I recommend people use many different indicators to get a mental model of inflation, and you will notice that CPI does not represent inflation well.<p>The memes of Arby’s 5 for $5 becoming 4 for $10 are more informative than the CPI numbers. Don’t let the shock at the grocery store wear off – it’s real and painful despite what the news tells you.<p>True inflation would measure the amount of prosperity achieved per hour worked.<p>Take 1963 as an Example. Sears sold entire two story home kits with all materials for $1600. An Italian rifle in 1963 was $20. McDonalds burgers were 15¢ . Postage was 5¢ and had only increased 5 times in the previous 100 years.<p>You might retort that average household income is $70000 now vs $6200 in the early 60s– a tremendous boon. Remember in 1963 only the man was working, and typically supported 4 kids, a wife and often parents in the home.<p>In other words you had 1 man working 50 hours a week afford a house and support 5-6 other people. Today you have 2 people working 100 hours a week to support 1-2 additional people , while living in an apartment and living in a run down and crime infested neighborhood.<p>In case you think this is academic, look at the occupations for those who lived in today’s wealthiest neighborhoods. Today Palo Alto, Menlo Park, and other super zips are exclusively $500k incomes and up. In the 1960 census records you will find these good neighborhoods occupied with plumbers, painters and other blue collar workers.<p>My point is that inflation isn’t abstract and it isn’t a law of nature. It’s a deliberate approach to stealing your prosperity while you cheer it on.<p>Summers is right more than he’s wrong. Real inflation has always been higher than the bogus CPI numbers, and the past 5 years it’s been accelerating.
I don't really understand the argument at the heart of this article, which is "we should include interest rates in CPI".<p>How do interest rates effect everyday people exactly, other than price inflation on goods and services (which is included separately in CPI)?<p>The only way seems to be interest rates on personal loans and mortgages. So if anything, we should only include interest rates in proportion to how many people are taking out major loans during the sampled period (and maybe some additional amount based on the effect on adjustable-rate mortgages, etc).<p>Blindly stacking interest rates on top of CPI doesn't really make sense as a measure of personal inflation, and "it feels like stuff got more expensive" (as a lot of other comments here argue) isn't so much an argument for this strategy so much as an argument that the CPI 'basket of goods' needs to be rebalanced in other ways.
Here is the actual paper - <a href="https://www.nber.org/papers/w32163" rel="nofollow">https://www.nber.org/papers/w32163</a><p>Fundamentally, the argument is "The Cost of Money is Part of the Cost of Living" (as the paper's title states).<p>The trillion dollar question is whether it really does.<p>Based on the backtesting done the paper, it spiked extremely high in late 2023, and then drastically fell to 1980s levels.<p>If we use Summers' argument, then the Reagan era was a high inflation era as well (as the paper itself shows).<p>Tbf, this is the very reason the CPI was changed. The rate of change of Cost of Goods has fallen, and incomes at the median level has risen, but housing remains expensive.<p>That said, lower interest rates aren't going to change squat, as the number of houses built has basically crashed to nil after 2008. There is a supply issue and it's not because of zoning - it's because financing dried up after the entire real estate financial sector collapsed in the 2008-11 period.<p>The Forbes contributer themselves is not a good source, as they gloss over a significant portion of the paper, and their think tank (FREOPP) is partisan [0]<p>P.S. I am opposed to partisan shilling on both sides of the aisle on policy related subjects. We are all on the same team - America - and we better darn act like it.<p>Screw the EPI and screw FREOPP.<p>[0] - <a href="https://www.c-span.org/video/?529864-3/avik-roy-freedom-conservatism-future-republican-party" rel="nofollow">https://www.c-span.org/video/?529864-3/avik-roy-freedom-cons...</a>
Interesting that the article doesn't mention what seems to be an obvious takeaway if you believe that interest rates explain the gap between CPI and sentiment: raising interest rates to fight inflation will make people feel inflation is worse.<p>I'm suspicious that this isn't mentioned because Summers and Roy are inflation hawks who've advocated the Fed raise rates and the alleged fact that people will experience this as increased inflation at least in the short term is politically inconvenient for them, even as they'd like to claim inflation is worse than the CPI says so they can claim vindication for their hawkishness...
