is there a conspiracy to understate inflation?

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larryswedroe
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is there a conspiracy to understate inflation?

Post by larryswedroe » Tue Dec 24, 2013 8:25 am

http://www.cbsnews.com/news/poking-hole ... cy-theory/

Not according to the billion prices project

Best wishes
Larry

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Re: is there a conspiracy to understate inflation?

Post by Call_Me_Op » Tue Dec 24, 2013 8:40 am

Thanks Larry. We needed an objective assessment of this important issue.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Browser
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Re: is there a conspiracy to understate inflation?

Post by Browser » Tue Dec 24, 2013 10:07 am

First, intentionally understating inflation wouldn’t help the government because investors would quickly learn they're being cheated. Investors would begin to demand a higher rate on TIPS -- a premium to offset the cheating and the risk of even greater cheating.
I could never fathom why the conspiracy theorists couldn't seem to understand this simple argument. You would have to assume that bond investors are brain-dead to buy the notion that the government could manipulate bond returns. Course, if they did try and TIPS rates went up as a result, I guess that would hurt current holders of TIPS because the principal value of outstanding bonds would decrease without a compensating inflation adjustment.
We don't know where we are, or where we're going -- but we're making good time.

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Re: is there a conspiracy to understate inflation?

Post by Spirit Rider » Tue Dec 24, 2013 10:54 am

Some of the reasons that drive the "conspiracy theories".

1. It's the government, so there must be a conspiracy.

2. I like to call this gambler's accounting. Most people I know who gamble a lot claim they come out way ahead. These are either the people who buy instant/lottery tickets or go to casino's. They place much higher weight to their larger infrequent winnings than their smaller frequent purchases/bets. Yet anyone observing from the outside can see that they come out way behind.

In the case of inflation, people focus on their pain points. Something they have to pay transparently (food, gas, utilities, property taxes, etc...). They will see when one of those increases significantly, but will not put it into perspective about how much of their total expenses that increase yields.

3. This is also related to perspective. Any inflation measure is going to be an average across the whole country and across everyone. Yet everyone has a personal rate of inflation. There are macro factors such as regional differences (housing, food, energy, etc...) and demographic differences (age, family unit, cultural, etc...) that relate to specific expenses (medical, entertainment, travel, etc...).

Then even after applying these macro factors, there is the micro factor of your own "specific" expense model. Only a limited number of people will actually match the "basket of goods and services" that the government uses to determine the rate of inflation. This means that the majority of people will have their own personal inflation rate. It may be lower, equal, or greater than the government's calculation.

4. The bottom line is that the government measure of inflation may not be perfect or reflect "your" personal inflation. It is the best that can reasonably determined and as indicated by Larry's post, probably substantially accurate. More importantly, this shows that the raw data is in the public domain and can be independently verified. That in itself causes the government to be transparent and to strive to be accurate.

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ogd
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Re: is there a conspiracy to understate inflation?

Post by ogd » Tue Dec 24, 2013 11:00 am

Another factor debunking the conspiracy theories of 2010 vintage is the simple passage of time. You can only claim to have 10% hidden inflation for a couple years before it starts to look ridiculous.

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Imperabo
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Re: is there a conspiracy to understate inflation?

Post by Imperabo » Tue Dec 24, 2013 11:22 am

I went on a clothes shopping spree the other day for the first time I can remember. I was stunned at how cheap everything was, and I'm not talking about Walmart either. I remember paying these prices 20 years ago. Yes, healthcare and education have gone up a lot, but not everything has. (perhaps because healthcare and education aren't made in Bangladesh)

dad2000
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Re: is there a conspiracy to understate inflation?

Post by dad2000 » Tue Dec 24, 2013 11:31 am

Samuel Lee has a similar piece on M*: http://news.morningstar.com/articlenet/ ... ?id=624132

The conspiracy theorists still argue that the MIT data simply mimics CPI and proves nothing, that U.S. investors are suckers, and that the big currency crash is still coming. If they've missed out on the >100% run up of the last few years, what else can they say without admitting they were wrong?

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nisiprius
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Re: is there a conspiracy to understate inflation?

Post by nisiprius » Tue Dec 24, 2013 11:36 am

Nobody who had lived through 10% inflation could believe that we are experiencing it today. A qualitative difference in feel.

