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CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apple

CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apples cost the same but good luck trying to buy property. Yes we have the usual supply constraints, etc.

SilasX 6y ago
Yep, the new money has flowed into capital assets rather than consumption goods. But inflated, prices have. It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.
- dragonwriter 6y ago
  > Yep, the new money has flowed into capital assets rather than consumption goods. Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers. > It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much. So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI
  - SilasX 6y ago
    Depends on who the “we” is there. Certain agencies don’t care that new money is flowing into capital assets but probably should care.
    - dragonwriter 6y ago
      > Depends on who the “we” is there. I would argue the statement is true for any significant government or private use of general inflation measures. But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.
      - deleted 6y ago
        [deleted]
      - SilasX 6y ago
        That was the purpose of comparing to cows and milk. For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low). In the case of a household, those mean that you can't take some of your production, and save it for the future in capital goods -- the same kind of thing that happens when more of your income has to go to the same necessities. In the case of a central bank, those mean that the injections of money aren't (currently) effective for stimulating economic activity, but are simply causing a wealth transfer and rallies in whatever stores of value remain. That is the same signal it needs to get back as when consumer goods become more expensive: you are not relaxing a limiting factor on economic growth. Edit: toned down
        dragonwriter 6y ago
        > For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low). I would argue that the only reason you should consider cows being an expensive an issue if milk is cheap is in regard to it making some other bovine product expensive; cows aren’t important in and of themselves, but as instrumentalities in the production of milk and other products. > In the case of a household, those mean that you can’t take some of your production, and save it for the future in capital goods No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments. > In the case of a central bank, those mean that the injections of money aren’t (currently) effective for stimulating economic activity No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working. What would indicate that it is not working is if output figures did not exceed what was expected without the policy.
jlmorton 6y ago
House prices are absolutely included and are the single largest item in CPI. It's Owner's Equivalent Rent. Overall, shelter represents 33% of CPI.
- dragonwriter 6y ago
  To the extent that purchase prices vary independently of rental prices in the same market, the CPI inclusion of equivalent rents will not reflect home purchase prices. Then again, I don’t see why it should, unless it is some measure based on the lower of rents (actual or equivalent) or amortized purchase and ownership costs (as you need shelter one way or the other), but that could only drive the CPI down compared to just considering rents as is done now.
huitzitziltzin 6y ago
>House prices aren't included and we've seen prices balloon over the last decade Depending on exactly what you mean, this is not a great criticism of the CPI. House prices are excluded on purpose. Housing costs are included (including for housing equivalent to what an owner owns). CPI does include housing expenses: "The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, *housing*, apparel, transportation, medical care, recreation, education and communication, and other goods and services)." [1] Furthermore, it includes housing expenses for owner-occupied housing as follows: "The [owners' equivalent rent] index is designed to measure the change in the rental value of owner occupied housing change. In essence, OER measures the changes in the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market." [see p. 107 of [2]] As the BLS notes, the primary service provided by houses is to shelter the inhabitants. The house itself may be held as an investment. See [3] So the CPI explicitly captures the cost of providing shelter, though it excludes the investment value of the property. [1] https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=BLS%20has%20classified%20all%20expenditure,and%20other%20goods%20and%20services https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=BL...). [2] https://www.bls.gov/opub/hom/pdf/cpi-20180214.pdf https://www.bls.gov/opub/hom/pdf/cpi-20180214.pdf [3] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...
- Infinitesimus 6y ago
  Thanks for the extra context - I should have been more clear. CPI does capture OER and rental costs as you show. I get that mortgage costs and the like aren't considered as consumption ( rightly so ) but that makes the measure inaccurate when assessing prices people pay to live day to day. Rental prices are generally a more applicable indicator for most of the population as the BLS says but the rising costs of houses and mortgage costs by extension imo should be captures because it signals how money is flowing. Is there another metric perhaps that captures both consumption costs and housing beyond rent/rent equivalents?
  - 6y ago
deleted 6y ago
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SilasX 6y ago