The CPI is kinda fine and should not include interest rates. The CPI is used to measure price inflation and not individual misery and should be left to do just that.<p>Wait, there is actually a misery index: <a href="https://en.wikipedia.org/wiki/Misery_index_(economics)" rel="nofollow">https://en.wikipedia.org/wiki/Misery_index_(economics)</a><p>It would have been better to invest in such an index. Here is a simplified example: The US is made of two cities; NYC and midland. Inflation rate is 0% for both and misery is non-existent. midland now has no jobs. None. So people move to NYC and inflate prices there. Inflation in NYC is 20% while deflation in midland is 30%. The Fed works the numbers and says that overall inflation is around 2% for the whole country and so everything is fine.<p>The reality is that misery is sky high; people are being burnt by prices in NYC and can't find jobs/buyers in midland. They have to move at high personal costs or close their businesses in the midland. On the other hand, they struggle to make a living in the new NYC town.
It's interesting that consumer sentiment apparently tracks the older formula more closely. Presumably we have data that could allow us to include "the price of money" in inflation metrics, perhaps weighed based on how much the average American borrows.
In Sweden we measure inflation both with and without interest rate changes. The latter measure is called KPIF (“konsumentprisindex med fast ränta” / “consumer price index with fixed interest rate”). The central bank inflation target of 2% is formally for this KPIF. As I understand it KPIF includes borrowing costs (e.g. car loans), but at a fixed fake / interest rate.<p>It sounds complicated, but I think this is actually the right approach.
That seems subjectively accurate, looking at my grocery store receipts and $13/lb meat. Certainly more accurate than “3.5%” bullshit the “free press” is asking us to believe.
I invoice in USD and have expenses in a different currency, and while I've seen a few (~5) percent decline in the exchange rate since then, it's been nowhere near 18%.
Beware any election-year stories that just happen to elicit a deep sense of things being astray. Larry Summers in particular has a long track record of playing complex angles in his public policy views. The technical argument in the paper is totally separate from the headline here. The headline is what matters.<p>You can think of macroeconomic policy as having been trained on economic history, probably more so than any other hard-science discipline. The effect of the pandemic was ridiculously unlike any history on record, times a factor of 10.<p>The null hypothesis is that the inflation wave came and went. You won't find a credible economist that can prove otherwise.<p>Furthermore, the wave could not be avoided by any amount of conventional intervention, such as massive tightening. You'd have to get into war-time tools like price controls to manually constrain the massive shifts in supply and demand as people came in and out of the labor force, switched from demanding services to goods and back, etc.
> “Alternative measures of inflation that include borrowing costs” account for most of the gap between the experts’ rosy pictures and Americans’ skeptical assessment.<p>I think the article doesn't actually cover support for this (though I have not read the actual paper), because part of people's skepticism is not based in them doing a parallel calculation. Even people who aren't taking out a large loan often have the sense that inflation has been much worse than official sources state -- and I think part of it is related to cognitive biases where when we're shocked by the high price of a good, it becomes a salient example to us, and it skews our assessment of overall price increases. E.g. I've seen the recent stat that food prices have increased a total of ~25% since before the pandemic -- but if you have a few grocery items that you buy regularly that have doubled in price, you're likely to be skeptical of this.
It's interesting how throughout the paper they discuss the actual borrowing cost as the driver of low sentiment but that when it comes time to explain the jump in sentiment for January despite flat borrowing costs they quickly switch to talking about the derivative of borrowing costs:<p>> In January, after most of the research for this paper was completed, consumer sentiment jumped to its highest level since 2021. Although this is just one month of data, it appears consistent with our hypothesis. If high borrowing costs explain the consumer sentiment anomaly of 2023, then the recent moderation of the growth rate of borrowing costs in recent months could help consumers significantly in 2024, but further rises could prolong consumer dissatisfaction.<p>Am I misreading this?
