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This is the big flaw in how inflation is measured. Assets (eg. for pension savings) and especially housing costs are for some reason not included in the Consume

This is the big flaw in how inflation is measured. Assets (eg. for pension savings) and especially housing costs are for some reason not included in the Consumer Pricing Index despite them being a huge expense from person's monthly paycheck. One can argue the reasons why. Is of the same problem with KPIs in general thay we only measure things which are easy to measure and omit the difficult but often much more important things to measure? Or is it a conspiracy plot in which the governments realized that the only way to repay those ever increasing government debts is by inflating them away. Ie. borrowing at 1% akin to CPI reported inflation instead of at 8% which is what the actual inflation might be.

ianai 7y ago
Putting on my academic Econ hat for a moment: There’s probably a stronger argument for including housing costs like rent into CPI than asset value like home values. Assets like homes are supposed to be illiquid and relatively constant over time. Ie little change in the underlying fundamentals of the item or changes that can be accounted for in an uncomplicated way. When such stable in underlying value but relatively illiquid assets like homes trade their realized prices are supposed to reflect little more than inflation. So maybe their price changes make more sense on the exogenous side of the equation than the endogenous? Is this argument still valid? It seems like it would be since it still seems moving in and out of a mortgage is a longer (by months) process than moving in or out of a lease.
- ianai 7y ago
  Replying to myself to avoid an edit as this is a new topic. I’m wondering increasingly lately if oil hasn’t replaced gold and fiat as the underlying backer value of currency. We had a problem in Econ to contrast and compare fiat currency to gold backed currency. Fiat is supposed to not be tied to a scarce resource and thus central banks have the ability to influence market growth through currency growth. Gold or resource backed currency can only grow at the rate new stock is removed from the ground. Of course, oil complicates there concept as oil is irreversibly consumed when it’s burned. The value of it still greatly affects market growth potentials though.
  - derefr 7y ago
    The difference with oil is that not everybody exports it. With the gold standard, every sovereign nation worth the name attempted to create a gold-backed sovereign currency, and so was essentially “exporting gold” in some sense (the sense in which you can take their currency outside the country and spend it.) But not all countries are oil exporters, or oil “holders”; and even those who are, are not exporters to the same order-of-magnitude. This creates very clear market effects where e.g. the value of the Canadian dollar at any time is essentially the value of the US dollar divided by the quantity of US oil exports. This would be like different gold-backed sovereign nations declaring a different, floating “ratio” of their fiat currency’s value to their level of gold deposits, such that changes in the price of gold would throw exchange rates around (and some nations having no gold at all, and thus having an exchange rate that measures only how much of some other country’s gold their fiat currency could buy you!)
- QuesnayJr 7y ago
  CPI does include rent. For houses that people own outright, the BLS tries to back out an implied rent.
derefr 7y ago
I think (Core) CPI is what it is because many things carry an inflationary signal, but very few things have no other signals mixed in as noise. Core CPI isn’t quite “measuring what is easy to measure”, but rather “measuring what is least distorted by other pressures on the market” (because goods like food and clothing are both easy-enough to produce and in high-enough demand that there is almost always an efficient market for them.) You can then use the inflation signal from Core CPI to correct other measures for inflation, in order to see what those other measures are doing beyond just inflating. (Maybe they’re doing something like “inflation squared”, but that’s still a separate thing, which you still need a measure of base-term inflation to find out!)
QuesnayJr 7y ago
Your basic assumption here is not true. The CPI includes housing costs. Here is how the BLS calculates housing costs for the CPI in great detail: https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

ianai 7y ago

Putting on my academic Econ hat for a moment: There’s probably a stronger argument for including housing costs like rent into CPI than asset value like home values. Assets like homes are supposed to be illiquid and relatively constant over time. Ie little change in the underlying fundamentals of the item or changes that can be accounted for in an uncomplicated way. When such stable in underlying value but relatively illiquid assets like homes trade their realized prices are supposed to reflect little more than inflation. So maybe their price changes make more sense on the exogenous side of the equation than the endogenous? Is this argument still valid? It seems like it would be since it still seems moving in and out of a mortgage is a longer (by months) process than moving in or out of a lease.

ianai 7y ago
Replying to myself to avoid an edit as this is a new topic. I’m wondering increasingly lately if oil hasn’t replaced gold and fiat as the underlying backer value of currency. We had a problem in Econ to contrast and compare fiat currency to gold backed currency. Fiat is supposed to not be tied to a scarce resource and thus central banks have the ability to influence market growth through currency growth. Gold or resource backed currency can only grow at the rate new stock is removed from the ground. Of course, oil complicates there concept as oil is irreversibly consumed when it’s burned. The value of it still greatly affects market growth potentials though.
- derefr 7y ago
  The difference with oil is that not everybody exports it. With the gold standard, every sovereign nation worth the name attempted to create a gold-backed sovereign currency, and so was essentially “exporting gold” in some sense (the sense in which you can take their currency outside the country and spend it.) But not all countries are oil exporters, or oil “holders”; and even those who are, are not exporters to the same order-of-magnitude. This creates very clear market effects where e.g. the value of the Canadian dollar at any time is essentially the value of the US dollar divided by the quantity of US oil exports. This would be like different gold-backed sovereign nations declaring a different, floating “ratio” of their fiat currency’s value to their level of gold deposits, such that changes in the price of gold would throw exchange rates around (and some nations having no gold at all, and thus having an exchange rate that measures only how much of some other country’s gold their fiat currency could buy you!)
QuesnayJr 7y ago
CPI does include rent. For houses that people own outright, the BLS tries to back out an implied rent.

derefr 7y ago

I think (Core) CPI is what it is because many things carry an inflationary signal, but very few things have no other signals mixed in as noise. Core CPI isn’t quite “measuring what is easy to measure”, but rather “measuring what is least distorted by other pressures on the market” (because goods like food and clothing are both easy-enough to produce and in high-enough demand that there is almost always an efficient market for them.) You can then use the inflation signal from Core CPI to correct other measures for inflation, in order to see what those other measures are doing beyond just inflating. (Maybe they’re doing something like “inflation squared”, but that’s still a separate thing, which you still need a measure of base-term inflation to find out!)

QuesnayJr 7y ago

Your basic assumption here is not true. The CPI includes housing costs. Here is how the BLS calculates housing costs for the CPI in great detail: https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...