0% Inflation? HAH!

[coinstar]

Don't understand how the government is saying we have 0% inflation. The CPI books are cooked. My rent has gone up every year. Property taxes keep going up. Food is up. Gas was down but is basically back up to where it was before it went down. Healthcare is WAYYY up (it doubled for me due to Obamacare requirements).

Now I realize the government has a vested interest in reporting low inflation. It means their inflation-adjusted pension payments and SS payments don't have to go up as much. It means they can issue bonds at an artificially low rate because buyers are looking at the REAL return in general. So a 3% bond during 0% inflation is close to a 6% bond in 3% inflation.

But here's the problem. The PP returns are quoted as being 4% REAL returns over time annualized. If my personal spending inflation rate is 5% or 10% because I consume food and government-mandated healthcare more than I buy a new flat-screen TV or whatever the CPI is measuring... but CPI is reported at 0%, then I basically LOST money given a 4% REAL return compared to a FAKE inflation rate.

Of course the answer is "if not the PP then what?" and truthfully there's nothing better. But it does put retirement planning into question if instead of getting a 4% REAL return, I have to expect to get a 1% REAL loss every year. Then again if that's true, I can probably never retire.

[dragoncar]

Link?  Looks like Europe?

[Libertarian666]

Don't understand how the government is saying we have 0% inflation. The CPI books are cooked. My rent has gone up every year. Property taxes keep going up. Food is up. Gas was down but is basically back up to where it was before it went down. Healthcare is WAYYY up (it doubled for me due to Obamacare requirements).

Now I realize the government has a vested interest in reporting low inflation. It means their inflation-adjusted pension payments and SS payments don't have to go up as much. It means they can issue bonds at an artificially low rate because buyers are looking at the REAL return in general. So a 3% bond during 0% inflation is close to a 6% bond in 3% inflation.

But here's the problem. The PP returns are quoted as being 4% REAL returns over time annualized. If my personal spending inflation rate is 5% or 10% because I consume food and government-mandated healthcare more than I buy a new flat-screen TV or whatever the CPI is measuring... but CPI is reported at 0%, then I basically LOST money given a 4% REAL return compared to a FAKE inflation rate.

Of course the answer is "if not the PP then what?" and truthfully there's nothing better. But it does put retirement planning into question if instead of getting a 4% REAL return, I have to expect to get a 1% REAL loss every year. Then again if that's true, I can probably never retire.

No, all you have to do is buy more flat-screen TVs, and voila, your inflation rate is lower!
(Note: )

[iwealth]

Just renewed my apt lease for the 3rd year, and the price hasn't budged. The landlord didn't renew us immediately this recent time because he wanted to "run the numbers" so I thought for sure we were in for a bump, but I guess he didn't like what he saw. Can't speak to property taxes, but I'm sure they are rising with home values.

Gas is still significantly cheaper here in coastal Florida than it was at the peak. We've retraced maybe 60% back from the lows, but I'm still not paying much more now than I was at any point over the past decade or so. And it's only cost me $20 to get my oil changed for as long as I can remember.

My healthcare costs also increased significantly due to Obamacare, but I know a few people lucky enough to see their healthcare bill drop to $0 due to subsidies. I'm a sole prop in my 30s that makes over $40k/year and those of us in that demographic got hit the hardest from what I gather. I don't blame that on inflation though.

Technology is driving down the cost of cool electronic gadgets.

I don't spend much time in the middle aisles of the grocery store, and I find the meat/milk/bread/produce stuff swings up and down quite a bit depending on whatever's going on with the particular commodity involved.  If I spent even 5 minutes/week looking at the sales/coupons, or bothered to shop at Walmart instead of the local convenient grocery store, I could probably cut my grocery bills by 10-20% and thus eliminate a few years worth of food inflation in one shot.

Anyway, I find that the effects of inflation are largely local and situational. I'm shocked I haven't felt more of it living here in coastal FL...maybe I've just been lucky.

[MachineGhost]

[quote=http://stats.bls.gov/cpi/cpifaq.htm#Question_21]What are some limitations of the CPI?

The CPI is subject to both limitations in application and limitations in measurement.

Limitations of application

The CPI may not be applicable to all population groups. For example, the CPI-U is designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor. (BLS does produce and release an experimental index for the elderly population; however, because of the significant limitations of this experimental index, it should be interpreted with caution.)

As noted in the answer to question 19, the CPI cannot be used to measure differences in price levels or living costs between one place and another; it measures only time-to-time changes in each place. A higher index for one area does not necessarily mean that prices are higher there than in another area with a lower index. It merely means that prices have risen faster in the area with the higher index since the two areas' common reference period.

The CPI cannot be used as a measure of total change in living costs because changes in these costs are affected by factors (such as social and environmental changes and changes in income taxes) that are beyond the definitional scope of the index and so are excluded.

Limitations in measurement

Limitations in measurement can be grouped into two basic types, sampling errors and non-sampling errors.

