The CPI Is a Conspiracy! (Or Maybe You Just Don't Understand It)

The Consumer Price Index, the inflation gauge produced by the Bureau of Labor Statistics, says inflation was 2.9% in the year ended January. Yet, the average price of a gallon of gasoline went up more than 10% during that period. The price of milk increased double-digits, too. Heating oil prices have skyrocketed.

How do you reconcile these figures? If you're like many, you conclude that the CPI is flawed or, worse, a government conspiracy.

There may be some truth to that. The CPI isn't perfect, and the incentive for the government to downplay inflation is obvious. But that's no excuse to make blind criticisms, particularly when you're an established member of the media.

Enter CNBC host Rick Santelli.

Last week, Santelli pointed out that American Institute of Economic Research issues its own measure of "everyday" inflation, which shows prices rising 8% annually. He explains:

Their Everyday Price Index doesn't look at things that you buy on a grand scale -- maybe every couple of years like a house -- they look at things that you actually consume on a daily, weekly, monthly basis. And do you know what their inflation rate is? Eight percent.

OK, so let me get this straight. They are saying 8%, and most of our leaders, especially in the Fed, want us to believe that they have a 2% [core inflation] target, and we're under it. Now if you believe that ...

Hold up there, Rick. A few points.

It's true that many people only buy a home every couple of years. But most people have home payments every month. That's a real expense, just like milk or gasoline. There's no reasonable excuse to exclude housing from an inflation gauge. Indeed, 41% of the CPI is made up of housing costs, and since the housing market has been ravaged, overall inflation has battled serious headwinds.

Why does housing make up more than 40% of the CPI? Some say it's a trick to suppress the real rate of inflation. Others (rightly) say it's because surveys show about 40% of an average household's income goes to housing costs.

That's really the heart of this issue: weightings. The reason the price of things like milk can rise faster than the CPI is because the CPI is comprised of more than milk. The index's latest numbers show dairy products make up about 1% of the overall index. It also shows -- and this is really important -- that dairy prices surged 9% last year. But since dairy holds only a small weighting in the index, prices can rise a lot without making a big difference on the overall total.

Same with meat, poultry, and eggs. The CPI shows prices for these items jumped 7.2% in the last year. But they hold a 2% weighting in the index, so the overall impact isn't that much. The price of fats and oils rose nearly 13% last year, but make up well under 1% of the index. Average gasoline prices rose 10% in the last year, which is exactly what the CPI shows. But gas only makes up 5.5% of the index. And again, that's because surveys show most people spend about 5% of their income on gas.

The American Institute of Economic Research's Everyday Price Index Santelli cites changes the weightings around. Here's how the organization explains it:

Because the EPI takes into account only a subset of all consumer expenditures, fuel and energy costs account for a larger portion of the EPI than they do for the CPI. Rising and volatile fuel and energy prices made the CPI more volatile in recent years as well, but they had a much stronger effect on the EPI. ...

Food and beverage expenditures, for example, constitute a major part of everyday spending -- between 38 and 47 percent over the years. Even small changes in the price of food affect the EPI significantly. ...

In essence, we each have our own Everyday Price Index. People who spend more of their money on products with rapid price increases have seen their cost of living rise even more dramatically than the EPI suggests. This includes people who spend more on fuel and transportation, prescription drugs, tobacco, cable TV (part of the recreation category), and child care.

On the other hand, people who are very healthy or who do not smoke are not at all affected by rapid price increases in prescription drugs and tobacco. People who spend more on products that are experiencing falling prices -- such as personal care products and services, household supplies, food and beverages, and phone and Internet service -- saw their everyday cost of living rise more slowly than the EPI suggests.

The most important line there: "[T]he EPI takes into account only a subset of all consumer expenditures."

Yes, the prices of things like fuel and food are rising very fast right now. Both CPI and EPI admit this. The difference is how those items are weighted. CPI weights them based on how most people spend their money. EPI gives them more weight while excluding other items entirely in order to highlight specific changes. If you spend close to half your income on food and don't have any housing payments, the EPI index might be a good benchmark for you. If you're an average American, CPI is probably more indicative of your situation.

Or maybe it's somewhere in between. The smartest point EPI makes is that "we each have our own Everyday Price Index." I hardly drive at all, so gas prices don't mean much to me. But I probably eat twice as much fruit as most people, so that's really important to me. I spend $10 a month on milk, so even when prices rise 20%, I hardly notice. Rent is my largest expense, so even small percentage changes there add up fast. For other people, these weightings are far different. It's all about your individual circumstances.

Same for the CPI. It's an average index that doesn't apply to any specific person, or to specific items like milk or gas. That might make it less useful to you, but it doesn't make it a conspiracy.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 13, 2012, at 2:49 PM, TheDumbMoney wrote:

    Yeah, AEI "research" will show excellent figures confirming the CPI the next time a Republican is President. That is what you get when your "research" organization's conclusions are plastered all over its website's About Page even before a single person does any "research." (AEI, Heritage, etc.)

    Here is how the Billion Prices Project has tracked the CPI over time.

    http://bpp.mit.edu/usa/

    DTAF

  • Report this Comment On March 13, 2012, at 4:02 PM, wolfman225 wrote:

    While it would be quite a bit more labor intensive, wouldn't a more helpful measure of the rate of increase in the cost of living be the actual cost of living for a typical resident?

