## How accurately can we measure INFLATION?

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Topic Author
grayfox
Posts: 4959
Joined: Sat Sep 15, 2007 4:30 am

### Re: How accurately can we measure INFLATION?

PVW wrote:
Mon Apr 16, 2018 3:18 pm
grayfox wrote:
Mon Apr 16, 2018 1:05 pm

Which of the different inflation rates you mention would you use for i to calculate the real return RR?

Should everyone use the same i or a different i?
Your personal inflation rate is the only one that matters for your personal income and expenditures. Imagine your only expenditure is food and you get it all from a farmer that never raises his prices. If you get a 3% raise, then you can buy 3% more food. It doesn't matter that the average cost for all goods and services went up by some amount or that the value of money has deflated, you are still getting 3% more food than before so your personal inflation rate is 0%.

It's not so clear when figuring returns on your investments - you need the current inflation rate of the goods and services that you will buy in the future with your investments. In this case you might assume your personal inflation rate is the same as the average inflation rate, but defining a suitable average keeps a lot of smart people busy for entire careers.
Thanks for you input.

Topic Author
grayfox
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Joined: Sat Sep 15, 2007 4:30 am

### Re: How accurately can we measure INFLATION?

I think that measuring inflation is not so simple. You have prices and CPI-U which are levels. We want to know inflation which is a rate of change over time. It means taking differences, a.k.a derivatives, which are noisy.

Sure you can sample prices and get the current prices. But prices are changing all the time.

I just bought strawberries at the supermarket. 2 lbs for \$5.00. The supermarket has a weekly flyer with the new prices. Last week strawberries were \$3.99/lb. In the winter they were \$4.99 some weeks. In the summer they get as low as \$1.99/lb. It all depends on how plentiful they are. They cut the price by 50% to move them. So the prices can change by 25% or 50+% week to week.

Thursday 4/19/2018. News Flash: I went to the supermarket today. Strawberries 99 cents per pound. Down from \$2.50 last week. Bought 2 pounds. Strawberry deflation is -60% per week. Hyperdeflation!

Then you try to find the inflation trend on the order of 2% in prices that are changing 10-50% every week.

The short term fluctuations dominate in the short term. Monthly inflation is probably just measuring noise. You need longer periods of time to observe a trend. Even a year is a short time.

I compared inflation from BPP with inflation from CPI-U. Someone said both use the same basket and weights, and only difference is the method of sampling prices. And yet sometimes they differed by as much as +/-1.5%. Include standard errors and it is probably only good to +/-2%. <--This is what I am concluding.

Considering that the we're trying to measure a 2% rate, that is huge measurement error. When BLS reports 2%, I bet true 12-month inflation could be anywhere from 0 to 4%.

If that's the case, I think its a huge problem. E.g. GDP. If Nominal GDP growth is 4.1% p.a., what is real GDP growth if annual inflation is 2.4% +/- 2%. We could be in a recession and not know it. The instruments don't work well in real time.
Last edited by grayfox on Thu Apr 19, 2018 5:08 pm, edited 2 times in total.

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

grayfox wrote:
Mon Apr 16, 2018 4:57 pm
...
I compared inflation from BPP with inflation from CPI-U. Someone said both use the same basket and weights, and only difference is the method of sampling prices. And yet sometimes they differed by as much as +/-1.5%. Include standard errors and it is probably only good to +/-2%. <--This is what I am concluding.

Considering that the we're trying to measure a 2% rate, that is huge measurement error. When BLS reports 2%, I bet true 12-month inflation could be anywhere from 0 to 4%.

If that's the case, I think its a huge problem. E.g. GDP. If Nominal GDP growth is 4.1% p.a., what is real GDP growth if annual inflation is 2.4% +/- 2%. We could be in a recession and not know it. The instruments don't work well in real time.
The Bureau of Labor Statistics publishes its weightings, its data, and its methodology. Anybody who wants to can read, calculate, and criticize them.