"Inflation, the wrong concept is to think of it as a single number, it is a multi-dimensional number. You have inflation for stock, real estate, food, energy. The policy makers bundle this into a single number, which is very misleading." - Didier Sornette; Oct 11, 2023; <a href="https://www.youtube.com/watch?v=IbU70IA4Z_w" rel="nofollow">https://www.youtube.com/watch?v=IbU70IA4Z_w</a>
What is CPI used for? Mostly to index the Social Security payments, and, to a lesser effect, adjust tax brackets. Retirees don't use much credit, on the contrary, they benefit from higher borrowing rates, because they are those that lend money. So it makes sense that borrowing costs are not included in the CPI. Otherwise it would be double-tap for retirees - they get greater SS increases and greater income from safe investments.
Inflation expectations are one of the key elements that determine next years inflation.<p>The main reason they have always "fiddled" the public inflation numbers is if they reported actual inflation people would set their expectations on that - and it would make next years inflation worse/more volatile.<p>insiders generally dont care about the public figures - they have their own in house statisticians to give them the real picture.
The reason the government lies on inflation isn't 2024 politics. Much older reason:
1) High inflation in 1960-1970s from stagflation
2) 1973 "COLAs" Law was passed, forcing increases in social security when inflation happens
3) By 1983, the US gov mathematically couldn't give those increases. Inflation raged across 1970s. So the government rigged CPI (inflation) numbers, by changing models
4) ShadowStats.com gives details and historic numbers
5) Lying about inflation numbers helped every politician from 1983 until now.
6) But citizens know the truth when they run out of money paying bills mid-month when they used to be able to pay for everything.
It remains absurd to me that the many ways inflation is measured and presented for the purpose of its impact on regular people is based almost entirely on its impact on funds with no meaningful component reflecting the impact on the overwhelming majority of distinct legal entities impacted by it.<p>My opinion is that if there are changes to monetary policy based on the effect of inflation, the policy should be centered on maximizing the outcome for the majority of distinct legal entities (ie overwhelmingly individuals) not maximizing the outcome for capital. Because wtf are you optimizing policy for the wealth generation of an overwhelming <i>minority</i> of the entities impacted by that policy?
It's a bit of a strange article. It's kind a obvious that in the case where prices of different goods/services increase by different amounts, there is not a single metric that would reflect the price increase. Also it is clear if we're trying to make some kind of weighted mean, the weights will differ for different groups of people, reflecting different consuptions.<p>So depending on what we want to measure we'd chose different weights. If say for low income population interest rates play a bigger role (i.e. due credit card debt), than that may have significant weight.
I feel as if some variant of this argument pops up constantly and it just comes down to definitions.<p>Inflation in almost all major economies does not represent the return rate at which your savings will maintain the same value from year to year.<p>I don't know what it does track - it seems that often there are "corrections" for people lowering their standards (e.g. buying cheaper/less meat, watching movies at home instead of in the cinema, etc).<p>To me that makes it kind of like some average of how much everyone is spending. I don't personally see any use in knowing that.
The big problem here is the breakdown in trust. If the government uses a figure for inflation that differs dramatically from what common Americans experience, the people conclude that the government is working against them instead of for them.<p>Many, perhaps most Americans have lost or are losing trust. The problem with this is where do people turn? Biden represents the government as manipulator. Where is the alternative? The truth is that in a choice between Biden and Trump many people have turned to Trump.<p>It is interesting in a sick way because the human reaction to betrayal is extremely strong. I find in myself a remarkable distaste for Biden. I find myself comparing Biden to President Snow. Not rational, but betrayal will do that to you.<p>And most concerning is that the problem is not really Biden or Trump. It is about corporations that have taken over our democracy. The most insightful question is: Cui Bono. Who benefits from the laws that are enacted? Corporations. Who uses the courts? Corporations because average citizens cannot afford a lawyer. [If you doubt this, ask yourself how much Microsoft owes in taxes to the American people]. And the Supreme Court? These are the people who decided that Corporations can buy and sell politicians and elections.<p>The disparity between the profits of Corporations and the daily lives of common American citizens is breathtaking. Who benefits from convincing Americans there is no inflation problem?