    Instead of using a broad brush to weight the various parts of the index to calculate the CPI for everyone, why not survey typical households in various parts of the country to measure the percentage increase of actual expenses?

    The survey could control for factors such as the size of the household to ensure we're comparing "apples to apples".

    The biggest problem with the current CPI, other than the omission of major expenses like energy and food, is that there is no way a national measure of inflation can be applied to the entire country. I'm quite sure that the cost of living in LA or NYC is quite different than Arab,AL or my hometown of Danville,VT.

    Such a system would also make calculating the annual COLA's much more precise.

  • Report this Comment On March 13, 2012, at 4:06 PM, TMFMorgan wrote:

    <<The biggest problem with the current CPI, other than the omission of major expenses like energy and food, >>

    The CPI *does* include food and energy. Core CPI does not.

  • Report this Comment On March 13, 2012, at 4:20 PM, mdk0611 wrote:

    Perhaps the best way to look at the EPI is not as a replacement for the CPI but, rather, a supplimental measure similar to Core CPI. Core CPI removes the more volitile components of CPI. EPI removes the more stable. I think they both have value.

  • Report this Comment On March 13, 2012, at 4:49 PM, wolfman225 wrote:

    ^^I should have been clearer. Core CPI was what I meant. The main problem remains. If the people reporting the CPI (regardless of party in power) are the same as the ones deciding which expenditures receive what weightings in the computation the process will always be open to fraud and manipulation.

  • Report this Comment On March 13, 2012, at 5:20 PM, Hawmps wrote:

    Man, if I could write a lease that escalates annually based on EPI instead of CPI, that would be something.

  • Report this Comment On March 13, 2012, at 6:38 PM, KCinAustria wrote:

    Taxes are by far my largest expense. Turns out finishing grad school and getting a 'real' job caused my 'personal inflation index' to skyrocket. I'm curious, does any inflation index account for how much average people 'spend' on taxes?

  • Report this Comment On March 13, 2012, at 7:29 PM, katyfcolorado wrote:

    Thanks Morgan! Once again you give us great useful information to understand our world. I eat a lot of fruit, too!

  • Report this Comment On March 13, 2012, at 8:38 PM, hbofbyu wrote:

    All I know is what I see. Government statistics be damned. Quantitative easing is now trickling down and it may be too heavy for Bernanke to reel it back in.

    Have you read the news about Tide being used as currency?

    http://www.q13fox.com/news/kcpq-police-take-on-rising-wave-o...

    http://now.msn.com/money/0313-tide-detergent-thefts.aspx

    When you are rich you can buy commodities, when you are poor you shoplift a commodity.

    I'm not saying we are doomed, but this is exactly what happens in third world countries as the citizens try to protect themselves from a falling currency.

    I once attended a lecture given by a very successfull retail buyer. He was asked how he can be so accurate with future trends. He said he goes to the inner city and looks at what they are wearing, what music they are listening to and what is trending in the ghettos. Saggy pants, hip hop, trash talk, tatoos -they were all there long before they hit suburbia.

    Maybe they have an ear for inflation as well.

  • Report this Comment On March 13, 2012, at 9:34 PM, TMFGalagan wrote:

    Hey Morgan -

    Much of the more rigorous criticism of CPI centers around three factors: so-called "hedonic adjustments" that try to account for changes in quality of things like electronics; the use of "owner-equivalent rent" rather than a market-based rental figure; and product substitution analysis. Bill Gross did a nice job explaining how the U.S. differs from the rest of the world in its inflation calculations in this letter four years ago: http://www.pimco.com/EN/Insights/Pages/IO%20June%202008.aspx

    Obviously, there's a middle ground between thinking the CPI is "right" versus thinking it's a conspiracy. There's substantial evidence supporting the idea that it misstates actual inflation. Given the political implications CPI has for things like Social Security payments and other inflation-indexed items, the BLS is clearly under great pressure to make all of its constituents happy.

    best,

    dan (TMF Galagan)

  • Report this Comment On March 13, 2012, at 10:04 PM, TMFMorgan wrote:

    Dan,

    Agree: CPI is far from perfect. But arguing that it must be wrong because the price of a few commodities are rising much faster misinterprets how it is calculated.

    Further, the BLS has a good rebuttal regarding some the criticisms of hedonic adjustments:

    http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

  • Report this Comment On March 13, 2012, at 10:51 PM, CaptainWidget wrote:

    The fallacy, in the case of all inflation measurements, is the assumption that gradual price increases are both natural and healthy.

    They're not. Markets drive down prices consistently. Imagine if the CPI included the price of a Terabyte of hard-drive storage as 40% of the CPI. We'd be ruined. As the real cost of producing storage went down, they would massively print to offset the REAL gains in productivity. We'd still be paying $50,000 for a Terabyte of storge. We'd also be paying $50,000 for a new cell-phone however.

    Markets should be allowed to drive prices DOWN. The CPI simply inflates the dollar as the real cost of producing deflates.

    Now whether you measure it by the price of a house (extremely sticky, as the volume of individual transactions in the market are tiny) or in gasoline (extremely fluid, as people buy gas every day) is irrevelant.

    The truth is that as industries get more productive and producer cheaper goods, your dollar is weakened, making it impossible for you to procure those new cheaper goods at the cheaper rates.

