Wednesday, May 09, 2007

let them eat hamburger


I was mumbling about CPI, M3, inflation etc., a while back, and came across a site that discusses how CPI was rejigged. According to the author(s), it is understated by about 7%. There are all kinds of fallacious arguments about quality and safety being better, but I have never bought them.

The article is discussing the US position, but it is surely applicable to Canada.

A couple of choice quotes from the article;

Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year.
In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.
The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.


It's worth reading, and exploring the whole site.

shadowstats

more shadowstats

Edit: Thanks to casual observer for the link. I couldn't remember how I got there, and casual had posted the link on the previous thread to this one.

D-ohpe (baby-brain).

10 comments:

casual observer said...

I posted the same link in one of my comments on your last thread.

solipsist said...

Thanks casual - put it down to "baby-head".

casual observer said...

Not to worry Solipsist, been there, done that - twice.

I've been posting about this very topic on Mohican's blog.

I think that shadowstats just confirms what the average joe knows to be true. His cost of living is rising faster than the 2% stated rate. Anybody who has to pay for anything in our economy has realized this.

I hear it from my wife everytime she gets back from grocery shopping, or filling up the car.

Our politicians realize this. That's why they need a 29% raise. That's a little more than what I got this year. But, hey, inflation is only 2%, why do I need a raise.

I only need one if I plan to buy or rent a house, heat and light that house, drive a car, insure that car, eat food, send my kids to college, go out to dinner or to see a show, or pay for retirement.

Nope, don't need a raise. It's only 2%.

Anonymous said...

...replacing hamburger for steak in the calculations would reduce the inflation rate...

That's a ludicrous argument. Both steak and ground beef come from the same freakin' source. If the price of a cow goes up 50% BOTH meals get that much more expensive.

solipsist said...

Anonymous said...

5/13/2007 7:46 PM

solipsist says...
Ok then.

casual observer said...

"That's a ludicrous argument. Both steak and ground beef come from the same freakin' source. If the price of a cow goes up 50% BOTH meals get that much more expensive."

The statisticians substitute the nominal price of hamburger for steak. It doesn't have to be hamburger, it could be chicken, or some other cheaper meat.

The point is, they figure if the price of steak rises too much, people will not buy steak, they will buy something else. So, consequently, the inflation in the steak price doesn't get fully included in the calculation of the CPI.

casual observer said...

From Statistics Canada's website:
Weightings for B.C. ALL-ITEMS, CPI
1. Food - 17.29%
2. Shelter - 27.66%
3. Household operations and furnishings - 10.11%
4. Clothing and footwear - 4.91%
5. Transportation - 18.89%
6. Health and personal care - 4.42%
7. Recreation, education and reading - 12.99%
8. Alcoholic beverages and tobacco products - 3.73%

If an average person were to look at these 8 categories, which ones would they say have risen in price substantially, and which ones have fallen in price?

I would suggest that the ones with the highest weighting in the CPI have risen in price quite a bit over the last five years. Food, shelter, and transportation alone make up almost 64% of the index.

Anonymous said...

...replacing hamburger for steak in the calculations would reduce the inflation rate...

The key word there is RATE. The hamburger is cheaper than steak but it will change price at the same RATE because it comes from the same commodity.

casual observer said...

"The key word there is RATE. The hamburger is cheaper than steak but it will change price at the same RATE because it comes from the same commodity."

I'm not sure you understand what would happen. They wouldn't be measuring the rate of change from the old hamburger price to the new one.

They would be measuring the rate of change from the old steak price to the new hamburger price, allowing for a substitution in the basket of goods used to calculate the CPI.

The reasoning is the statisticians assume that as the price of one commodity goes up, people would substitute for a cheaper one.

While this may be true in some cases, it sort of negates the intent of measuring a fixed basket of goods if items can be substituted out if their price rises too much.

solipsist said...

Thanks for "fleshing" that out casual. I am too brain-dead and busy these days to work through it.