What do you expect CPI to measure?

PJW
Last edited by Phineas J. Whoopee on Mon Apr 16, 2018 5:34 pm, edited 1 time in total.

Topic Author
grayfox
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Joined: Sat Sep 15, 2007 4:30 am

### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 5:32 pm

The Bureau of Labor Statistics publishes its weightings, its data, and its methodology. Anybody who wants to can read, calculate, and criticize them.

What do you expect CPI to measure?

PJW
Consumer Prices. Your response seems like a non-sequitor.
Last edited by grayfox on Mon Apr 16, 2018 5:36 pm, edited 1 time in total.

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

grayfox wrote:
Mon Apr 16, 2018 5:33 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 5:32 pm

What do you expect CPI to measure?

PJW
Consumer Prices
If you disagree with the BLS's weightings, data, or methodology, all that's fine and it's published.

If you live, for example, in Juneau AK, the price of wild-caught Pacific salmon might be, I'm making up unrealistic examples, \$1.00 per pound. If in Atlanta GA it costs \$2.00 per pound, what are consumer prices?

PJW

Topic Author
grayfox
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### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 5:36 pm

If you disagree with the BLS's weightings, data, or methodology, all that's fine and it's published.

If you live, for example, in Juneau AK, the price of wild-caught Pacific salmon might be, I'm making up unrealistic examples, \$1.00 per pound. If in Atlanta GA it costs \$2.00 per pound, what are consumer prices?

PJW
Where did I say I disagree with BLS's weightings, data, or methodology.

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

grayfox wrote:
Mon Apr 16, 2018 5:38 pm
...
Where did I say I disagree with BLS's weightings, data, or methodology.
...
You did not say you disagree, you said you think there is uncertainty. You began with asking about calculations to three decimal places. You're absolutely correct to ask that.

If I understand properly you're questioning the relationship of reported CPI to reported GDP. Yes indeed, they both have uncertainties.

Suggesting we don't know what inflation is, when we do know what CPI-U is because it's tightly defined and all the information published, is incorrect. We do know what CPI-U is. If you mean we don't know with precision (not accuracy) what it implies, you are correct. If you're saying inflation is a poorly-defined term you're correct about that too.

In between somebody suggested CPI, in general across the nation across the economy average of everywhere is incorrect because it doesn't match their own personal expenses as they change year to year. That's not right. It isn't even wrong. That's not what CPI measures.

Inflation, regardless of how many decimal places CPI is reported to, is imprecise. You asked whether it's accurate. Those are two different things.

PJW

whodidntante
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### Re: How accurately can we measure INFLATION?

Horseshoes and wagon wheels are entirely overpriced in 2018!

Topic Author
grayfox
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### Re: How accurately can we measure INFLATION?

Just to clarify, I am asking how accurate or precise we know the rate of change in CPI-U.

e.g. 21jul2010, BLS reported 12-month change +1.05%. How close is that to true inflation?

At the same time BPP reported +2.83%, +1.78% higher than BLS.

What do I conclude? That the uncertainty for 12-month change in consumer prices can be +/- 1.75 to 2.0%

http://www.thebillionpricesproject.com/usa/

delamer
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### Re: How accurately can we measure INFLATION?

grayfox wrote:
Mon Apr 16, 2018 4:57 pm
I think that measuring inflation is not so simple. You have prices and CPI-U which are levels. We want to know inflation which is a rate of change over time. It means taking differences, a.k.a derivatives, which are noisy.

Sure you can sample prices and get the current prices. But prices are changing all the time.

I just bought strawberries at the supermarket. 2 lbs for \$5.00. The supermarket has a weekly flyer with the new prices. Last week strawberries were \$3.99/lb. In the winter they were \$4.99 some weeks. In the summer they get as low as \$1.99/lb. It all depends on how plentiful they are. They cut the price by 50% to move them. So the prices can change by 25% or 50+% week to week.