    Which is retarded. The problem with the fed is that they assume they can control employment and prices...and they can't. When the fed was originally created, they had no such aspirations of stabilizing prices and employment. They realized they had no power. The only thing they have the power to do is inflate or deflate the money supply. So that, along with bank liquidity, was the original fed goal.

    In a perfect world, no one person would control the price or value of my money. And no one would have a monopoly over making that money.

    In a less than ideal world, the federal reserve should reign in the scope of their "job" from dictating policy to simply making sure people are able to hold the balances of cash they wish to hold while letting prices drop naturally with productivity.

  • Report this Comment On March 14, 2012, at 12:32 AM, TerryHogan wrote:

    I'd be curious to see a little more data on how they calculate the housing number. For example, assuming I had a fixed rate mortgage in 2007, I'd still be making the same payments on that mortgage today regardless of the housing market. So how many people actually see a decline in their monthly payments due to a crash in the housing market (Yeah I get that there's a lot of renters out there, but rents haven't fallen as much as housing have they?)

  • Report this Comment On March 14, 2012, at 12:43 AM, TMFAleph1 wrote:

    <<The only thing they have the power to do is inflate or deflate the money supply. So that, along with bank liquidity, was the original fed goal. >>

    Hold on, friend. Controlling the money supply has *never* been an end in itself.

  • Report this Comment On March 14, 2012, at 3:55 AM, Zederone wrote:

    I have to agree with the above, I really find that the CPI's value other than the minor impact created by the people who act on it is almost worthless. Your mileage may very but to me it's been a source of laughter for a long time, I guess it could be regional.

  • Report this Comment On March 14, 2012, at 4:45 AM, CaptainWidget wrote:

    <,Hold on, friend. Controlling the money supply has *never* been an end in itself.>>

    Controlling the money supply has ALWAYS been the end goal. It doesn't matter what how they dress it up to the public, controlling the money supply has always been the end game.

    "Give me control of a nations money supply, and I care not who makes it’s laws"-Amschel Rothchild

    But yes, the original goal of the federal reserve was to keep banks liquid and prevent the US dollar from being devalued. At some point when I don't feel like doing the research to find out, it shifted to "maintaining employment, keeping prices stable, and moderate long term interest rates"

    ...which for anyone with knowledge of economics, knows that it translates into "just the right amount of inflation to steal the savings of the working man straight out of his bank account with ticking him off too much"

  • Report this Comment On March 14, 2012, at 9:52 AM, whereaminow wrote:

    Morgan,

    I am quite sure that neither you nor Rick Santelli understand the CPI. The BLS uses a substitution effect called Geometric Mean. Are you familiar with this concept?

    Basically, Geometric Mean is an OBJECTIVE and CARDINAL utility function. Now I put those words in capital letters because it's important and i can't use italics here, not because I'm screaming at you.

    Utility, however, is SUBJECTIVE and ORDINAL. Economic satisfaction is ranked by market actors according to preference, and as such there is no objective reference point by which to measure it. We don't say, for example, that buying this candy bar is 42.3% more satisfying than buying another. We say that we prefer one to the other. It's a ranking system that is ordinal, not a measuring system that is cardinal.

    So the very idea of employing substitution effects is a fallacy. The debate shouldn't be about whether or not the CPI is too high or too low to represent reality. The debate should be about the methodology of the (dismal, thanks to Keynesians) science.

    The next problem CPI you've touched on, sort of. It's the shopping cart effect. Each individual's shopping cart is unique, so to speak. What Ben Bernanke purchases - and the distribution of his purchases as a percentage of disposal income - is far different than what a single mom on a fixed income (or what I like to call Guaranteed Declining Standard of Living Recipient). Therefore, price rises that impact the single mom more - such as food items - do not impact the Bernank in the same way. So the two of them can have a very different feeling about how The Bernank's money printing is impacting prices.

    Finally, what we don't know is the real kicker here. We don't know WHERE PRICES WOULD BE WITHOUT THE FED'S MONEY PRINTING. Again, not capitalized because I'm shouting. I don't have italics and that's an important point.

    What should prices be at today, Morgan? Do you know? Do I know? No one knows. Increases in productivity lower prices (all things being equal), so using yoy price measurements is a bit misleading, since prices should be lower - not the same as last year. Therefore, even if 2% was the correct number (Ha!) for yoy measurements, that still doesn't tell us HOW MUCH HIGHER PRICES ARE THAN THEY OTHERWISE WOULD BE WITHOUT FED MONEY PRINTING.

    I know you can't address these points Morgan. These overthrow the entire fundamental premise of the only economic model that you've ever studied. But you can't say I didn't try :)

    David in Liberty

  • Report this Comment On March 14, 2012, at 9:56 AM, Turfscape wrote:

    All I know is that I have a good friend who smokes and is lactose intolerant. He doesn't buy milk...so he doesn't include that in his inflation estimates, but he does buy cigarettes a few times a week. His rate of inflation over the past year has been in excess of 20%, but yet the good folks putting out the EPI want us to believe that the rate of inflation is only 8%! It's a conspiracy!

  • Report this Comment On March 14, 2012, at 9:59 AM, GigemAgs2009 wrote:

    Good article. It explains a lot.

