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CPI has been engineered to meet targets for a long time. Several major flaws with CPI: Hedonic adjustments are more or less at the mercy of the bureaucrats. Fo

CPI has been engineered to meet targets for a long time. Several major flaws with CPI: Hedonic adjustments are more or less at the mercy of the bureaucrats. For example, new vehicles did not go up in hedonic-adjusted price from 1997 to 2020 according to the BLS [0]. The justification is that new cars have bluetooth and other features that counter-act the price change. An automatic Toyota Corolla was $12373 brand new in 1997. It was $19700 in 2020. Our inflation numbers over those years did not incorporate a price increase AT ALL, so it's a fair assessment that real inflation was higher based on that alone. The Big Mac index has probably always been the most accurate assessment, free of political pressures. And the most fundamental problem: the survey evaluates the median spending of a sample of Americans, but the median American spends pretty much all of their money. So you end up with the dotted line in this chart: [1]. Spoiler, it's pretty much a flat line. Real median wages don't move because CPI is calculated by measuring median wages. If prices rise, people can't <consistently> spend more than all of their money, so they buy cheaper things and buy less of them, and this changes the weights and reduces the inflation numbers. The fact that some economists with PhD's think this makes sense is why you should always do your due diligence instead of accepting a doctor's diagnosis blindly. [0] https://fred.stlouisfed.org/series/CUUR0000SETA01 https://fred.stlouisfed.org/series/CUUR0000SETA01 [1] https://www.bls.gov/charts/usual-weekly-earnings/usual-weekly-earnings-over-time-total-men-women.htm# https://www.bls.gov/charts/usual-weekly-earnings/usual-weekl...

missedthecue 4y ago
I agree in general about the hedonic adjustments and their potential for manipulation or miscalculation. But automobiles are probably the worst example! Toyota didn't even roll out passenger side airbags until 1998. Only the driver had them prior to this. The new Corolla has 8 airbags. Today we have better fuel efficiency, collision protection, driver assistance, remote start... Even the seats are more comfortable. Not to mention most car brands have much better warranties today than they did in the '90s. Other things get hedonic adjustments but shouldn't. Shirts for instance.
- lend000 4y ago
  But it's irrelevant when that's the cheapest new vehicle, most working Americans need a car, and despite better fuel efficiency, it isn't really that much cheaper to own a car. Hedonic adjustments make sense in theory, but in practice it's a loophole to make inflation whatever the government wants it to be. In the case of vehicles, they clearly went overboard. The counterargument to hedonic adjustments is that almost everything should become cheaper over time, including all vehicle parts and assembly, due to technological progress in manufacturing. I don't think it's unreasonable to assume hedonic adjustments should cancel out increases in manufacturing technology and just ignore them both, probably resulting in a simpler AND more accurate CPI.
  - RC_ITR 4y ago
    > But it's irrelevant when that's the cheapest new vehicle, most working Americans need a car, and despite better fuel efficiency, it isn't really that much cheaper to own a car. Hedonic adjustments make sense in theory, bpractice it's a loophole to make inflation whatever the government wants it to be. The average new car in the US lasts like 2x longer than it did in 1998. Shouldn’t that factor in?
    - symlinkk 4y ago
      No
    - spaetzleesser 4y ago
      “The average new car in the US lasts like 2x longer than it did in 1998. Shouldn’t that factor in?” Absolutely not. Where do you stop with this game? Do you factor in that the seats are better so people go less to the doctor for back pain?
      - thfuran 4y ago
        Yes, that sounds like a good idea if what you're trying to estimate is the cost of maintaining a certain quality of life.
californical 4y ago
> the survey evaluates the median spending of a sample of Americans, but the median American spends pretty much all of their money. I feel like this is relevant. If you already don’t save anything, then your spending power decreases drastically over a year or two, you still spend all of your money but just buy fewer of the nonessential or “nicer” things. So CPI adjusts and assumes that “this is normal spending now”, but really there was no flexibility in someone’s spending anyways. They would’ve kept buying more if they could, but now their quality of life has decreased but CPI treats it as if the product has improved & they don’t need as much anymore (even as a QOL increase). Am I understanding this correctly?
- lend000 4y ago
  That was my interpretation when I first read the detailed process about the BLS survey. It will still measure inflation, but if the median American's spending preferences changes when prices change (which is true until the median American can never afford anything except the bare necessities to begin with), then those changing preferences will result in falsely lower inflation numbers. Combined with Hedonic adjustments, true inflation has probably been about 50% higher than reported for the last two decades (and more in line with the Big Mac index) [0]. [0] https://medium.datadriveninvestor.com/what-do-big-mac-prices-tell-us-about-true-inflation-27f44912500f?gi=9fa6a5f3f65d https://medium.datadriveninvestor.com/what-do-big-mac-prices...

