If you take a 1980s inflation measure, or the big mac index, and extend it out, it turns negative in 1984 (87 for big mac) and stays negative. If you take government figures for inflation, yes it stays positive.
But unless you agree that since 1990 people "deserve" less housing (and therefore don't see the less square footage for their rental/mortgage dollar as any kind of loss), less fuel, a lot less education. Then in 2000 it gets lowered again. We've gotten to the point that they call the current measure "PCE deflator". So unless you agree people now deserve less of essentially any and all capital goods, ...
This is the issue with government measures. Their claim is that they're just adjusting to what they're seeing, and the "underlying value" is the same. Yet when I offer an economist to provide him with a 10 year supply of tobacco if he pays for my PhD ... no takers (and that's generous, in 1980 it was just 6.8 years of tobacco for a PhD, and I think that included housing for 5 years). That's an investment yielding over 5% ! No takers. But ... I thought the underlying value was the same ? So I'm offering you something of what you claim is greater value for something of less value, and yet you don't take the deal ? Obviously something is wrong here.
They have an excuse, obviously. The reasoning goes like this: more inflation, without higher wages - people spend less measured in goods (in a few years even in dollars) - therefore the inflation measure must be broken (doesn't represent a realistic basket of goods anymore type argument) - inflation measure gets replaced with something with less of whatever got expensive, and less in general - goto 1. Result: inflation measure gets deflated by ~5% every 5 years. Substract that and productivity growth has been negative for decades. This matches people's experiences much better than the figures, so I'm not really willing to accept the PCE deflator.
So these official figures neglect to state that "real" is calculated using about a different inflation measurement every 2 columns. Not totally non-overlapping, perhaps, but different. And despite the repeated claims that they're just changing it to reflect what people buy it always changes in the same way ...
Needless to say, for specific inflation measures, productivity is disastrous. For instance, take square footage real estate per hour worked. Gold in kg per hour worked. Those sorts of measures. They look really, really, really bad.
And for what should be the real inflation measure, the total amount of money, which is total credit + M1 supply, and calculate what portion of "the world economy" you get for an hour of work and see it evolve over time ... blimey.
Of course, but there are lots of years where the inflation number was almost zero and even one year where it was negative. My allegation is that the basket is nonsense. For example, public college tuition (one of the major expenses for families) went up 250% net from 2000 to 2020 where as the CPI was up 50% net over the same time period. I think healthcare, housing, college, transportation, etc. aren't weighted into the CPI appropriately.
CPI is also a broken measure due to its inability to measure wealth inequality (sampling median purchasers only) and discretionary hedonic adjustments. Real inflation has likely been ~33% higher than reported for decades (the Big Mac index is probably the true gold standard).
Depends on how you measure it. The government keeps shifting the goalposts and the current measurement is little related to what a consumer faces. Inflation is measured differently today from the 90s and both different from 80s IIRC.
>CPI is also a broken measure due to its inability to measure wealth inequality (sampling median purchasers only)
And that's fine, because the CPI's job is to measure how prices have changed (ie. inflation), not wealth inequality. Just because a given metric doesn't support your pet cause doesn't mean it's "broken". It's like complaining GDP is a broken metric because it doesn't measure how oppressed minorities are.
> Real inflation has likely been ~33% higher than reported for decades (the Big Mac index is probably the true gold standard).
I tried to confirm this and the results were far from conclusive. The big mac index data can be obtained from github[1] and gives a 129.9% increase between april 2000 (earliest data available) and july 2022 (latest data available). To compare this against the CPI data, I checked on FRED and the "Consumer Price Index for All Urban Consumers: Food Away from Home in U.S. City Average"[2] component of the CPI gives a 87.0% for the same time period. If you take those numbers and convert them to annualized rates, you will indeed find a 33.3% difference between them. Looks like your claim is confirmed, right? But not so fast. The CPI category listed above actually breaks down into more detailed categories, including "Limited service meals and snacks", which presumably the big mac falls into. That data isn't available on FRED but can be found on BLS's data viewer[3] and gives you a 105.8% increase for the same time period. If you convert that to an annualized rate the difference between that and the big mac index drops to 15%. I suspect if we try harder we can eliminate more of the discrepancy. For instance, the "Limited service meals and snacks" index was probably computed from a basket of items, not just big macs. Items that have fatter margins (eg. fries or drinks) might have inflated slower than big macs, thereby dragging the growth of the basket down and explaining the difference.