Then you try to find the inflation trend on the order of 2% in prices that are changing 10-50% every week.

The short term fluctuations dominate in the short term. Monthly inflation is probably just measuring noise. You need longer periods of time to observe a trend. Even a year is a short time.

I compared inflation from BPP with inflation from CPI-U. Someone said both use the same basket and weights, and only difference is the method of sampling prices. And yet sometimes they differed by as much as +/-1.5%. Include standard errors and it is probably only good to +/-2%. <--This is what I am concluding.

Considering that the we're trying to measure a 2% rate, that is huge measurement error. When BLS reports 2%, I bet true 12-month inflation could be anywhere from 0 to 4%.

If that's the case, I think its a huge problem. E.g. GDP. If Nominal GDP growth is 4.1% p.a., what is real GDP growth if annual inflation is 2.4% +/- 2%. We could be in a recession and not know it. The instruments don't work well in real time.
I don’t understand what you are trying to say here:”Sure you can sample prices and get the current prices. But prices are changing all the time.”

That is exactly what the CPI measures — changes in prices. The CPI is not a “level.” It is an index that, by definition, measures the rate of change between two time periods.

Also, seasonal changes in prices that occur on a consistent basis are adjusted for in the CPI: https://www.bls.gov/cpi/seasonal-adjust ... nswers.htm

delamer
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### Re: How accurately can we measure INFLATION?

One way for sure that the CPI can be improved is by sampling more items and their prices. Larger samples mean smaller sampling errors, all other things being equal.

So if you want a better CPI, lobby your congressperson to increase its budget.

Topic Author
grayfox
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### Re: How accurately can we measure INFLATION?

delamer wrote:
Mon Apr 16, 2018 6:20 pm

I don’t understand what you are trying to say here:”Sure you can sample prices and get the current prices. But prices are changing all the time.”
The example I gave. The supermarket changes the price of strawberries every Wednesday.
If you sample the price on Tuesday at 9PM, \$2.50
On Wednesday morning at 6AM, \$3.99

It changes every week.

Topic Author
grayfox
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### Re: How accurately can we measure INFLATION?

delamer wrote:
Mon Apr 16, 2018 6:20 pm

That is exactly what the CPI measures — changes in prices. The CPI is not a “level.” It is an index that, by definition, measures the rate of change between two time periods.
Do you recall Distance = Rate x Time problems?

CPI-U Index is the Distance and Inflation is the Rate.

triceratop
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### Re: How accurately can we measure INFLATION?

Mon Apr 16, 2018 2:06 pm
Oicuryy wrote:
Mon Apr 16, 2018 11:53 am
The Consumer Price Index (CPI) does not measure inflation. It measures the change in the price of a basket of consumer goods and services.

The price of a thing, in dollars, is the ratio of the value of the thing to the value of a dollar. A price of five dollars for some thing means the value of the thing is five times the value of a dollar. A price could increase because the value of the thing went up and/or because the value of a dollar went down.

Axiom 1 implies that inflation is a decline in the value of a dollar. The trick to measuring inflation is to figure out how much of a change in prices is due to a change in the value of things and how much is due to a decline in the value of a dollar.

Ron
The CPI does try to remove some of the effects of the change in value of items in the basket of goods by reweighting the basket based on substitution effects and adding/removing items over time. Many economists however think there is still some effect from the change in value of items and CPI overstates inflation that is purely from the decline in the value of the dollar.
This may be of some interest, so I'll pass it along: The Index Number Problem: A Differential Geometric Approach. [pdf]
Pia Malaney Thesis: Abstract wrote:The first part of this thesis looks at issues in index number theory. By
using techniques developed in differential geometry, it is shown that the so-
called index number problem can be resolved by the development of a special
economic derivative operator constructed for this purpose. This derivative
is shown to give rise to a unique differential geometric index number which
is then demonstrated to equal the Divisia index. It is then shown in the
second chapter (co-authored with Eric Weinstein) that when placed under
similar assumptions, this data based index equals the Konus index, previously
asserted to be incalculable in the absence of a knowledge of preference maps.
Simply from a mathematical perspective it's a fascinating result.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

delamer
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### Re: How accurately can we measure INFLATION?