Sampling errors. Because the CPI measures price changes based on a sample of items, the published indexes differ somewhat from what the results would be if actual records of all retail purchases by everyone in the index population could be used to compile the index. These estimating or sampling errors are limitations on the accuracy of the index, not mistakes in calculating the index. The CPI program has developed measurements of sampling error, which are updated and published annually on the CPI home page. The CPI sample design allocates the sample in a way that maximizes the accuracy of the index, given the funds available.

Non sampling errors. These errors occur from a variety of sources. Unlike sampling errors, they can cause persistent bias in measurements of the index. Nonsampling errors are caused by problems of price data collection, logistical lags in conducting surveys, difficulties in defining basic concepts and their operational implementation, and difficulties in handling the problems of quality change. Nonsampling errors can be far more hazardous to the accuracy of a price index than sampling errors. Hence, BLS expends much effort to minimize these errors. Highly trained personnel ensure the comparability of quality of items from period to period (see answer to question 8 ); collection procedures are extensively documented, and recurring audits are conducted. The CPI program has an ongoing research and evaluation program in order to identify and implement improvements in the index. [/quote]

[WiseOne]

Translation:  The CPI is a measure of inflation, but it will not predict what a specific individual's costs are going to be due to regional/local events and price variations, the fact that not all goods are included in the CPI etc.  For all its limitations, the CPI is not a bad measure.  Check out the "billion prices project" at MIT; you'll see that it tracks the CPI closely.

For your situation specifically, neither medical care nor property taxes are included in the CPI.  BLS does track medical costs but does so separately from the CPI-U.  Your rent probably is explained by the property tax increases.  To take a similar example, my coop maintenance charge has gone up 32% since I bought my place.  Over the same period of time, the CPI-U went up only 10%.  This is due largely to the fact that property taxes almost doubled in that time period (ouch), although some dubious financial decisions by the board also played a role.

You can take comfort in the fact that "past performance is not a reliable predictor of future results."  Your rent won't go up like that every year, unless your landlord is a jerk :-) in which case you should move.

[Mountaineer]

This is a qualitative answer, not quantative, for approximately the past year in my area:

Food: up a lot
Gasoline: down
Utilities: flat
Household supplies: up
Insurance, non-medical: slightly up
Insurance, medical: up
Travel, dining out: up a lot
Other stuff: up

... Mountaineer

[Mark Leavy]

MachineGhost made a comment in a different thread that T-Bills are, unintuitively, the best hedge agains inflation.  He didn't add much explanation.

I've been trying to wrap my head around that, and I've somehow managed to convince myself that it makes sense.  I don't know what MG's reasoning is, but mine is that market forces will force short term interest rates to match whatever the real inflation is.  I know that is pretty vague, but... this  is just a working theory.

If that is so, (and that is a big IFF) then, the broad measure of inflation really is zero - because that is about what T-Bills are yielding today.

I'm pretty sure that I'm missing something fundamental - and would love to hear more from MG or others.

[MachineGhost]

I'm pretty sure that I'm missing something fundamental - and would love to hear more from MG or others.

No, you hit the nail on its head.  It has to do with the time an asset needs to respond to inflation.  Only T-Bills track inflation short-term, medium-term and long-term.  Other assets fail in various time periods, including gold.  Now, that doesn't mean T-Bills are a 100% perfect match to whatever inflation is, but it is best of breed.  It has zero duration so virtually matches whatever inflation/interest rates increase to.

It was a huge loss when the CME discontinued its T-Bill futures (mainly used for the T-Bill/Eurodollar spread).  It would have provided us with all the leverage we need to deal with the PP's Achille's Heel.

[D1984]

I'm pretty sure that I'm missing something fundamental - and would love to hear more from MG or others.

It was a huge loss when the CME discontinued its T-Bill futures (mainly used for the T-Bill/Eurodollar spread).  It would have provided us with all the leverage we need to deal with the PP's Achille's Heel.

MG,

Perhaps this is a stupid question, but why can the 30-day Federal Funds Rate Future (which CME still trades; see http://www.cmegroup.com/trading/interes ... -fund.html ) not be used instead of the now discontinued 91-day T-Bill future (or the 13-week T-Bill future if that's what they called it instead of the 91-day t-bill future)...the rates on both underlyings would be roughly the same, wouldn't they? Does the 30-day FFR future not have enough leverage while the 90-day T-Bill future did? We have data for Federal Funds Rates and T-Bill yields from 1941 onwards (and maybe earlier)...how do the yields compare? I'd assume they are pretty highly correlated.

[MachineGhost]

Perhaps this is a stupid question, but why can the 30-day Federal Funds Rate Future (which CME still trades; see http://www.cmegroup.com/trading/interes ... -fund.html ) not be used instead of the now discontinued 91-day T-Bill future (or the 13-week T-Bill future if that's what they called it instead of the 91-day t-bill future)...the rates on both underlyings would be roughly the same, wouldn't they? Does the 30-day FFR future not have enough leverage while the 90-day T-Bill future did? We have data for Federal Funds Rates and T-Bill yields from 1941 onwards (and maybe earlier)...how do the yields compare? I'd assume they are pretty highly correlated.

http://fidelityfiplus.econoday.com/byre ... rcrid=1017