  • Report this Comment On March 14, 2012, at 10:11 AM, ETFsRule wrote:

    TMFGalagan wrote:

    "There's substantial evidence supporting the idea that it misstates actual inflation."

    What evidence are you referring to? I have never seen any evidence, over any reasonably long period of time, showing any problem with the official CPI.

    The only quantitative evidence I have come across suggests that the CPI slightly overestimates food inflation:

    http://www.ers.usda.gov/publications/FoodReview/sep1995/food...

    If you were thinking of something else, I would love to take a look at it.

  • Report this Comment On March 14, 2012, at 11:33 AM, ETFsRule wrote:

    TerryHogan wrote:

    "I'd be curious to see a little more data on how they calculate the housing number."

    Hi Terry. They explain it, at great length, here:

    http://www.bls.gov/bls/fesacp1120905.pdf

    "For example, assuming I had a fixed rate mortgage in 2007, I'd still be making the same payments on that mortgage today regardless of the housing market. "

    True - except that in the current downturn, many people have reduced their monthly payments by refinancing to a lower interest rate.

  • Report this Comment On March 14, 2012, at 12:05 PM, DJDynamicNC wrote:

    -->"Markets drive down prices consistently."<--

    I would agree that markets which are operated transparently and honestly in situations with accurate price signals and in the absence of successful rent seeking or price fixing do tend to drive down prices over time provided supply and demand remain relatively consistent.

    That, however, is a much more specific claim.

    -->"When the fed was originally created, they had no such aspirations of stabilizing prices and employment." <--

    The Federal Reserve Act, which created the Fed, specifically calls for maximum employment as part of the Federal Reserve mandate. It also specifically calls for stabilizing prices. You have been misinformed.

  • Report this Comment On March 14, 2012, at 12:14 PM, wan2bretired wrote:

    Housing prices may go up, they may go down, but I am in a 15 year fixed mortgage. Since many who own a home are in fixed mortgages, housing prices have nothing to do with or fixed monthly mortgage payments. Those on adjustable mortgages are tied to some variable, that is currently low due to the fed. On the other hand those who rent are experiencing rising rental rates due to increased demand for rentals Those on fixed incomes eg, on social security are more effected by factors in the EPI and not the core CPI, yet social security is pegged to the later. I believe the politicians have done this to save money in decreased cost of living increases for social security recipients. Unless your buying a home on a yearly basis, a 40% weighting in the core CPI seems dubious. Most of my employee's are concerned with gas, heating, and food cost increases, not reflected in the core cpi.

  • Report this Comment On March 14, 2012, at 12:54 PM, whereaminow wrote:

    DJ,

    Setting aside the impossibility of the dual mandate, and setting aside the absurd economic fallacies that underlie it, the Federal Reserve's creation had nothing to do with it.

    Even at the time, the propaganda in support of the Fed focused primarily on ending bank panics (ha! guess that didn't work out in 1931). Secondary to that was smoothing out the business cycle (double ha! as if they even understand what causes it!)

    But that was the propaganda for public consumption. Americans were divided on the issue and the culture of America had always been against centralization of banking powers. There was also this pesky thing called the Constitution that needed to be overcome.

    The solution was an alliance between the elite bankers and the Progressives.

    But I won't spoil the ending for you. If you actually want to be informed, and not dragged down by mainstream superficial analysis, I suggest Murray Rothbard's "The Case Against the Fed".

    Or you can be like Morgan, shout "conspiracy theory" and thus silence all dissenting opinion without actually studying it. I hear that's quite effective.

    David in Liberty

  • Report this Comment On March 14, 2012, at 1:50 PM, TMFAleph1 wrote:

    There are conspiracy theorists, but they have nothing on meta-conspiracy theorists who allege that anyone who invokes the term "conspiracy theory" is part of a conspiracy to silence all dissenting opinion.

    My theory is that the meta-conspiracy theorists are part of the Establishment and are just trying to sow confusion with their allegations.

  • Report this Comment On March 14, 2012, at 1:52 PM, TheDumbMoney wrote:

    :-)

  • Report this Comment On March 14, 2012, at 2:09 PM, whereaminow wrote:

    Alex Dumortier,

    Antidisestablishmentarianism aside, I've already offered you a chance to debate the use of objective utility functions in BLS reporting and since I saw no reply I have to assume that this is another economic discussion that is beyond your limited expertise.

    However, you do have the market cornered for trifling sarcasm. So you have that going for you, which is nice.

    David in Liberty

  • Report this Comment On March 14, 2012, at 2:26 PM, DJDynamicNC wrote:

    "The solution was an alliance between the elite bankers and the Progressives."

    To what end, exactly? What exactly are these elite bankers getting out of the deal?

    I'm not shouting conspiracy theory, but you have to understand that it sure does look like a conspiracy theory, and to best address that, I'd like to understand:

    1) Motive

    2) Objective

    3) Method

    4) Results

    The Fed has been at its nefarious... whatever it does that's bad... for a hundred years. In that time we've seen some of the most prosperous times in human history, an expansion of voting rights to almost the entire population for increased representation, long periods of nearly full employment, long periods of controlled inflation, increases in aggregate purchasing power year over year up until the recent debacle of the 2000s, extensions of life expectancy, a stabilizing world geopolitical environment, hell even the literacy rate has increased. Obviously that's not because of the Fed, but whatever the Fed is doing, it hasn't prevented any of that. What exactly is it doing that's so bad?