grayfox wrote:
Mon Apr 16, 2018 6:36 pm
delamer wrote:
Mon Apr 16, 2018 6:20 pm

That is exactly what the CPI measures — changes in prices. The CPI is not a “level.” It is an index that, by definition, measures the rate of change between two time periods.
Do you recall Distance = Rate x Time problems?

CPI-U Index is the Distance and Inflation is the Rate.
An index is set to 100.0 in its base period, which is a particular point in time. If the index equals 104.0 at one year after the base period, then prices have gone up 4% in one year. That is all you can say based on those two numbers — 100.0 and 104.0.

dknightd
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### Re: How accurately can we measure INFLATION?

In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW

PVW
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### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 4:18 pm
PVW wrote:
Mon Apr 16, 2018 3:55 pm
...
The Bureau of Labor Statistics has not started reporting the CPI-PVW, but my only concern about the BLS measures of inflation are how they affect my government benefits.

There is a CPI-PVW and CPI-Phineas J. Whoopee. In figuring my expenditures, I only care what CPI-PVW is. Maybe your point is that I can't calculate CPI-PVW, and I agree, but that doens't change the fact that your personal inflation rate is the only one that matters for your expenses.
Individual expenditures is not what CPI means at all.

If I like collecting vintage sports cars, and the price of vintage sports cars goes up, that's inflation.

If I stop spending money on vintage sports cars and start spending on cardiac care, stents for example, that is not inflation.

Inflation is one thing. Personal expenses are another.

PJW
I don't think I'm explaining myself clearly. I'm saying the inflation that matters is the change in value of the things you buy, not the change in your personal budget.

If you are investing your money to eventually purchase a 1932 Packard Eight Phaeton, then the change in price of that car is the only thing that matters. It doesn't matter that last year you didn't buy a vehicle. It doesn't matter what the average price index for pre war Packards is. The only thing that matters is the inflation of the things you buy.

dknightd
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### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
I'll admit I did not read the whole list. Does the SS inflation adjutment at least keep up with the medicare premiums (and copays)?

Phineas J. Whoopee
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Joined: Sun Dec 18, 2011 6:18 pm

### Re: How accurately can we measure INFLATION?

PVW wrote:
Mon Apr 16, 2018 7:58 pm
...
I don't think I'm explaining myself clearly. I'm saying the inflation that matters is the change in value of the things you buy, not the change in your personal budget.

If you are investing your money to eventually purchase a 1932 Packard Eight Phaeton, then the change in price of that car is the only thing that matters. It doesn't matter that last year you didn't buy a vehicle. It doesn't matter what the average price index for pre war Packards is. The only thing that matters is the inflation of the things you buy.
Good. We agree. Inflation is a macroeconomic measure. It can inform one's personal choices, but it isn't designed to, and does not, give an indication about what one personally will spend.

I am not aiming these links at you individually, PVW. I include them for anybody else who may come across this thread.

Macroeconomics

Microeconomics

PJW

delamer
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### Re: How accurately can we measure INFLATION?

dknightd wrote:
Mon Apr 16, 2018 8:04 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
I'll admit I did not read the whole list. Does the SS inflation adjutment at least keep up with the medicare premiums (and copays)?
Medicare premiums are prevented by law from increasing faster than Social Security payments for existing recipients.

So if your copays go up 10%, then you think the SS inflation adjustment should go up 10%?

What if the cost of your groceries goes up 5%; should your SS benefit go up 5%? Food is as much of a necessity as medical care.

Rhetorical questions obviously. Any inflation adjustment for SS will reflect an average change in prices across a variety of goods and services.

