4 ms·

Good X and Good Y both increase in price over some period of time, but one does by 2% and the other by 4%. What is the true value of inflation? 2% or 4%? Or is

Good X and Good Y both increase in price over some period of time, but one does by 2% and the other by 4%. What is the true value of inflation? 2% or 4%? Or is it 3%? Or is it 3.5% because you buy one of the goods twice as often as the other? That's a question of first philosophical origins, and there's no "right" answer. Particularly if one of those is a house and in the period of time mentioned houses not only got more expensive but they changed in character, being more resistant to earthquakes because of reinforced foundations, and because the fire departments built near them got new hoses for their trucks. So if houses were the one that went up by 4% but they also increased in quality, should we "count" them as having gone up by 4%? After all it's not like your money buys you 4% less house since it actually buys you a slightly different house but for 4% more. Now multiply the number of products and dimensions by a thousand or hundred thousand each and we have the true problem of compiling CPI.

reedjosh 6y ago
> Good X and Good Y both increase in price over some period of time, but one does by 2% and the other by 4%. What is the true value of inflation? 2% or 4%? Or is it 3%? Or is it 3.5% because you buy one of the goods twice as often as the other? That's a question of first philosophical origins, and there's no "right" answer. Shouldn't the solution basically be how much monthly or yearly does an average consumer spend on x good, and then that is included in the calculation of inflation by that amount. So if the average consumer spends 30% on housing, then housing should be 30% of the measurement.
- sokoloff 6y ago
  Yes. What then should happen when Good Z is invented and grows from 0% to substitute for 25% of Good Y? How should a measure of inflation track that? What if Good X becomes half as expensive per unit but people consume twice as much of it as a result? Should that be reflected as a reduction of inflation? If housing per front door goes up by 100% but only up per square foot [or room] by 50%, should the inflation rate of housing be 50%, 75%, or 100%?
  - lumost 6y ago
    TBH looking at my budgets I think this type of argument is missing the point. Excluding savings, My budget boils down to discretionary and non-discretionary spending. Roughly 1/4th of my budget is fully discretionary and will vary year to year with what I like to do, tracking inflation on the discretionary portion seems like a high difficulty activity which ultimately doesn't matter to my perception of prices. The remaining 75% of my budget is non-discretionary covering items like - Housing ~1/4 - Childcare ~1/4 - Food ~1/8 - Non-discretionary expenses (repairs, car, phone, computer, etc. ) ~1/8 I'm fortunate that my healthcare is inexpensive at the moment, but it's pretty straightforward to calculate my future expected health costs and my previous education costs. I'd judge that calculating inflation on the non-discretionary portion of my budget should be trivial, small items like phones/computers simply do not add up to much relative to the big ones like housing, childcare, food, health, and education. Ironically the CPI seems to focus on the magic basket of goods and not what will actually move the needle for perceived costs by most individuals.
    - tharkun__ 6y ago