missedthecue 4y ago

I agree in general about the hedonic adjustments and their potential for manipulation or miscalculation. But automobiles are probably the worst example! Toyota didn't even roll out passenger side airbags until 1998. Only the driver had them prior to this. The new Corolla has 8 airbags. Today we have better fuel efficiency, collision protection, driver assistance, remote start... Even the seats are more comfortable. Not to mention most car brands have much better warranties today than they did in the '90s. Other things get hedonic adjustments but shouldn't. Shirts for instance.

lend000 4y ago
But it's irrelevant when that's the cheapest new vehicle, most working Americans need a car, and despite better fuel efficiency, it isn't really that much cheaper to own a car. Hedonic adjustments make sense in theory, but in practice it's a loophole to make inflation whatever the government wants it to be. In the case of vehicles, they clearly went overboard. The counterargument to hedonic adjustments is that almost everything should become cheaper over time, including all vehicle parts and assembly, due to technological progress in manufacturing. I don't think it's unreasonable to assume hedonic adjustments should cancel out increases in manufacturing technology and just ignore them both, probably resulting in a simpler AND more accurate CPI.
- RC_ITR 4y ago
  > But it's irrelevant when that's the cheapest new vehicle, most working Americans need a car, and despite better fuel efficiency, it isn't really that much cheaper to own a car. Hedonic adjustments make sense in theory, bpractice it's a loophole to make inflation whatever the government wants it to be. The average new car in the US lasts like 2x longer than it did in 1998. Shouldn’t that factor in?
  - symlinkk 4y ago
    No
  - spaetzleesser 4y ago
    “The average new car in the US lasts like 2x longer than it did in 1998. Shouldn’t that factor in?” Absolutely not. Where do you stop with this game? Do you factor in that the seats are better so people go less to the doctor for back pain?
    - thfuran 4y ago
      Yes, that sounds like a good idea if what you're trying to estimate is the cost of maintaining a certain quality of life.

californical 4y ago

> the survey evaluates the median spending of a sample of Americans, but the median American spends pretty much all of their money. I feel like this is relevant. If you already don’t save anything, then your spending power decreases drastically over a year or two, you still spend all of your money but just buy fewer of the nonessential or “nicer” things. So CPI adjusts and assumes that “this is normal spending now”, but really there was no flexibility in someone’s spending anyways. They would’ve kept buying more if they could, but now their quality of life has decreased but CPI treats it as if the product has improved & they don’t need as much anymore (even as a QOL increase). Am I understanding this correctly?

lend000 4y ago
That was my interpretation when I first read the detailed process about the BLS survey. It will still measure inflation, but if the median American's spending preferences changes when prices change (which is true until the median American can never afford anything except the bare necessities to begin with), then those changing preferences will result in falsely lower inflation numbers. Combined with Hedonic adjustments, true inflation has probably been about 50% higher than reported for the last two decades (and more in line with the Big Mac index) [0]. [0] https://medium.datadriveninvestor.com/what-do-big-mac-prices-tell-us-about-true-inflation-27f44912500f?gi=9fa6a5f3f65d https://medium.datadriveninvestor.com/what-do-big-mac-prices...