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

dknightd wrote:
Mon Apr 16, 2018 8:04 pm
...
I'll admit I did not read the whole list. Does the SS inflation adjutment at least keep up with the medicare premiums (and copays)?

Nobody is insulated from all risk, financial or otherwise.

PJW

dknightd
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### Re: How accurately can we measure INFLATION?

delamer wrote:
Mon Apr 16, 2018 8:18 pm
dknightd wrote:
Mon Apr 16, 2018 8:04 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
I'll admit I did not read the whole list. Does the SS inflation adjustment at least keep up with the medicare premiums (and copays)?
Medicare premiums are prevented by law from increasing faster than Social Security payments for existing recipients.

So if your copays go up 10%, then you think the SS inflation adjustment should go up 10%?

What if the cost of your groceries goes up 5%; should your SS benefit go up 5%? Food is as much of a necessity as medical care.

Rhetorical questions obviously. Any inflation adjustment for SS will reflect an average change in prices across a variety of goods and services.
I think SS should cover the increase in medical costs, AND, the costs of a basket of food. As near as I can tell (not retired yet) it does not do that. I think it should.
Otherwise I can't count on it as an inflation adjusted income.

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

dknightd wrote:
Mon Apr 16, 2018 8:29 pm
...
I think SS should cover the increase in medical costs, AND, the costs of a basket of food. As near as I can tell (not retired yet) it does not do that. I think it should.
Otherwise I can't count on it as an inflation adjusted income.
Don't count on it. Don't think it should.

Congress decides.

Vote.

PJW

delamer
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### Re: How accurately can we measure INFLATION?

dknightd wrote:
Mon Apr 16, 2018 8:29 pm
delamer wrote:
Mon Apr 16, 2018 8:18 pm
dknightd wrote:
Mon Apr 16, 2018 8:04 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
I'll admit I did not read the whole list. Does the SS inflation adjustment at least keep up with the medicare premiums (and copays)?
Medicare premiums are prevented by law from increasing faster than Social Security payments for existing recipients.

So if your copays go up 10%, then you think the SS inflation adjustment should go up 10%?

What if the cost of your groceries goes up 5%; should your SS benefit go up 5%? Food is as much of a necessity as medical care.

Rhetorical questions obviously. Any inflation adjustment for SS will reflect an average change in prices across a variety of goods and services.
I think SS should cover the increase in medical costs, AND, the costs of a basket of food. As near as I can tell (not retired yet) it does not do that. I think it should.
Otherwise I can't count on it as an inflation adjusted income.
Again, an increase in costs is not the same as an increase inflation. If the pill that I take once a month goes from \$5 per pill to \$5.50 per pill, that is a 10% inflation increase. But if I now have to take 2 pills a month, my cost just went from \$5 a month to \$11 a month — or 120% cost increase.

So should my SS benefit go up 10%, 120%, or something else?

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

Don't count on it. Don't think it should.

Congress decides.

Vote.

PJW

dknightd
Posts: 1165
Joined: Wed Mar 07, 2018 11:57 am

### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 8:36 pm

Don't count on it. Don't think it should.

Congress decides.

Vote.

PJW
I guess for planning purposes I'll assume nothing, Which makes it hard to plan

Phineas J. Whoopee
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### Re: How accurately can we measure INFLATION?

Vote.
PJW

Topic Author
grayfox
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### Re: How accurately can we measure INFLATION?

There sure are a lot of measures of inflation. Two more:

1. Trimmed Mean PCE Inflation Rate from Federal Reserve Bank of Dallas

12-month PCE Inflation = 1.8% for Feb-2018 (CPI-U showed 2.2%)

2. Personal Consumption Expenditures excluding Food and Energy (chain-type price index)

Personal consumption expenditures price index

PCE and CPI Inflation: What’s the Difference?