      Even discretionary and non discretionary is a contentious item and in a CPI has to be defined. For example: is TV service discretionary? Is Internet service discretionary? Is broadband Internet access discretionary? I just checked. Bell TV + Internet is advertised as $120CAD right now. Cell service combined with that add $70CAD. Per month. With taxes on top that's round about $2,620 per year if we are talking Single person household. Now it depends on where you are and whether you live alone or not and such. In Toronto as a single person at the median income this alone can be 4.5% of your net income. I'd say that moves the needle. I pay less than half of this with a different ISP and cell provider + Netflix. Of course the precise calculations change as we move between cities and provinces as well as single person vs. families etc. as base costs get shared.
      - lumost 6y ago
        The hypothetical single income earner that we are debating would pay an average rent of $2250/mo for a 1-bedroom in Toronto. Roughly 10x the cost of TV, internet, and phone. This cost has risen from ~$1750/mo in 2017 at roughly ~10% per year. For perspective, our hypothetical individual would be experiencing house price inflation equal to a new TV, phone, and internet bill every year. (1-bedrooms displayed the lowest price increase of any housing category in Toronto according to https://www.zumper.com/rent-research/toronto-on https://www.zumper.com/rent-research/toronto-on )
Cederfjard 6y ago
I guess that still leaves the question that since it is so difficult, is the CPI actually useful?
- xyzzyz 6y ago
  Yes, because CPI is a product of both market forces and changes in money supply. The former is not controlled much by anyone, while the latter is controlled by some very rough and not easily predictable knobs held by guys at Fed. Guys at Fed are committed to keep CPI at something like constant 2%, so the must turn these knobs, but for that they need a good feedback as to what their movements are doing. And sure, they could use something different as a measure of inflation than CPI, but what would that be, and why it would be better than CPI? These questions need to be answered first before we move away from CPI.
  - pas 6y ago
    The Fed's dual mandate is very important here. And there's some movement toward "automatic QE in case unemployment starts to rise" - https://www.stitcher.com/show/voxs-the-weeds/episode/fix-recessions-by-giving-people-money-66991306 https://www.stitcher.com/show/voxs-the-weeds/episode/fix-rec... (Matt Yglesias wonktalks with Claudia Sahm, very recommended) CPI is very important, but the labor numbers are much better (since they are easier to measure), so CPI might become a secondary (high level, target) metric over time.
deleted 6y ago
[deleted]
bcrosby95 6y ago
The problem is laymen care about cost of living, not CPI. But news agencies commonly talk about inflation with CPI rather than an actual cost of living. Which is what matters to people living ordinary lives. Given this, the answers to your questions should be obvious. The answer, as far as laymen are concerned, is 3.5%. Improvements don't matter either. If we eliminated every car other than a Porsche, as far as laymen are concerned then car inflation went up by around 150%.
- mywittyname 6y ago
  >Given this, the answers to your questions should be obvious. If the answer seems obvious, then the question isn't fully understood, because there are trade-offs involved in CPI calculations. There's no such thing as a "layman." Different people in different regions experience different CPI. Inflation for all goods in the Northeast might be 2.1% over the past ten years, but could be 1.6% in the South for the same basket. that might not sound like much, but that means that inflation is rising 25% faster in the Northeast. No matter what you do, CPI at a national level won't accurately reflect any group. People in the South will claim it's way too high, and people in the NE will complain that it's way too low, etc, etc. If you want real numbers, relevant to your situation, then the BLS provides the ability to calculate your own person CPI based on what you buy and where you live.

