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Wed Dec 19, 2012, 07:23 AM

The fallacy of the "chained" CPI - it's chained to your paycheck!


The original CPI was designed to measure what a typical consumer pays for the things he/she wants to buy. If you change the definition to account for substitution effects, then it becomes a measure of the amount you actually spend, not what you would want to spend to preserve your standard of living. And if you start out spending your entire paycheck every month, and that paycheck never goes up, guess what, neither can the "chained" CPI. In other words, it stops being a measure of prices, and instead becomes only a measure of your income.

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Reply The fallacy of the "chained" CPI - it's chained to your paycheck! (Original post)
reformist2 Dec 2012 OP
unblock Dec 2012 #1
newfie11 Dec 2012 #2
reformist2 Dec 2012 #3
newfie11 Dec 2012 #4
HiPointDem Dec 2012 #5
Old Codger Dec 2012 #6
Selatius Dec 2012 #7
reformist2 Dec 2012 #8
Selatius Dec 2012 #10
reformist2 Dec 2012 #11
Egalitarian Thug Dec 2012 #9

Response to reformist2 (Original post)

Wed Dec 19, 2012, 07:33 AM

1. exactly!

part of the academic economist's rationalization for this is that if "inflation" is meant to measure ALL price increases in the economy, then labor costs should be reflected too. if everything went up by 5% except your paycheck, well then, not everything went up by 5%, did it? so for the ENTIRE economy, it went up by a bit LESS than 5%.

the problem with this, of course, is that the policy PURPOSE of inflation is to measure not price increases across the entire economy, but to measure price increases that consumers actually face. most consumers don't directly employ others, and so don't benefit from less inflation in labor costs.

the substitution effect in chained cpi measures not inflation, but the way people COPE with inflation when their paycheck doesn't grow as quickly as consumer prices.

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Response to reformist2 (Original post)

Wed Dec 19, 2012, 07:35 AM

2. How do they know what I am buying?

I see the examples of folks who were buying beef changing to chicken and then to cheaper things as chained CPI follows this.

How does CPI know what I am buying?

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Response to newfie11 (Reply #2)

Wed Dec 19, 2012, 07:57 AM

3. They just assume you just start buying the cheaper alternative.

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Response to reformist2 (Reply #3)

Wed Dec 19, 2012, 08:40 AM

4. Thanks for clearing that up

It still sucks!

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Response to reformist2 (Original post)

Wed Dec 19, 2012, 09:05 AM

5. kr

 

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Response to reformist2 (Original post)

Wed Dec 19, 2012, 09:10 AM

6. They already

Have it set up to not actually reflect the true cost of living, they omit, food, and energy including gas from the inflation index, we got a 1.7% increase for 2013, gas has fluctuated more than that for the last several years. Gas has actually inflated almost 300% or more over the last 10 years, food costs are tied to cost of transportation so that goes up along with gas prices...BUT none of that is counted as "cost of living" although that is one of the biggest expenditures by most of us.
Also it depends solely on the ability to find cheaper prices than we already pay which is a fallacy in itself as most of us are already shopping at he bottom in order to actually have enough to make it through the month.

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Response to reformist2 (Original post)

Wed Dec 19, 2012, 09:12 AM

7. If we recorded inflation the way Jimmy Carter's Administration did, we're looking at 9%.

http://www.shadowstats.com/alternate_data/inflation-charts

Methodology prior to 1980, under Jimmy Carter:



Methodology prior to 1990, under George HW Bush:

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Response to Selatius (Reply #7)

Wed Dec 19, 2012, 09:18 AM

8. I actually don't agree with that. A 9% avg rate since 2000 means prices would have tripled.


Prices have gone up - a lot in certain cases - but they haven't tripled since 2000.

I think inflation has been around 4-5% on average.

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Response to reformist2 (Reply #8)

Wed Dec 19, 2012, 09:42 AM

10. Energy prices have essentially tripled, though.

That's a huge component of a household's spending. In a country with an infrastructure built upon the assumption that energy is cheap and private vehicle ownership is the preferred method of travel, energy becomes a key component to most people's budgets.

The loaves of bread I buy used to be around a dollar back around 2000. They're at 2.50 or close now. While it's not an increase of three times, it's still pretty high. Meanwhile, people's wages have not kept up with that. Even if we took the George H.W. Bush methodology and not the Jimmy Carter methodology, a 2% "cost of living" raise from your employer isn't going to cover 5% or 6% inflation.

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Response to Selatius (Reply #10)

Wed Dec 19, 2012, 10:03 AM

11. Yes.

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Response to reformist2 (Original post)

Wed Dec 19, 2012, 09:28 AM

9. In the new tradition of exploiting the public's incalculable ignorance of all things numbery.

 

what this and all of the 'reformed' indices do is simply to remove the baseline by which to measure change. Inflation can never exceed whatever value they declare because they have only to change the value of comparison. The economic indicators can always be made to look rosy because all we have to do is limit the view to the last year (see all official reports on our economic recovery). Every 3 months we just cut out a large chunk of workers to be counted, so unemployment is always improving, and so on.

And they can do this because they know that there's always a sufficient number of sheeple that will nod their heads and, very seriously, bleat agreement.

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