Pittsburgh to Florida for $150 round trip, we'd go often because it was cheap.  Now a flight is in the $400 range.  It's almost impossible to find a flight out of Pittsburgh for less than $200 round trip unless you're flying to a city within a 2-3 hour drive.  Sure I can fly to Baltimore for $67, but by the time I drive to the airport and get there an hour before my flight I'd be 2/3 of the way to Baltimore by car, a deal if time is free.

 

I know I've been told there is no inflation, or it's really low, yet somehow for us and our friends our money stretches less and less.  And we make a sizable living.  My brother has chosen to live a more modest life, for them and their friends the economic situation is dire.  It's very hard to find a job, and expenses have risen considerably, they felt the pinch so much they decided to move to a city in the south with a lower cost of living.

 

I can point to two items that I know have gone up for us, health care, and local taxes to make up for a shortfall in city revenue.  Outside of that it's a number of small things that have all increased much faster than my wages have increased.

 

Clearly this post is completely anecdotal, and it doesn't show up in any economic stats, but if I asked everyone I knew they would all emphatically say that wages haven't kept up with inflation.

[Ham Hockers]

The WSJ article is horrible, but typical.

 

See attached. They deal with all of this head on. I've never seen a cogent reply to the points the BLS makes in their paper. Critics just keep saying the same thing over and over again (steak for hamburger!)

art1full.pdf

[rkbabang]

If you define inflation, the way the Austrian economist do, as an increase in the money supply, then there is no question that there has been a lot of inflation.  And while it is impossible to calculate exactly how much this has led to an increase in prices, due to the impossibility of calculating the effects of productivity changes, technology changes, consumer behavior changes, supply and demand changes, etc.  It is easy to know that it does have some effect and that all else being equal (even if they never are) prices would be lower in its absence.  Consider what happens in general to the price of a stock when a company issues a lot of shares vs. when it buys them back.

[Ham Hockers]

It is easy to know that it does have some effect and that all else being equal (even if they never are) prices would be lower in its absence.  Consider what happens in general to the price of a stock when a company issues a lot of shares vs. when it buys them back.

 

Yes but the fact that things are never equal is really really important! In addition, context matters a lot!

 

I doubt that you ever use such a generalized approach when you look at stocks

 

[blainehodder]

If you don't believe in CPI as a measure of inflation, you might like to take a look at the MIT Billion Prices Project, where they gather pricing data from hundreds of online retailers to track real time prices.  Of course this data has its own flaws, but it is a good double check against CPI.

 

Spolier: It pretty much tracks CPI.

 

http://www.pricestats.com/us-series

[rkbabang]

It is easy to know that it does have some effect and that all else being equal (even if they never are) prices would be lower in its absence.  Consider what happens in general to the price of a stock when a company issues a lot of shares vs. when it buys them back.

 

Yes but the fact that things are never equal is really really important! In addition, context matters a lot!

 

I doubt that you ever use such a generalized approach when you look at stocks

 

 

 

All true.  But ask yourself, has the fed been acting more like BRK (almost never issuing stock, only on a rare occasion to make a large accreditive acquisition) or more like some penny stock company run by a scam artist?