With normal inflation, you are constantly being surprised that the price of some isolated thing has gone up so much. Hey, the gallon of distilled water in the supermarket that used to be $0.99 is now $1.29. And you do notice price decreases as well as increases, like last year I was paying $12 for a 33-ounce tub of coffee that I now pay $8 for (but that shouldn't count, that's just the well-deserved rewards of being a savvy shopper).

With 10% inflation, no price is stable. You are aware of everything changing because everything you buy has gone up in price since the last time you bought it. It is bad enough to be a psychological deterrent to planning. Anything. And both salary and bank interest lag, so that even though in retrospect it all looks OK, at the time it all seems very threatening. Your monthly household budget gets way out of whack and your salary review isn't coming up any time soon. And you never see any price go down, ever.

How recently it was that all the CPI-is-cooked crowd was pointing to gas prices as proof of cookery and crookery. How many people are saying "Oh, look, gas prices are down, our personal rate of inflation must be lower than they are claiming?"

The CPI-is-cooked crowd used to point to owner equivalent rent as a fiddle, and insisting that CPI ought to be based on actual housing prices. How many of them have been saying "Due to the use of owner equivalent rent, the CPI has been overstating inflation for seven years?"
Last edited by nisiprius on Tue Dec 24, 2013 11:50 am, edited 4 times in total.
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solonseneca
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Re: is there a conspiracy to understate inflation?

Post by solonseneca » Tue Dec 24, 2013 11:41 am

From Larry's piece I'm afraid one must conclude he's in on it too....

MathWizard
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Re: is there a conspiracy to understate inflation?

Post by MathWizard » Tue Dec 24, 2013 12:06 pm

Right theory, wrong country.

Argentinia is facing pressure from the IMF regarding its undereporting of inflation.
I recall double digit (per month) inflation in the 80's in that country leading to riots.

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fishnskiguy
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Re: is there a conspiracy to understate inflation?

Post by fishnskiguy » Tue Dec 24, 2013 12:14 pm

Of all the weasels and charlatans that appear on CNBC, Peter Schiff is hands down the worst. While a stopped clock is correct twice a day, Peter Schiff's clock is never stopped. He's ALWAYS wrong.

Even when he predicted as he always has, a major market drop that actually materialized, his strategies for combating said drop were utter money losers.

We have been retired on a CPI adjusted federal pension since 1992. We cannot detect any change in our overall buying power over all those years.

Chris
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jfn111
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Re: is there a conspiracy to understate inflation?

Post by jfn111 » Tue Dec 24, 2013 12:59 pm

Inflation can be a very individual experience.
If you smoke Cig prices are up (Both taxes and industry price increase)
If you drink Liquor prices are up (Again, both taxes and industry increases)
Utility prices are up, at least in MN
If you drink coffee, prices are stagnant but packaging size is down (less coffee for the same price)
Maybe not Bogleheads but for a lot of people these 4 things are a big part of their weekly budget.

manwithnoname
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Re: is there a conspiracy to understate inflation?

Post by manwithnoname » Tue Dec 24, 2013 1:16 pm

larryswedroe wrote:http://www.cbsnews.com/news/poking-hole ... cy-theory/

Not according to the billion prices project

Best wishes
Larry


Regardless of what the metric meisters at MIT think, there is a basis for questioning how the government calculates inflation because the standards have changed to lower the rate of inflation.

"Over the years, the methodology used to calculate the CPI has also undergone numerous revisions. According to the BLS, the changes removed biases that caused the CPI to overstate the inflation rate. The new methodology takes into account changes in the quality of goods and substitution. Substitution, the change in purchases by consumers in response to price changes, changes the relative weighting of the goods in the basket. The overall result tends to be a lower CPI. However, critics view the methodological changes and the switch from a COGI to a COLI focus as a purposeful manipulation that allows the U.S. government to report a lower CPI."

http://www.investopedia.com/articles/07 ... eindex.asp

For those of you who actually shop have you noticed that while the price you pay for groceries is not increasing the quantities are now less. For example, a bag of sugar is now 4 lbs instead of 5. Same price but 20% less. Half gallon of orange juice contains 59 oz and a gallon of detergent is now 120 oz.

So while the prices are the same you are getting a lower quantity for the same price which is the same as a price increase.

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Re: is there a conspiracy to understate inflation?

Post by Spirit Rider » Tue Dec 24, 2013 1:40 pm

manwithnoname wrote:For those of you who actually shop have you noticed that while the price you pay for groceries is not increasing the quantities are now less. For example, a bag of sugar is now 4 lbs instead of 5. Same price but 20% less. Half gallon of orange juice contains 59 oz and a gallon of detergent is now 120 oz.

