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Murcielago

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Joined: 8/27/02

More info.

Apr 10, 2024, 10:45 AM [ in reply to don't think I've agreed with a post more ]

It's not as simple as "they're cooking the books." The fact is, the world is complicated and it's difficult to represent enormous economic trends with tidy little numbers.

Why Has the Inflation Calculation Changed Over Time?
As prices soar, some critics are raising doubts about the official inflation figures. But many economists say the figures are an accurate snapshot of rising prices.
May 24, 2022

Consumer prices are increasing at the fastest clip in about 40 years, climbing 8.3 percent in April compared with a year earlier.

Here are two major changes made to inflation since the 1980s and why economists adopted them.

Change No. 1: Inflation doesn’t include house prices
People who are skeptical about America’s inflation measures often cite a change to how home costs are measured in the Consumer Price Index, a closely watched metric produced by the Bureau of Labor Statistics.

In 1983, the government switched from using home prices — which also included mortgage payments and maintenance costs — to using rental prices to gauge the cost of housing.

The cost of housing for people who own their property is now measured using what is called “owners’ equivalent rent”: how much their house would cost to rent if they did not own it.

The idea is that homes are an investment. House prices appreciate, and you may eventually sell for a profit a property that you have purchased. Rent, however, represents consumption. It does not leave you with an asset that you can sell down the road.

Critics often argue that by leaving home prices out of the equation, the inflation metric underestimates the cost of living at moments when home prices are increasing markedly and when it costs first-time buyers more to get a foothold in the market. Some even claim that if the government used the old methodology, its reported inflation rate would be much higher today than it was during the 1980s.

It is true that inflation isn’t perfectly comparable over time because of the change in how housing was measured, said Omair Sharif, founder of the research firm Inflation Insights. But the change would not be enough to make today’s inflation higher than the nearly 15 percent it hit 40 years ago.

“Yes, inflation today would be higher, but by roughly 1.25 percentage points, not the 4 to 5 percentage points people say,” said Mr. Sharif, who last year pulled home price, mortgage costs and home repair data from the 1970s, applied the relevant weights, and did the math on the old numbers to see how much the change in methodology changed inflation.

“It wasn’t a mind-blowing number like a lot of people think it is,” he said.

Another estimate — using calculations used in a paper for The Quarterly Journal of Economics and updated for the newsletter Full Stack Economics — found that including home prices and interest rates instead of rent would have pushed the inflation rate to 11.5 percent in February, the latest date available, up 3.6 percentage points from the official figure that month. That’s more than Mr. Sharif’s estimate but still less than the 1980s.

Others argue that the C.P.I.’s rent measure understates the cost of other types of shelter, pointing out that real-time rent trackers tend to capture rising prices much more quickly. But that is for a simple reason: They track new rents, while the C.P.I. tracks a sample of existing rents, including for people who renew their leases.

“This divergence means that at the moment, the C.P.I. does not do a good job telling the story of how costly it is for an individual or household to secure housing in a new city,” said Jeff Tucker, a senior economist at the real estate website Zillow. Yet the point is to better reflect what prices look like for all consumers, not just ones looking for a new home, he said.

Change No. 2: Economists swap expensive products for cheaper ones
Economists once collected a basket of items — like eggs, milk, shampoo and other items — and simply tracked how much they cost over time, updating the basket only rarely. But that measure was criticized for potentially overestimating inflation because it ignored that consumers adjust their spending both over time and as prices increase.

Economists began to update the basket more regularly about 20 years ago, and the weights are now reset every two years to reflect what people actually spend their money on.

They also tried to account for substitutions. Imagine that the price of cupcakes went up one month. Instead of paying more, a consumer might buy cookies instead — a decent but cheaper dessert alternative — and their monthly costs wouldn’t go up.

They might also buy a container with fewer cupcakes, switch to a cheaper brand or shop at a discount store where cupcakes are cheaper. To factor in that behavior, the government tweaked how it calculates inflation in some categories in 1999, correcting the problem in the eyes of many economists.

Critics sometimes raise a separate point: that product swaps are made between entirely different categories, like using chicken when the price of steak increases. Those larger substitutions are not included in the normal C.P.I. calculation, but are included for a measure called the Chained Consumer Price Index. While the C.P.I. showed prices rose 8.3 percent in April from a year earlier, the Chained C.P.I. was a little more muted, at just 7.8 percent.

Think those changes aren’t enough? There will certainly be more. The Labor Department is still constantly instituting changes to try to make C.P.I. a more accurate reflection of reality.

“It’s a good long-run method,” Mr. Detmeister at UBS said. “Over the course of a couple of months, even over the course of a year, it may differ from what is happening on the ground.”

https://www.nytimes.com/2022/05/24/technology/inflation-measure-cpi-accuracy.html#:~:text=In%201983%2C%20the%20inflation%20calculation,making%20the%20measurement%20less%20volatile.&text=The%20idea%20is%20that%20homes,property%20that%20you%20have%20purchased.

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CPI came in hotter than expected.

less than two

This is a wonderful and totally flawless system we work with here.***

Re: This is a wonderful and totally flawless system we work with here.***

shut up boys

Somebody around here said that they economist said too

somebody's economist said that?

just economist in general say that unemployment has to be

The unemployment number is a joke.

another facet that I overlooked haha

Re: The unemployment number is a joke.

i love you man

I think we are mostly on the same page here and agree the system sucks.

That's how the Fed looks at it because they only have so many tools.

It would not be the Federal Reserve's job, but the real way to

I hear you

Fine by me. Eliminate them all, but probably not in a

JFC YOU TIGGITY WANNABE MOFUGGA

This is what we've got going on behind the scenes

Re: CPI came in hotter than expected.

They can't. Not a stomach issue, it's a suicide issue.

don't think I've agreed with a post more

More info.

Lol.

You're acting like interest rates only affect mortgages for rental properties.

Renting is cheaper now than buying because the overhead on an existing

You're using anecdotal evidence and made-up numbers.

Numbers.

6 is different than <4.

Its not that big of a change, at least since about '97.

Re: They can't. Not a stomach issue, it's a suicide issue.

Re: CPI came in hotter than expected.

Renting is cheaper than buying currently. That's because many/most

Institutional investors LEFT the market? Where?

Inflation is transitory. Pewtin is causing transitoriness.

I think we're all conditioned to freak out at the news.

to be fair though

Interesting. The scary part ended in....yep. 1983.

Because Volcker raised interest rates as high as 20% in 1981.***

In response to 16% inflation. (old calculation btw)

Sell!!!!!!!***

Why would you sell when the market drops?

-$11,800+ today

Why did you sell today?

No selling. That was an unrealized loss.***

So you didn't lose anything.

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