This is why I think raising interest rates to deal with inflation rather than working on increasing supply / reducing supply bottlenecks is absurd. Making money cost more isn’t reducing inflation, it’s reducing supply’s ability to produce while reducing demands ability to finance by making everything more expensive. That’s a dumb way to treat supply scarcity relative to demand - which is what makes inflation happen. The other way is reduce interest rates further and invest heavily in infrastructure and production targeting areas of specific demand. You might see a short term spike in inflation as more money enters pocketbooks but you’ll also see a dramatic drop as supply floods the market in response.<p>The wild card is housing, but making it more expensive to finance construction or purchase, interest rate hikes don’t help that either. It just makes more homeless.
Honest question: Paul Graham said that inflation was over if we exclude food, rent, gas, and used cars. Was this his intellectually honest thinking about economy or him being partisan?
Goodhart's law applies to how inflation measures have ceased to be an accurate measure: "when a measure becomes a target, it ceases to be a good measure."
Government makes its money from a share every transaction between members of its society and others. Salaries, income, capital gains, and property taxes add on top of that. Inflation happens when supply can’t keep up with demand or when supply is restricted to increase the costs on demand by retailers / manufacturers / suppliers of energy, etc.<p>Putin’s war on Ukraine triggered an energy shortage which jumped prices on everything worldwide. When that happens retailers have an excuse to raise prices and the excess cash in the system meant consumers didn’t really resist for a while (didn’t reduce spending, and won’t until credit tightened and people start filing for bankruptcy en masse). Instead of resisting higher prices with less consumption, the excess cash in the system is still so superfluous that it’s going back into crypto and stock market excess.<p>Now the expanding war in the middle east is going to raise energy prices even more and re-boost the inflation on everyday goods. The accumulating high interest consumer and commercial real estate debt is a ticking time-bomb and when that puts tension on the banks, the ever increasing liquidity ratios allowed by Trump will come back with a vengeance.<p>One way to fight back is to move massively to EVs and Solar - which is already happening. The decreases impact of oil prices and foreign conflicts on the economy would reduce inflation.<p>Another way is to increase supply of goods that are inflating. Lower tariffs or provide subsidies for new supply in each area with an increase in prices and see how incumbents would be incentivized to keep their prices at bay. Housing is kind of a big chunk of the wallet share. Increase supply - provide a massive incentive for families who built their first home or buy a new home. Provide incentive for empty homes or unused investment properties to be put back to use - many fear squatting or rent control laws, eliminate or reduce those and see how quickly the rentable supply increases, lowering costs of rent. Interest rates are a blunt tool. Increase supply and lower prices organically.<p>If interest rates and the costs of capital are added into the equation that determines interest rates by proxi of inflation, you’d get a recurrent function (an infinite loop). You want signal in the data, not noise. The problem is the current signal is employment, not supply. Incentivize supply.
Why bring this us up now? This formula was changed in 1983, when Ronald Reagan was president and the interest rate was 9.09% (down from 12.24% in 1982).<p>I'll note that Steve Forbes supported Trump in 2016, and claimed last year that Joe Biden is "not up to the job anymore" - although this is not necessarily relevant.<p>We can't change how we look at inflation based on the perception we want to achieve. This is what we have measured since 1983. And what if the change the formula back? Then we have a new number. And now what?<p>The article claims that the previous formula correlates better with sentiment. Maybe so. Sure, ever increasing money supply might make you feel rich, when in fact you are not.
Did we think we will never have to be pay the bill for over a decade of near-zero interest rates?<p>The current sentiment seems to be as much influenced by what people want to believe or what their peer group on social media believes.
It should be noted that the previous formula was from before 1983 when it was changed and it was changed because it overstated inflation.
So a better headline should be, academic sour about being wrong all the time uses outdated formula to calculate higher inflation number.
People are angry about inflation now because they compare prices to before the pandemic, so cumulative inflation over a longer period than one year.
Also given most mortgages are 30year fixed, the change in 1983 was the correct thing to do, though it could be updated to use internet data on rents more.