  • Report this Comment On March 14, 2012, at 2:38 PM, DJDynamicNC wrote:

    "However, you do have the market cornered for trifling sarcasm. So you have that going for you, which is nice."

    Oh I don't know, looks like there is some pretty healthy competition in that sector.

  • Report this Comment On March 14, 2012, at 3:05 PM, TMFAleph1 wrote:

    <<However, you do have the market cornered for trifling sarcasm. So you have that going for you, which is nice.>>

    Thanks, I'm working hard to corner that market; hopefully, it won't end like the Hunts' attempt to corner the silver market.

    I salute your use of a quote from one of the great comedic monologues in cinematic history.

    "Oh, there won't be any money, but on your deathbed, you will receive *total* consciousness."

  • Report this Comment On March 14, 2012, at 3:08 PM, TMFAleph1 wrote:

    The Rothschilds are a conspiracy theorist's catnip.

  • Report this Comment On March 14, 2012, at 4:17 PM, whereaminow wrote:

    Yes, outside of my love of economics and Ron Paul, I am a normal guy that occasionally drinks his face off and watches 80s comedy.

    David in Liberty

  • Report this Comment On March 14, 2012, at 4:26 PM, whereaminow wrote:

    DJ,

    There is a great deal of documentation concerning the history of the creation of the Federal Reserve. This is simply fact. I'm sorry that it's not a part of the regular curriculum of the standard university, but that doesn't make it any less true.

    http://mises.org/daily/3823

    "The Federal Reserve Act of December 23, 1913, was part and parcel of the wave of Progressive legislation on local, state, and federal levels of government that began about 1900. Progressivism was a bipartisan movement that, in the course of the first two decades of the 20th century, transformed the American economy and society from one of roughly laissez-faire to one of centralized statism.

    Until the 1960s, historians had established the myth that Progressivism was a virtual uprising of workers and farmers who, guided by a new generation of altruistic experts and intellectuals, surmounted fierce big business opposition in order to curb, regulate, and control what had been a system of accelerating monopoly in the late 19th century. A generation of research and scholarship, however, has now exploded that myth for all parts of the American polity, and it has become all too clear that the truth is the reverse of this well-worn fable.

    In contrast, what actually happened was that business became increasingly competitive during the late 19th century, and that various big-business interests, led by the powerful financial house of J. P. Morgan and Company, tried desperately to establish successful cartels on the free market. The first wave of such cartels was in the first large-scale business — railroads. In every case, the attempt to increase profits — by cutting sales with a quota system — and thereby to raise prices or rates, collapsed quickly from internal competition within the cartel and from external competition by new competitors eager to undercut the cartel.

    During the 1890s, in the new field of large-scale industrial corporations, big-business interests tried to establish high prices and reduced production via mergers, and again, in every case, the merger collapsed from the winds of new competition. In both sets of cartel attempts, J. P. Morgan and Company had taken the lead, and in both sets of cases, the market, hampered though it was by high protective, tariff walls, managed to nullify these attempts at voluntary cartelization.

    It then became clear to these big-business interests that the only way to establish a cartelized economy, an economy that would ensure their continued economic dominance and high profits, would be to use the powers of government to establish and maintain cartels by coercion, in other words, to transform the economy from roughly laissez-faire to centralized, coordinated statism. But how could the American people, steeped in a long tradition of fierce opposition to government-imposed monopoly, go along with this program? How could the public's consent to the New Order be engineered?

    Fortunately for the cartelists, a solution to this vexing problem lay at hand. Monopoly could be put over in the name of opposition to monopoly! In that way, using the rhetoric beloved by Americans, the form of the political economy could be maintained, while the content could be totally reversed." - Murray Rothbard

    Now, I let others come on here and try to slander Murray. He is without a doubt the single most well read (from the entire spectrum) and prolific economist of the post WWII era. But hey, that's just one man's opinion :)

    David in Liberty

  • Report this Comment On March 14, 2012, at 5:51 PM, CaptainWidget wrote:

    <<I would agree that markets which are operated transparently and honestly in situations with accurate price signals and in the absence of successful rent seeking or price fixing do tend to drive down prices over time provided supply and demand remain relatively consistent.

    That, however, is a much more specific claim.>>

    So free markets drive prices down? I'm a writer, I have a knack for brevity.

    <<The Federal Reserve Act, which created the Fed, specifically calls for maximum employment as part of the Federal Reserve mandate. It also specifically calls for stabilizing prices. You have been misinformed.>>

    You have not been misinformed. You simply never knew in the first place and wanted to see if you could bluff me....well you didn't, and you're wrong.

    http://en.wikipedia.org/wiki/Federal_Reserve_Reform_Act_of_1...

    So I had to look it up, but it was 1977. The federal reserve act was amendment to "promote maximum employment, production, and price stability," something it never mention previously. Anywhere.......until 1977....not 1913.....1977.....

    Before that, as I mentioned, the only objective goals were to provide liquidity to banks and prevent devaluation of the dollar.

    Does this shake your belief structure to the core? If you could be so utterly and completely WRONG about this, what about all your other shallow-end-of-the-pool beliefs? Maybe a bit more research next time, eh?

