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Posted: 4/17/2006 12:25:15 PM EST
Does anybody else think the gov't basket of goods is incomplete?

I think the goverment due to COLA trys to understate inflation.
Link Posted: 4/17/2006 12:28:03 PM EST
It doesnt matter much because the goverment has committed itself to fighting unemployment, since it sounds better in elections than fighting inflation, though the Fed seems to be able to keep inflation in check these days (according to the CPI).
Link Posted: 4/17/2006 12:28:56 PM EST
of course it does. it's some very tricky accounting that they use.
Link Posted: 4/17/2006 12:29:06 PM EST
Well CPI frequently EXCLUDES the "volatile" food, housing and energy sectors.

I.e. it is accurate if you are talking about a homeless person on a hunger strike.
Link Posted: 4/17/2006 12:32:46 PM EST

Originally Posted By AROptics:
Well CPI frequently EXCLUDES the "volatile" food, housing and energy sectors.

I.e. it is accurate if you are talking about a homeless person on a hunger strike.



Excluding the things you need most makes for a highly "spun" statistic.
Link Posted: 4/17/2006 12:46:20 PM EST
Of course it's fake.
Link Posted: 4/17/2006 12:47:59 PM EST

Originally Posted By SS109:
Does anybody else think the gov't basket of goods is incomplete?

I think the goverment due to COLA trys to understate inflation.


On the contrary, the CPI is commonly believed to overstate inflation, largely due to the substitution effect.

The basket they use is always going to be incomplete. People buy thousands of things in a year. The government can't measure all of that, so they use a basket of something like 200 items, which is probably a pretty good estimation of how prices are moving. But its always going to be just an estimation, no matter how they measure it.

BLS spends a lot of time/effort to make the CPI be a useful measure of price movements. The statisticians at BLS occassionally update their methodology, and they try very hard to avoid political bias in the process. They consult statisticians, demographers and economists from academia, from industry, from special interests (especially AARP) and from within the government as they make these updates. Politicians have more than once gotten their hands slapped for trying to interfere with what is commonly accepted to be an intellectually robust (albeit imperfect) process.
Link Posted: 4/17/2006 12:55:54 PM EST

Originally Posted By AROptics:
Well CPI frequently EXCLUDES the "volatile" food, housing and energy sectors.

I.e. it is accurate if you are talking about a homeless person on a hunger strike.


CPI never excludes those items.

Sometimes analysts look at the CPI without those items included, but the stats used in COLAs never exclude those items.

The reason analysts look at CPI without those items is because they are in fact volatile, your quotation marks notwithstanding. So looking at the non-volatile portions can sometimes provide a better indication of what is going on broadly in the economy, especially looking over short time periods. Analysts almost never exclude those items if they are analyzing long-term trends.

If energy prices spike for one month, its hardly cause to raise interest rates, but if they stay high for a number of months and/or prices are rising across the board, it might start to make sense to tighten monetary policy.
Link Posted: 4/17/2006 12:59:04 PM EST
[Last Edit: 4/17/2006 12:59:50 PM EST by The_Macallan]

Originally Posted By fight4yourrights:
Of course it's fake.


Yeah but it helps make those I-bonds I bought back in 2000 have higher earnings rates.



Link Posted: 4/17/2006 1:07:49 PM EST
tag
Link Posted: 4/17/2006 1:13:55 PM EST
Good to hear the CPI is so non-political. Maybe it is just where I live but I think inflation, especially in housing has been increasing a lot faster than 4%. It may be that housing is going down in other parts of the country compared to Colorado but if anything, I think real estate has been rising even faster in the Sun Belt and the coasts.

Link Posted: 4/17/2006 1:53:12 PM EST

Originally Posted By SS109:
Good to hear the CPI is so non-political. Maybe it is just where I live but I think inflation, especially in housing has been increasing a lot faster than 4%. It may be that housing is going down in other parts of the country compared to Colorado but if anything, I think real estate has been rising even faster in the Sun Belt and the coasts.



CPI does not include a cost of owned housing. All housing is factored in based on rental rates.

Here's the logic behind not including housing purchase prices:

1) You don't buy a new house every year, so the change in housing prices only affects people in lump sums.

2) CPI doesn't include investment purchases. If you think about your spending as divided into consumption and investment, your owned house is included as an investment. However, if you did not live in the house, then you would be able to rent it out, so the amount of rent you give up by living there represents the true cost to you of living in the house. (i.e. Your consumer half is renting the house from your investor half, at a market rate.)

In most markets rents have been increasing much more slowly than the cost of purchasing a house. Since CPI only includes rents, it doesn't rise as fast as the rising home prices would indicate. But, again, as an investment, rising home prices shouldn't affect the CPI any more than rising stock prices should.
Link Posted: 4/17/2006 6:58:54 PM EST
Makes sense about the housing, as interest rates fall, housing prices rice because so many people buy a house based on the payment size than the actual price.

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