Then there is this paper INFLATION AT THE HOUSEHOLD LEVEL from researchers at NBER
ABSTRACT
We use scanner data to estimate inflation rates at the household level. Households' inflation rates have an annual interquartile range of 6.2 to 9.0 percentage points. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods. Lower-income households experience higher inflation, but most cross-sectional variation is uncorrelated with observables. Households' deviations from aggregate inflation exhibit only slightly negative serial correlation. Almost all variability in a household's inflation rate comes from variability in household-level prices relative to average prices, not from variability in aggregate inflation.
This looks into how households perceive inflation. Maybe it can explain why so many people believe that inflation is higher than reported.

Article that discusses the paper What's the inflation rate? Depends who you ask. (Easier read)

“It’s possible some people think inflation is really high," said Kaplan, "because for them, inflation actually is high.”

I skimmed the paper. It appears to be saying that households inflation rates can deviate from the aggregate inflation rate by +4 or -4 percent. This almost sounds like Personal Inflation, which was brought up in this thread. E.g. when the aggregate experiences 4% inflation, 10th, 90th percentile households might experience 8%.

PVW
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### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 8:07 pm
PVW wrote:
Mon Apr 16, 2018 7:58 pm
...
I don't think I'm explaining myself clearly. I'm saying the inflation that matters is the change in value of the things you buy, not the change in your personal budget.

If you are investing your money to eventually purchase a 1932 Packard Eight Phaeton, then the change in price of that car is the only thing that matters. It doesn't matter that last year you didn't buy a vehicle. It doesn't matter what the average price index for pre war Packards is. The only thing that matters is the inflation of the things you buy.
Good. We agree. Inflation is a macroeconomic measure. It can inform one's personal choices, but it isn't designed to, and does not, give an indication about what one personally will spend.

I am not aiming these links at you individually, PVW. I include them for anybody else who may come across this thread.

Macroeconomics

Microeconomics

PJW
We don't agree. The macroeconomics definition of inflation is only useful for macroeconomists.

This is the one that matters,
https://www.bankrate.com/personal-finan ... tion-rate/

If you want to calculate CPI-PJW, here is a place to start
https://www.frbatlanta.org/research/inf ... mycpi.aspx

Oicuryy
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### Re: How accurately can we measure INFLATION?

Money is fungible | Abbreviations and Acronyms

bertilak
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Location: East of the Pecos, West of the Mississippi

### Re: How accurately can we measure INFLATION?

I think it all depends on how accurately (and precisely) you can define it.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Topic Author
grayfox
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Joined: Sat Sep 15, 2007 4:30 am

### Re: How accurately can we measure INFLATION?

Final conclusion: CPI, etc measure price level for some market basket. There are many market baskets.
12 month change is the change in price level of market basket.

Change in price level is not the same as the inflation rate.

Thesaints
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### Re: How accurately can we measure INFLATION?

The standard inflation index is a triple average of a price change: it is the average change in price of the average consumption for an average family.
Therefore, it averages the price of salmon in Juneau, AK and Mobile, AL. It averages the cost of dentures and the cost of pacifiers. Since the average family, on average, buys a new vehicle every seven years, it also contains the average cost of one seventh of an average vehicle, as well as the school expenses for one thirteenth of a 14-yo child.

Many BH complain that the 3 decimals value published every month does not reflect their own perception of price changes. The inflation value is not meant to do that. They rebut that the inflation data is therefore useless.
The expected value of a single dice toss is 3.5. You better not expect that result, though; it will never come up. Not a single time over a trillion trillion tosses. Is it useless information ?

abhikush
Posts: 7
Joined: Mon Jan 07, 2013 6:04 pm

### Re: How accurately can we measure INFLATION?

Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
Are the price changes in each category published independently? If so, is there a tool to calculate personal inflation by changing the weights for your personal situation?

delamer
Posts: 6707
Joined: Tue Feb 08, 2011 6:13 pm

### Re: How accurately can we measure INFLATION?

abhikush wrote:
Thu Apr 19, 2018 12:51 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
Are the price changes in each category published independently? If so, is there a tool to calculate personal inflation by changing the weights for your personal situation?
Yes, indexes are published for detailed categories. I don’t know of a tool to use those to create your own inflation rate.