Yep, the new money has flowed into capital assets rather than consumption goods. But inflated, prices have. It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.

dragonwriter 6y ago
> Yep, the new money has flowed into capital assets rather than consumption goods. Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers. > It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much. So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI
- SilasX 6y ago
  Depends on who the “we” is there. Certain agencies don’t care that new money is flowing into capital assets but probably should care.
  - dragonwriter 6y ago
    > Depends on who the “we” is there. I would argue the statement is true for any significant government or private use of general inflation measures. But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.
    - deleted 6y ago
      [deleted]
    - SilasX 6y ago
      That was the purpose of comparing to cows and milk. For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low). In the case of a household, those mean that you can't take some of your production, and save it for the future in capital goods -- the same kind of thing that happens when more of your income has to go to the same necessities. In the case of a central bank, those mean that the injections of money aren't (currently) effective for stimulating economic activity, but are simply causing a wealth transfer and rallies in whatever stores of value remain. That is the same signal it needs to get back as when consumer goods become more expensive: you are not relaxing a limiting factor on economic growth. Edit: toned down
      - dragonwriter 6y ago
        > For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low). I would argue that the only reason you should consider cows being an expensive an issue if milk is cheap is in regard to it making some other bovine product expensive; cows aren’t important in and of themselves, but as instrumentalities in the production of milk and other products. > In the case of a household, those mean that you can’t take some of your production, and save it for the future in capital goods No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments. > In the case of a central bank, those mean that the injections of money aren’t (currently) effective for stimulating economic activity No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working. What would indicate that it is not working is if output figures did not exceed what was expected without the policy.

jlmorton 6y ago

House prices are absolutely included and are the single largest item in CPI. It's Owner's Equivalent Rent. Overall, shelter represents 33% of CPI.

dragonwriter 6y ago
To the extent that purchase prices vary independently of rental prices in the same market, the CPI inclusion of equivalent rents will not reflect home purchase prices. Then again, I don’t see why it should, unless it is some measure based on the lower of rents (actual or equivalent) or amortized purchase and ownership costs (as you need shelter one way or the other), but that could only drive the CPI down compared to just considering rents as is done now.

huitzitziltzin 6y ago

>House prices aren't included and we've seen prices balloon over the last decade Depending on exactly what you mean, this is not a great criticism of the CPI. House prices are excluded on purpose. Housing costs are included (including for housing equivalent to what an owner owns). CPI does include housing expenses: "The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, *housing*, apparel, transportation, medical care, recreation, education and communication, and other goods and services)." [1] Furthermore, it includes housing expenses for owner-occupied housing as follows: "The [owners' equivalent rent] index is designed to measure the change in the rental value of owner occupied housing change. In essence, OER measures the changes in the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market." [see p. 107 of [2]] As the BLS notes, the primary service provided by houses is to shelter the inhabitants. The house itself may be held as an investment. See [3] So the CPI explicitly captures the cost of providing shelter, though it excludes the investment value of the property. [1] https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=BLS%20has%20classified%20all%20expenditure,and%20other%20goods%20and%20services https://www.bls.gov/cpi/questions-and-answers.htm#:~:text=BL...). [2] https://www.bls.gov/opub/hom/pdf/cpi-20180214.pdf https://www.bls.gov/opub/hom/pdf/cpi-20180214.pdf [3] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

Infinitesimus 6y ago
Thanks for the extra context - I should have been more clear. CPI does capture OER and rental costs as you show. I get that mortgage costs and the like aren't considered as consumption ( rightly so ) but that makes the measure inaccurate when assessing prices people pay to live day to day. Rental prices are generally a more applicable indicator for most of the population as the BLS says but the rising costs of houses and mortgage costs by extension imo should be captures because it signals how money is flowing. Is there another metric perhaps that captures both consumption costs and housing beyond rent/rent equivalents?
- 6y ago

deleted 6y ago

[deleted]