reedjosh 6y ago

> Good X and Good Y both increase in price over some period of time, but one does by 2% and the other by 4%. What is the true value of inflation? 2% or 4%? Or is it 3%? Or is it 3.5% because you buy one of the goods twice as often as the other? That's a question of first philosophical origins, and there's no "right" answer. Shouldn't the solution basically be how much monthly or yearly does an average consumer spend on x good, and then that is included in the calculation of inflation by that amount. So if the average consumer spends 30% on housing, then housing should be 30% of the measurement.

sokoloff 6y ago
Yes. What then should happen when Good Z is invented and grows from 0% to substitute for 25% of Good Y? How should a measure of inflation track that? What if Good X becomes half as expensive per unit but people consume twice as much of it as a result? Should that be reflected as a reduction of inflation? If housing per front door goes up by 100% but only up per square foot [or room] by 50%, should the inflation rate of housing be 50%, 75%, or 100%?
- lumost 6y ago
  TBH looking at my budgets I think this type of argument is missing the point. Excluding savings, My budget boils down to discretionary and non-discretionary spending. Roughly 1/4th of my budget is fully discretionary and will vary year to year with what I like to do, tracking inflation on the discretionary portion seems like a high difficulty activity which ultimately doesn't matter to my perception of prices. The remaining 75% of my budget is non-discretionary covering items like - Housing ~1/4 - Childcare ~1/4 - Food ~1/8 - Non-discretionary expenses (repairs, car, phone, computer, etc. ) ~1/8 I'm fortunate that my healthcare is inexpensive at the moment, but it's pretty straightforward to calculate my future expected health costs and my previous education costs. I'd judge that calculating inflation on the non-discretionary portion of my budget should be trivial, small items like phones/computers simply do not add up to much relative to the big ones like housing, childcare, food, health, and education. Ironically the CPI seems to focus on the magic basket of goods and not what will actually move the needle for perceived costs by most individuals.
  - tharkun__ 6y ago
    Even discretionary and non discretionary is a contentious item and in a CPI has to be defined. For example: is TV service discretionary? Is Internet service discretionary? Is broadband Internet access discretionary? I just checked. Bell TV + Internet is advertised as $120CAD right now. Cell service combined with that add $70CAD. Per month. With taxes on top that's round about $2,620 per year if we are talking Single person household. Now it depends on where you are and whether you live alone or not and such. In Toronto as a single person at the median income this alone can be 4.5% of your net income. I'd say that moves the needle. I pay less than half of this with a different ISP and cell provider + Netflix. Of course the precise calculations change as we move between cities and provinces as well as single person vs. families etc. as base costs get shared.
    - lumost 6y ago
      The hypothetical single income earner that we are debating would pay an average rent of $2250/mo for a 1-bedroom in Toronto. Roughly 10x the cost of TV, internet, and phone. This cost has risen from ~$1750/mo in 2017 at roughly ~10% per year. For perspective, our hypothetical individual would be experiencing house price inflation equal to a new TV, phone, and internet bill every year. (1-bedrooms displayed the lowest price increase of any housing category in Toronto according to https://www.zumper.com/rent-research/toronto-on https://www.zumper.com/rent-research/toronto-on )

Cederfjard 6y ago

I guess that still leaves the question that since it is so difficult, is the CPI actually useful?

xyzzyz 6y ago
Yes, because CPI is a product of both market forces and changes in money supply. The former is not controlled much by anyone, while the latter is controlled by some very rough and not easily predictable knobs held by guys at Fed. Guys at Fed are committed to keep CPI at something like constant 2%, so the must turn these knobs, but for that they need a good feedback as to what their movements are doing. And sure, they could use something different as a measure of inflation than CPI, but what would that be, and why it would be better than CPI? These questions need to be answered first before we move away from CPI.
- pas 6y ago
  The Fed's dual mandate is very important here. And there's some movement toward "automatic QE in case unemployment starts to rise" - https://www.stitcher.com/show/voxs-the-weeds/episode/fix-recessions-by-giving-people-money-66991306 https://www.stitcher.com/show/voxs-the-weeds/episode/fix-rec... (Matt Yglesias wonktalks with Claudia Sahm, very recommended) CPI is very important, but the labor numbers are much better (since they are easier to measure), so CPI might become a secondary (high level, target) metric over time.

deleted 6y ago

[deleted]

bcrosby95 6y ago

The problem is laymen care about cost of living, not CPI. But news agencies commonly talk about inflation with CPI rather than an actual cost of living. Which is what matters to people living ordinary lives. Given this, the answers to your questions should be obvious. The answer, as far as laymen are concerned, is 3.5%. Improvements don't matter either. If we eliminated every car other than a Porsche, as far as laymen are concerned then car inflation went up by around 150%.

mywittyname 6y ago
>Given this, the answers to your questions should be obvious. If the answer seems obvious, then the question isn't fully understood, because there are trade-offs involved in CPI calculations. There's no such thing as a "layman." Different people in different regions experience different CPI. Inflation for all goods in the Northeast might be 2.1% over the past ten years, but could be 1.6% in the South for the same basket. that might not sound like much, but that means that inflation is rising 25% faster in the Northeast. No matter what you do, CPI at a national level won't accurately reflect any group. People in the South will claim it's way too high, and people in the NE will complain that it's way too low, etc, etc. If you want real numbers, relevant to your situation, then the BLS provides the ability to calculate your own person CPI based on what you buy and where you live.