While I agree that Shadowstats is likely wrong, your counterfactual statement is not really counterfactual:
In the 70s and even early 80s, it was possible to support a family of 4 on the income of one average wage earner. In the 50s it was even a good life. Today it is nearly impossible to do, so something very significant happened to the value of money that is not reflected in the official inflation/wage disparity.
TVs and computers cost about 90% less than they did in 1980, and that's something the BLS happily takes into account in more ways than one ("hedonistic adjustment"). If you assume, e.g., that houses right now are worth what they were worth in 1980 and work everything out form there, it's a lot less inconsistent than you think. It is inconsistent, sure, but at about the same level of inconsistency that official BLS numbers suggest.
> Why would banks willingly offer 30-year fixed mortgages at 3.6% if inflation was 8%/year?
Because they don't know how to get a higher return, regardless of what inflation really is. (Of which there are multiple definitions - some based on prices, and some on money supply - and they are useless if you are not consistent in the definition you use)
And the AEI quote is hyperbole. Read e.g. Karl Deninger for consistent numerical proof (if you accept his methodology, which is not mainstream but definitely not unreasonable) that indeed, all GDP growth in the last 30-40 years is smoke and mirrors.
That was my interpretation when I first read the detailed process about the BLS survey.
It will still measure inflation, but if the median American's spending preferences changes when prices change (which is true until the median American can never afford anything except the bare necessities to begin with), then those changing preferences will result in falsely lower inflation numbers. Combined with Hedonic adjustments, true inflation has probably been about 50% higher than reported for the last two decades (and more in line with the Big Mac index) [0].
The government changed the way they measured inflation to purposefully downplay it. For example, if they were measuring the cost of Levi's jeans, and they went up too high, they would replace them in their index with cheaper non-name brand jeans to show that inflation didn't occur.
And same thing goes with groceries. When ice cream used to be a pint, it's now 14 oz. They have decreased the size of things like food packages over the last 15 years, and I don't think that's taken into consideration in the inflation index. Recently they decreased the size of orange juice by 15% but kept the price the same. That is the definition of inflation.
I think I'm general inflation indexes are now completely impossible to generalize because (a) inflation has been enormous in some locales and some sectors but (b) the relative price of goods is now so dependent on location.
That is, like you say, in a major city I'd expect a Big Mac to be only slightly more expensive, but I'd expect housing to be astronomical. But outside of probably like 10-15 major metros I'd expect housing to be flat if not negative in huge swaths of the US.
The CPI has been gamed into uselessness because governments and corporations have indexed things like pension increases to it. The "hedonic substitution" concept is particularly disingenuous. Seniors can't afford steak any more and buy hot dogs instead? Inflation's gone down, yay!
" which means things like CPI are taken in to account."
Yes - but we should all be weary of this.
CPI is measured in funky ways, and it's tough one.
Problems with measures:
+ Both housing and Oil prices are usually left out of the numbers they use (included in others).
There are reasons for doing this, but it's bazonkers crazy to think of 'consumer prices' as not including their #1 item (housing) and a huge variable cost that consumers pay for directly (gas) but also that goes into everything (airline tickets, transport of stuff, taxi, etc. etc..)
And of course the hardest thing to measure is the real value increase of a product ... i.e. a tomato that is bigger, redder, juicier, healthier - is worth more than one that is not. So - if prices for tomatoes stay flat - but - their value has actually increased, well, that's deflation. That intangible is super hard to measure and quantify.
It's the later issue that is at the heart of so many economic arguments: some say we are 'poorer than ever' - and yet, every single bit of material consumable is way better than it ever was. The crappiest Peugot today drives better than the #1 Mercedes from 1985 ...
I'm starting to suspect that any single measure of inflation is pretty meaningless. I'll grant that the CPI measures some kind of inflation, and I'll grant that the Fed does keep CPI in check. I don't think CPI captures the the typical inflation that I see in housing, education, and other costs over the last 10 years. I don't think CPI is capturing the cost increases in food and other goods over the last 2 years.