  • Report this Comment On March 14, 2012, at 7:40 PM, whereaminow wrote:

    The only thing that shakes my faith in the free market is that news outlets like TMF (and there is much much worse out there) continue to employ writers who get pwned by their readers in nearly every piece they type.

    Maybe the journalism pool is the really shallow one. I know I'd have to disregard about 10 years of study to be eligible.

    David in Liberty

  • Report this Comment On March 14, 2012, at 9:06 PM, CaptainWidget wrote:

    <<

    Maybe the journalism pool is the really shallow one. I know I'd have to disregard about 10 years of study to be eligible.

    >>

    Those with great writing skills, great research skills, and great analytical skills tend to be much more highly compensated in other fields. It's a waste of time for a great econ writer and researcher to write website articles for $.75 a word. He'd be much better compensated getting his CFA and writing analysis on securities and selling those for huge dollars to investment firms.

    So websites get whatever's left. I canceled my premium membership to this website due to awful, slanted writing and horrible, misinformed, ill-timed research and recommendations.

    Love the Caps system though guys! Great fun!

  • Report this Comment On March 15, 2012, at 1:41 AM, TMFAleph1 wrote:

    <<He'd be much better compensated getting his CFA.>>

    Done.

  • Report this Comment On March 15, 2012, at 10:39 AM, DJDynamicNC wrote:

    @Captain - No, I was misinformed:

    "The Congress established three key objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."

    That's from the same source that you used to disprove me (article here: http://en.wikipedia.org/wiki/Federal_Reserve_System ), so I don't feel that bad. I will accept your correction, however, and thank you for it.

    I may edit the wikipedia article as well, if only so I don't forget and fall into the same mistake in a few months. :lol:

  • Report this Comment On March 15, 2012, at 10:42 AM, DJDynamicNC wrote:

    But no, getting the date wrong because of a mis-cited Wikipedia article does not shake my entire belief structure to the core.

  • Report this Comment On March 15, 2012, at 11:00 AM, slpmn wrote:

    Widget and Whereaminow - you guys should tone down the rhetoric a bit. Not every intelligent person wants to go into investment banking or trading or money management. Some really smart people like to read, research, think, and share their thoughts with others for a living and we (investors, society, whatever) are better off because of it. One of the sharpest guys I've ever worked with now works for the Fool. He could easily have gone the I-banker route had he desired, but he didn't. Has other things that make him tick. Oh, yeah, he has a CFA. So do I. So do a lot of people. Means little beyond indicating the holder did a lot of studying and passed three tests.

  • Report this Comment On March 15, 2012, at 11:12 AM, DJDynamicNC wrote:

    @David - I respect Rothbard for the contributions he made (and I think the Austrian school is not without a few valid and valuable contributions to the discourse) but the argument from authority isn't compelling, as I'm sure you're aware.

    So let's instead take Rothbard at his words and see what we find:

    "If we allow ourselves to use the term 'society' to depict the pattern of all individual exchanges, then we may say that the free market 'maximizes' social utility, since everyone gains in utility."

    It is difficult to see how Rothbard could honestly accept that everyone gains in utility in any voluntary transaction. The implication is that nobody can ever be fleeced and nobody ever acts with imperfect information (presumably Rothbard has a better answer for situations in which "voluntary" transactions are not properly voluntary at all, but then again, maybe not).

    This also compeletely fails to account for third parties who are deprived of access due to voluntary agreements undertaken by other actors. Of course, Rothbard ahd a response for this:

    "We cannot, however, deal with hypothetical utilities divorced from concrete action. We may, as praxeologists, deal only with utilities that we can deduce from the concrete behavior of human beings. A person's 'envy,' unembodied in action, becomes pure moonshine from a praxeological point of view.... How he feels about the exchanges made by others cannot be demonstrated unless he commits an invasive act. Even if he publishes a pamphlet denouncing these exchanges, we have no ironclad proof that this is not a joke or a deliberate lie."

    Interestingly, this completely undermines the notion of voluntary contracts. By taking the action to sign a contract, how do we know that the actor is not simply demonstrating a preference for signing things? Praxeologically speaking, we don't - there is no way to tell and, in fact, any attempt to tell is "moonshine," per Rothbard.

    We could take this further - we have no "ironclad proof" that other parties do NOT object to the voluntary transactions of others, just as we have no "ironclad proof" that they DO object. Why preference one state over the other? Praxeologically, there is no reason that can be derived - it must be assumed.

    I could go on, but you see where I'm going here. Rothbard was brilliant and had some outstanding insights, but he was not without serious logical flaws in his thinking.

    I will grant that this is a bit of a tangent, but Rothbard - flaws and all - fascinates me and I figured you'd appreciate a good discussion of him and his work as much as I would, so please pardon the digression.

  • Report this Comment On March 15, 2012, at 11:15 AM, DJDynamicNC wrote:

    "It's a waste of time for a great econ writer and researcher to write website articles for $.75 a word. He'd be much better compensated getting his CFA and writing analysis on securities and selling those for huge dollars to investment firms. "

    Much better financial compensation, maybe.

    There are other forms of compensation, and I think writing for - and interacting with - the Motley Fool community is certainly one of them. If I had the know-how I'd jump at the chance long before diving into the cesspool that is Wall Street.