So while the prices are the same you are getting a lower quantity for the same price which is the same as a price increase.
The changes to the CPI-U calculation were exactly because it was "overstating" inflation. Corrections would then result in a lower "correct rate". What is the problem there.

Of course prices are increasing, there is after all inflation no matter how low. We all understand the compounding inherent in investing for the future. It is not any different for inflation/prices. Even the low Inflation (with a year of deflation) over the last decade has been more than 25% cumulative.

Your examples of reduced sizes only represent 8% and 7% increases at the same price point. How a company chooses to pass higher costs onto customers by size reduction rather than price increases is a marketing decision. Either way, the price on individual products are anecdotal and irrelevant to the accuracy determination of the CPI-U.

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LH
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Re: is there a conspiracy to understate inflation?

Post by LH » Tue Dec 24, 2013 2:26 pm

History is replete with inflation caused by governments.

When money dies is a nice book.

http://www.amazon.com/When-Money-Dies-D ... 1586489941

The current Germans referred to our recovery policy as "clueless" quite recently.

http://www.independent.co.uk/news/busin ... 26766.html

Sure, previously, inflation was "overstated" and now its "correct", with each revision that brings it downward. Its a valid point of view. As is the US, and is the German, even though they are opposite.

So now, sure, all the revisions make inflation lower, than previous, and this is deemed "correct". I would deem it interesting. Regardless, times are not that bad.

One can look at Argentina inflation experience, and watch the government ministers talk, watch the official inflation over time degrade to its current farcical official level, I am sure there was conspiracy talk in Argentina too. Actually, there was a good interview on it on its current state. Usually, there is no point which the government comes out and says, hey, we are debasing money people, and the stats are cooked. Everything is a gradient. Argentina is at one extreme of the gradient. Watch it in action. I feel sorry for the government guy.

http://www.youtube.com/watch?v=mQNRF71pPBc

The question is not, what happens when things are ok, the question is what happens when things get bad. What will TIPS do then?

Its like the recent change in cola to chained CPI, ok, for purposes of discussion here, we can call it more "correct", but hey, its also lower COLA. Surprise? No surprise. Its just a matter of degree.

I hold TIPS because there is nothing else to hold per se, and hope for the best. There is no riskless. But I posit, there is inflation calculation risk, with any government anywhere. We are just human.

really, the whole conspiracy thing is pejorative. There need be no conspiracy. Its like saying, is there a conspiracy amongst employers, to try to pay lower wages, or the converse, is there a conspiracy amongst workers, to get higher wages? No.

Need there be a conspiracy, for a government that pays cola, to switch to chain cpi. Nope. Its kinda expected.

Much like PCRIX, the experiment still runs on TIPS. We may be watching them both in real time at some point in next tens of years if the inflation risk shows up.

LH

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Re: is there a conspiracy to understate inflation?

Post by allsop » Tue Dec 24, 2013 2:58 pm

LH wrote:History is replete with inflation caused by governments.

When money dies is a nice book.

http://www.amazon.com/When-Money-Dies-D ... 1586489941

The current Germans referred to our recovery policy as "clueless" quite recently.

http://www.independent.co.uk/news/busin ... 26766.html

Sure, previously, inflation was "overstated" and now its "correct", with each revision that brings it downward. Its a valid point of view. As is the US, and is the German, even though they are opposite.

So now, sure, all the revisions make inflation lower, than previous, and this is deemed "correct". I would deem it interesting. Regardless, times are not that bad. [snip]
I'm pretty sure that Schäuble, the German Minister of Finance, as a latter day incarnation of Chancellor Brüning, is part of the core of Europe's problems. Most of us have seen the old pictures of Germans with trolleys of paper money, but Chancellor Brüning's austerity brought Hitler to power and now similar minded people are gaining significant influence yet again.

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Re: is there a conspiracy to understate inflation?

Post by manwithnoname » Tue Dec 24, 2013 3:20 pm

Spirit Rider wrote:
manwithnoname wrote:For those of you who actually shop have you noticed that while the price you pay for groceries is not increasing the quantities are now less. For example, a bag of sugar is now 4 lbs instead of 5. Same price but 20% less. Half gallon of orange juice contains 59 oz and a gallon of detergent is now 120 oz.

So while the prices are the same you are getting a lower quantity for the same price which is the same as a price increase.
The changes to the CPI-U calculation were exactly because it was "overstating" inflation. Corrections would then result in a lower "correct rate". What is the problem there.