I think we need some additional measures of CPI which capture "opportunity cost inflation", "basic goods inflation", and "non-productive asset inflation". It's easy to claim substitution for city center housing by living further away from the city, or moving to a tier-2/tier-3 city - but this also comes with the opportunity cost of jobs. Similar claims can be made for deferring education/medical costs or choosing cheaper alternatives.
Opportunity costs add up over prolonged periods of time. A generation who had to substitute out high quality opportunities due to inflation will eventually be poorer for it.
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.
Here's a website that compares CPI today with the way it was calculated in the 1990s and 1980s. Suffice to say, it appears the government is trying to suppress CPI over time. [0]
The Consumer Price Index (CPI) is a measure of inflation and you should be aware of the adjustments it makes to accurately interpret the measure. It uses "owner equivalent rent" instead of housing prices and makes substitutions for example. Rob Arnott poked fun at the index a few years ago when they substituted chicken for beef.
It's incredible to reflect on how different the macro landscape is now compared to the last time inflation was this high. In 1984, inflation was 4%, the long bond yield was 14%, and the cyclically adjusted priced to earning ratio was 10.
Now, the long bond yield is 2.3% and the CAPE is 37.4.
Real long bond yields (nominal yield minus inflation) have gone from 10% in 1984 to -2.7% now. The yield on Treasury Inflation Protected Securities is negative, see the government website: https://www.treasury.gov/resource-center/data-chart-center/i...
CPI is such a bullshit measure precisely because of its definition. A lot of items have had their prices go down significantly due to globalization, efficiency in production, Chinese production, regulation or just by going obsolete and inconvenient. At the same time, the measures that matter - Healthcare, education, housing, have all gone up. Not to mention CPI does not account for wage stagnation.
You’re committing a fallacy of “Appeal to Authority”, even though your comment doesn’t make sense — obviously we need a consistent measure across decades if we want to compare inflation across decades. Comparing two numbers that measure different things is an apples-to-oranges comparison. (Which is what you’re arguing we should do.)
If you use a consistent measure from a 1980s basis, you’ll see that person is correct — as measured using the historic means, we’ve had ~40% inflation in the past few years and the highest rate of inflation in 40 years.
This chart uses the historic measure and bases in 1980.
Here's a comparison of CPI based on how it is calculated now with how it was calculated in the 1990s and 1980s. [0] There's a pretty clear trend here. Maybe the current calculation is more accurate. But I doubt it. Looks like suppression to me.
But unless you agree that since 1990 people "deserve" less housing (and therefore don't see the less square footage for their rental/mortgage dollar as any kind of loss), less fuel, a lot less education. Then in 2000 it gets lowered again. We've gotten to the point that they call the current measure "PCE deflator". So unless you agree people now deserve less of essentially any and all capital goods, ...
This is the issue with government measures. Their claim is that they're just adjusting to what they're seeing, and the "underlying value" is the same. Yet when I offer an economist to provide him with a 10 year supply of tobacco if he pays for my PhD ... no takers (and that's generous, in 1980 it was just 6.8 years of tobacco for a PhD, and I think that included housing for 5 years). That's an investment yielding over 5% ! No takers. But ... I thought the underlying value was the same ? So I'm offering you something of what you claim is greater value for something of less value, and yet you don't take the deal ? Obviously something is wrong here.
They have an excuse, obviously. The reasoning goes like this: more inflation, without higher wages - people spend less measured in goods (in a few years even in dollars) - therefore the inflation measure must be broken (doesn't represent a realistic basket of goods anymore type argument) - inflation measure gets replaced with something with less of whatever got expensive, and less in general - goto 1. Result: inflation measure gets deflated by ~5% every 5 years. Substract that and productivity growth has been negative for decades. This matches people's experiences much better than the figures, so I'm not really willing to accept the PCE deflator.
So these official figures neglect to state that "real" is calculated using about a different inflation measurement every 2 columns. Not totally non-overlapping, perhaps, but different. And despite the repeated claims that they're just changing it to reflect what people buy it always changes in the same way ...
Needless to say, for specific inflation measures, productivity is disastrous. For instance, take square footage real estate per hour worked. Gold in kg per hour worked. Those sorts of measures. They look really, really, really bad.
And for what should be the real inflation measure, the total amount of money, which is total credit + M1 supply, and calculate what portion of "the world economy" you get for an hour of work and see it evolve over time ... blimey.
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