  • Report this Comment On March 15, 2012, at 4:43 PM, decebalvs wrote:

    Houses are made by using food and energy, and other commodities. Hence, and unless there is something else coming into play (such as wide acceptance of lower quality of life), the food inflation will reflect sooner or later in everything else.

  • Report this Comment On March 16, 2012, at 9:04 AM, whereaminow wrote:

    slpmn,

    You sound like a nice guy, so let me tell you this. They get what they deserve around here. They spend years belittling their opponents and now their opponents outnumber them. We've spent enough time patiently explaining our positions in detail. They'd rather make a smart a** comment than address the arguments presented.

    They get what they deserve.

    David in Liberty

  • Report this Comment On March 16, 2012, at 11:57 AM, ScottPletcher wrote:

    Interesting article.

    The govt clearly has a vested interest in finding a lower rate of inflation, since CPI-W is used to adjust Soc Sec. Thus, (alleged) lower inflation saves the govt a lot of money.

    Then congress can redirect that money to its favorite thing -- itself!

  • Report this Comment On March 16, 2012, at 12:24 PM, jrj90620 wrote:

    So,we're just arguing over how much the govt understates inflation.Anyone with a brain can see that the only way govt can pay for it's deficits,without soaring interest rates,is to manipulate the currency and drive down it's value over time.Same thing that has happened in EVERY fiat currency country in the history of the world.

  • Report this Comment On March 16, 2012, at 12:28 PM, DJDynamicNC wrote:

    I think there is sufficient respect that none of us needs to get too worked up over the smart ass remarks. I know I've gotten caught up in the heat of debate and said some intemperate things, and also sometimes the snark is just too good to pass up. :lol: And I've been on the receiving end of some good shots too.

    When you get right down to it, everybody I interact with regularly in these threads has their wits about them. Sometimes they catch me in an error, sometimes I catch them in an error - and there's no shame in being proven wrong so long as we learn from it - but nobody here is stupid.

  • Report this Comment On March 16, 2012, at 12:30 PM, DJDynamicNC wrote:

    "manipulate the currency and drive down it's value over time."

    Drive down its value relative to what?

    Inflation does not happen in a vacuum. Wages, prices, purchasing power, these factors all fluctuate and make a tremendous difference in the end result.

    I'm interested in fast computers; my purchasing power in that sector has drastically increased over the past 10 years. That is not irrelevant when considering inflation and currency values.

  • Report this Comment On March 16, 2012, at 12:31 PM, DJDynamicNC wrote:

    ^^^ In other words, am I gaining more or less utility from my dollars?

  • Report this Comment On March 16, 2012, at 1:25 PM, JFMann wrote:

    One key problem causing confusion throughout this discussion is failure to realize that the term "inflation" has been grossly distorted over time……….and now is generally taken to mean any price increase for any reason whatsoever (including temporary supply disruptions due to snowstorms and other natural events)………..as opposed to the long-gone definition of a general increase in prices due to an increase in the money supply. We no longer have a word for the forgotten definition.

    Please see an article I have composed on that subject; http://www.helium.com/items/1024970-inflation-in-the-us

    CPI was intended ………by economists who did not foresee the massive changes in global economics that have occurred over time……….to measure the purchasing value of the dollar, in general. That is why components such as housing are included. Yet, the purchasing power of the dollar is now dominated by events outside the US………..that affect the price of oil for example……………or the price of commodities that are devoured by China. Most importantly however it that the CPI does not directly account for changes in the US money supply………which nowadays is almost a quaint idea since "money" is no longer a physical element……….it is a virtual reality that can be …….and is being…….manipulated via computer programs on a global level.

  • Report this Comment On March 16, 2012, at 1:28 PM, jconboy0226 wrote:

    Quite frankly, I think the CPI is a terrible indicator of standard of living and purchasing power. In that regard, I believe the biggest crime is how people utilize it to make opinions on other aspects of the economy.

    For starters, owner equivalent rent does not accurately reflect living expenses for many people. I rent in an area that has continued to climb year over year with a minor hiccup during the recession that prorated rent by taking off 1 or 2 months of rent. It was prorated because as soon as things became remotely better, they kept their baseline pricing and removed any free months in their incentives. Most of the data I have seen regarding rent shows that not much has changed on a national level, and the trend has been rising prices. Furthermore, individuals with mortgages on bubble prices do not see any gain from drops in real estate prices, although they are seeing their wealth take a significant hit.

    So what it comes down to is a segment of the population (renters and those who purchased a home in the past 5 to 10 years) that has seen no deflation in rent/mortgage payments. Given it is pretty much undeniable that the rest of the basket is more often than not increasing and at a big rate at that, people look at the CPI as a slap in the face.

    I don't believe the CPI is a conspiracy, but I do believe that the government has no incentive to change it because it understates inflation and their poor attempts at managing an economy.

  • Report this Comment On March 16, 2012, at 1:47 PM, TMFMorgan wrote:

    <<For starters, owner equivalent rent does not accurately reflect living expenses for many people. I rent in an area that has continued to climb year over year with a minor hiccup during the recession that prorated rent by taking off 1 or 2 months of rent.>>

    Again, CPI is not trying to capture price changes in your specific neighborhood. It's trying to do it nationwide. The methodology may be flawed (it is), but citing geographic specifics is not a good criticism of the CPI.