And in any case, it would be retrospective. The CPI isn’t going to tell you anything about the future.

If you wanted to breakdown your personal past cost increases into 1) inflation versus 2) changes in consumption, then it could play a role.

abhikush
Posts: 7
Joined: Mon Jan 07, 2013 6:04 pm

### Re: How accurately can we measure INFLATION?

delamer wrote:
Thu Apr 19, 2018 1:58 pm
abhikush wrote:
Thu Apr 19, 2018 12:51 pm
Phineas J. Whoopee wrote:
Mon Apr 16, 2018 7:42 pm
dknightd wrote:
Mon Apr 16, 2018 7:26 pm
In my mind the biggest thing left out of most inflation figures is the cost of healthcare.
Healthcare costs seem to go up more than any of the inflation indexes.
And the older you get, the more likely you are to need healthcare
Healthcare is included in CPI. See for yourself.

You may or may not like its weighting, but it's in there.

PJW
Are the price changes in each category published independently? If so, is there a tool to calculate personal inflation by changing the weights for your personal situation?
Yes, indexes are published for detailed categories. I don’t know of a tool to use those to create your own inflation rate.

And in any case, it would be retrospective. The CPI isn’t going to tell you anything about the future.

If you wanted to breakdown your personal past cost increases into 1) inflation versus 2) changes in consumption, then it could play a role.
Yes, that is what I want to achieve i.e. get a sense of past rate of inflation using weights that are more applicable for me based on my current consumption. I will dig around the BLS website over the weekend to see what I can find.

Thesaints
Posts: 1718
Joined: Tue Jun 20, 2017 12:25 am

### Re: How accurately can we measure INFLATION?

abhikush wrote:
Thu Apr 19, 2018 2:04 pm
Yes, that is what I want to achieve i.e. get a sense of past rate of inflation using weights that are more applicable for me based on my current consumption. I will dig around the BLS website over the weekend to see what I can find.
But you don't need BLS at all! You know what you buy and how much you pay for it. At most, normalize for cyclical purchases.
What do you care about what an average American family spends for an average car, if you drive BMW coupes ?

delamer
Posts: 6707
Joined: Tue Feb 08, 2011 6:13 pm

### Re: How accurately can we measure INFLATION?

Thesaints wrote:
Thu Apr 19, 2018 2:08 pm
abhikush wrote:
Thu Apr 19, 2018 2:04 pm
Yes, that is what I want to achieve i.e. get a sense of past rate of inflation using weights that are more applicable for me based on my current consumption. I will dig around the BLS website over the weekend to see what I can find.
But you don't need BLS at all! You know what you buy and how much you pay for it. At most, normalize for cyclical purchases.
What do you care about what an average American family spends for an average car, if you drive BMW coupes ?
The CPI doesn’t measure how much you or the average American paid for a BMW or Honda, but the change in price for the BMW or Honda.

Thesaints
Posts: 1718
Joined: Tue Jun 20, 2017 12:25 am

### Re: How accurately can we measure INFLATION?

delamer wrote:
Thu Apr 19, 2018 2:19 pm
The CPI doesn’t measure how much you or the average American paid for a BMW or Honda, but the change in price for the BMW or Honda.
Actually, "CPI" stands for "Consumer Price Index". It measures monthly the average price of the average consumption for the average family. Inflation is the rate of change of CPI values.

abhikush won't get any useful information about his personal inflation rate from BLS. He knows what he regularly purchases and how much he pays for it; the BLS does not. For less frequent purchases, either they are small and they don't matter, or they are large and he will promptly find info about the current price of a BMW on the BMWusa website. Then, again, if he is not buying a BMW now, what does its current price matter ?