Of course prices are increasing, there is after all inflation no matter how low. We all understand the compounding inherent in investing for the future. It is not any different for inflation/prices. Even the low Inflation (with a year of deflation) over the last decade has been more than 25% cumulative.

Your examples of reduced sizes only represent 8% and 7% increases at the same price point. How a company chooses to pass higher costs onto customers by size reduction rather than price increases is a marketing decision. Either way, the price on individual products are anecdotal and irrelevant to the accuracy determination of the CPI-U.
Your post merely confirms what the critics have said: CPI is being manipulated downward by the government to reduce inflation by changing the metrics that determine inflation. Today chicken is substituted for beef. Next year canned chicken for fresh chicken, all to prevent overstating inflation. If you actually shopped you would notice that size reductions have been trending for the last few years and relevant to how inflation is calculated.

What makes you think that sizes will not be reduced again to keep prices low. Why cant oj be reduced to 55 oz or detergent to 115 oz next year. Kind of naïve to think that manufacturers will not reduce sizes in the future to avoid raising prices.
Last edited by manwithnoname on Tue Dec 24, 2013 3:33 pm, edited 1 time in total.

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Cut-Throat
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Re: is there a conspiracy to understate inflation?

Post by Cut-Throat » Tue Dec 24, 2013 3:23 pm

My dad grew up during the Depression. I remember him describing Candy Bars that were as big as Loaves of Bread for 5 Cents.

I think he was exaggerating a bit. :o

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Re: is there a conspiracy to understate inflation?

Post by allsop » Tue Dec 24, 2013 3:31 pm

manwithnoname wrote:
Spirit Rider wrote:
manwithnoname wrote:For those of you who actually shop have you noticed that while the price you pay for groceries is not increasing the quantities are now less. For example, a bag of sugar is now 4 lbs instead of 5. Same price but 20% less. Half gallon of orange juice contains 59 oz and a gallon of detergent is now 120 oz.

So while the prices are the same you are getting a lower quantity for the same price which is the same as a price increase.
The changes to the CPI-U calculation were exactly because it was "overstating" inflation. Corrections would then result in a lower "correct rate". What is the problem there.

Of course prices are increasing, there is after all inflation no matter how low. We all understand the compounding inherent in investing for the future. It is not any different for inflation/prices. Even the low Inflation (with a year of deflation) over the last decade has been more than 25% cumulative.

Your examples of reduced sizes only represent 8% and 7% increases at the same price point. How a company chooses to pass higher costs onto customers by size reduction rather than price increases is a marketing decision. Either way, the price on individual products are anecdotal and irrelevant to the accuracy determination of the CPI-U.
Your post merely confirms what the critics have said: CPI is being manipulated downward by the government to reduce inflation by changing the metrics that determine inflation. Today chicken is substituted for beef. Next year canned chicken for fresh chicken, all to prevent overstating inflation.

What makes you think that sizes will not be reduced again to keep prices low. Why cant oj be reduced to 55 oz or detergent to 115 oz next year. Kind of naïve to think that manufacturers will not reduce sizes in the future to avoid raising prices.
What is really disturbing is the manipulated buggy whips prices! Every day I transport goods using horse and a wagon, and for this a buggy whip or three is essential! Not to talk about the price for grain for the horse! It is outrageous and manipulated!

PS: Perhaps close the thread before the green lizard men enters the discussion?
Last edited by allsop on Tue Dec 24, 2013 3:37 pm, edited 1 time in total.

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fishnskiguy
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Re: is there a conspiracy to understate inflation?

Post by fishnskiguy » Tue Dec 24, 2013 3:37 pm

Hey folks,
I'm pretty sure that chained CPI has not been incorporated in any program or pension yet. [OT comments removed by admin LadyGeek]

Chris
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allsop
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Re: is there a conspiracy to understate inflation?

Post by allsop » Tue Dec 24, 2013 3:45 pm

fishnskiguy wrote:Hey folks,
I'm pretty sure that chained CPI has not been incorporated in any program or pension yet. I'm pretty sure that chained CPI has not been incorporated in any program or pension yet. [OT comments removed by admin LadyGeek]

Chris
[OT comments removed by admin LadyGeek]

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Re: is there a conspiracy to understate inflation?

Post by fishnskiguy » Tue Dec 24, 2013 3:50 pm

Time to lock.

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