  • Report this Comment On March 16, 2012, at 2:14 PM, jconboy0226 wrote:

    @Morgan Housel

    I wasn't merely pointing out my own location. If I'm not mistaken, rent has increased nation wide and that is why it is not a good methodology for inflation considerations.

  • Report this Comment On March 16, 2012, at 2:25 PM, TMFMorgan wrote:

    <<If I'm not mistaken, rent has increased nation wide and that is why it is not a good methodology for inflation considerations.>>

    You are not mistaken, but owners equivalent rent is rising in the CPI. Since 2006, CPI's measurement of OER has risen 15.5%.

  • Report this Comment On March 18, 2012, at 9:59 PM, TMFAleph1 wrote:

    @CaptainWidget

    You'll find a sample of my institutional-level research here:

    http://slidesha.re/wq9jab

  • Report this Comment On March 19, 2012, at 10:55 AM, mmqyamap wrote:

    Where can I find the formula used to calculate EPI? Or the weights for each element?

  • Report this Comment On March 19, 2012, at 11:13 AM, PEStudent wrote:

    What the article misses is that the CPI is way off on many of the individual items, where yearly changes should be clear of "seasonal" factors.

    For example, after the 3rd quarter of 2008, the CPI said food prices had risen 5.7% in the past year. My county's school system announced at the same time it would cost 20% more to buy food for its cafeterias. Anyone who saw eggs go from $1.22 to $2.12/dozen, corn go from 5 to 2 ears for $1, meat, etc. rise know the county's numbers were more like the truth.

    And from Mar. 2009 to Mar. 2010, the CPI said gasoline dropped 7% where gasbuddy.com shows it rose somewhere in the neighborhood of 30%.

    I'm astonished the media never questions the bureaucrats on these items, but simply passes along the claims, no matter how ridiculous.

  • Report this Comment On March 19, 2012, at 11:19 AM, TMFMorgan wrote:

    <<For example, after the 3rd quarter of 2008, the CPI said food prices had risen 5.7% in the past year. My county's school system announced at the same time it would cost 20% more to buy food for its cafeterias.>>

    Again, the CPI isn't aiming to measure inflation at your school's cafeteria. It's aiming to do it nationwide. I don't know why this concept is so hard to grasp.

  • Report this Comment On March 19, 2012, at 11:24 AM, TMFMorgan wrote:

    <<And from Mar. 2009 to Mar. 2010, the CPI said gasoline dropped 7% where gasbuddy.com shows it rose somewhere in the neighborhood of 30%.>>

    From March 2009 to March 2010, the gasoline component of the CPI rose 43%.

    http://research.stlouisfed.org/fred2/data/CUUR0000SETB01.txt

  • Report this Comment On March 20, 2012, at 2:54 PM, DJDynamicNC wrote:

    Switching the name back, eh?

  • Report this Comment On March 20, 2012, at 6:55 PM, SolomonMotley wrote:

    The myth of "inflation is good for the economy" is just that...a myth.

    When inflation is compared to the increases in the average family's purchasing power...whoa!

    People just have to understand that the Fed's "tolerance for inflation" (a targeted 2%+/-) devalues your individual pruchasing power in half in just a few years.

    Inflation may be "good" for business's abilty to increase prices, but not necessarily for the consumer, absent comparable or greater increases in wages.

    The Fed's "target"ought to be ZERO inflation, and support for productivity increases that allow for greater profits to be shared with labor and business.

  • Report this Comment On March 20, 2012, at 8:05 PM, TMFAleph1 wrote:

    <<People just have to understand that the Fed's "tolerance for inflation" (a targeted 2%+/-) devalues your individual pruchasing power in half in just a few years.>>

    If by "a few" you mean thirty-five, then I agree with you:

    $1 / (1.02)^35 = $0.50

  • Report this Comment On March 22, 2012, at 6:41 PM, whereaminow wrote:

    LOL at TMFAleph1.

    You still don't get it. Let's just say the Fed did keep price increase at a general level at 2% exactly every year (ha!) for 35 years, the dollar would be devalued by FAR MORE than half.

    Why? Because without the Fed's interventions prices would have FALLEN against the free market currency.

    Why is this so hard for you to understand? Have you ever taken an economics course?

    David in Liberty

  • Report this Comment On April 07, 2012, at 1:10 PM, Momoneypls wrote:

    Although I readily admit I'm not an economist, from a layman's perspective it seems the EPI is a much better indicator of inflation than is the CPI, if the cost of housing play such a big role in the latter number. The reason is if you take the number of people purchasing a home in these years where the housing market has crashed, their cost of housing might be fairly low (relatively speaking). But I suspect the percentage of the total population who purchased a house during this period is low. On the other hand, the price of gasoline pretty much affects everything and everybody all the time. Take your example of buying a lot of fruit. The cost of fruit will go up due to higher gas prices unless you raise it all in your backyard. Cutting to the chase, yes, we all have our own individual measure of inflation but I suspect many more of us are affected negatively by the inflation defined by the EPI than are solaced by the inflation defined by the CPI, particularly those on the lower end of the economic ladder.

  • Report this Comment On April 07, 2012, at 2:09 PM, zymok wrote:

    The CPI does not use house prices and has not for twenty years. This is discussed extensively on the BLS web site. Poke around bls.gov/cpi for a while - they do a pretty good job of discussing this and many other factors that do into the CPI calculation.

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