4 ms·

Interest expense is a real cost people pay. Why ignore it?

by PKop 3y ago

ethbr1 3y ago
The reason to ignore it would be mechanical: it's more difficult to measure something when the measurement includes a thing that is adjusted by the measurement. For purposes of setting Fed rates, it makes sense to exclude it. For purposes of measuring perceived inflation, it makes sense to include it.
- PKop 3y ago
  "inflation rate" is a nebulous thing. Interest expense and interest rates, concretely paid by people like any other expense is not any more nebulous than tracking other expenditures. We already know the interest rate and various categories of interest expense paid by population. It is just not included. Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher". There is nothing mechanically weird about not ignoring a real expense the economy and people bear the cost of. This isn't touchy feely, this is concrete costs people pay. Not tracking is purely political.
  - ethbr1 3y ago
    > Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher". What is the CPI actually used for? To set various levers at the central bank level to manage inflation and keep the economy humming along. One of those levers is... the Fed funds rate... which in turn influences most other interest rates. So you'd be incorporating interest into the measurement used to set interest.
    - JumpCrisscross 3y ago
      > What is the CPI actually used for? Technically, they pay closer attention to PCE.
    - mitthrowaway2 3y ago
      CPI is used for other things too, including contract negotiations and standard of living comparisons. Anyway, recursive sums like that are nothing unusual; as long as the sum converges it's not a problem. Any negative feedback amplifier does the same thing.
    - deleted 3y ago
      [deleted]
bdjsiqoocwk 3y ago
If in a year a burger goes from $5 to $10 and the Fed rate goes from 2% to 5%, what do you think the inflationary factor should be in your methodology?
IshKebab 3y ago
It isn't exactly. Increasing interest can mean you have to pay liabilities unexpectedly early. But it's really the difference between your income and interest that matters. If your income is keeping up with inflation then higher inflation doesn't make you worse off; it just means you are paying off debts faster.
deleted 3y ago
[deleted]

Interest expense is a real cost people pay. Why ignore it?

by PKop 3y ago

Interest expense is a real cost people pay. Why ignore it?

The reason to ignore it would be mechanical: it's more difficult to measure something when the measurement includes a thing that is adjusted by the measurement. For purposes of setting Fed rates, it makes sense to exclude it. For purposes of measuring perceived inflation, it makes sense to include it.

PKop 3y ago
"inflation rate" is a nebulous thing. Interest expense and interest rates, concretely paid by people like any other expense is not any more nebulous than tracking other expenditures. We already know the interest rate and various categories of interest expense paid by population. It is just not included. Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher". There is nothing mechanically weird about not ignoring a real expense the economy and people bear the cost of. This isn't touchy feely, this is concrete costs people pay. Not tracking is purely political.
- ethbr1 3y ago
  > Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher". What is the CPI actually used for? To set various levers at the central bank level to manage inflation and keep the economy humming along. One of those levers is... the Fed funds rate... which in turn influences most other interest rates. So you'd be incorporating interest into the measurement used to set interest.
  - JumpCrisscross 3y ago
    > What is the CPI actually used for? Technically, they pay closer attention to PCE.
  - mitthrowaway2 3y ago
    CPI is used for other things too, including contract negotiations and standard of living comparisons. Anyway, recursive sums like that are nothing unusual; as long as the sum converges it's not a problem. Any negative feedback amplifier does the same thing.
  - deleted 3y ago
    [deleted]

bdjsiqoocwk 3y ago

If in a year a burger goes from $5 to $10 and the Fed rate goes from 2% to 5%, what do you think the inflationary factor should be in your methodology?

IshKebab 3y ago

It isn't exactly. Increasing interest can mean you have to pay liabilities unexpectedly early. But it's really the difference between your income and interest that matters. If your income is keeping up with inflation then higher inflation doesn't make you worse off; it just means you are paying off debts faster.

deleted 3y ago

[deleted]