Yal writes:
Thanks !
Yal | 05.08.08 - 11:13 am | #

Anonymous writes:
Positive inflation can be found in recent retail sales reports today, which are increasing as a result of inflation, which thus increase EPS, which induces consumer inflation and corporate EPS growth. This is The New American Dream and this bubble from stocks will be at best irrational!
Anonymous | 05.08.08 - 11:20 am | #

PerhapsMaybe writes:
Anybody get a chance to see Peltier (Buffett's Real Estate CEO) on CNBC this morning?

http://www.cnbc.com/id/24518179

I missed it. Is he calling a bottom? Article (besides the title) doesn't really say. Somebody here at the office was trying to say that Peltier said the effects are just reaching commercial real estate.
PerhapsMaybe | 05.08.08 - 11:21 am | #

REBear writes:
from the NYT graph, what is a "full service resturant meal"? The chinese resturant near work no longer serves soup with meals. Is this 'new' meal really full?
REBear | 05.08.08 - 11:27 am | #

cahuenga writes:
CPI is deliberately suppressed, most likely to thwart COLA to social security.

I mean really, what other rational explanation could there be for the ridiculous hedonic adjustments, product replacements, “volatility” exclusions, etc., etc.
cahuenga | 05.08.08 - 11:39 am | #

RE writes:
My biggest problem with the CPI is what is hidden the best which is hedonics and to a lesser but still significant degree substitution.

These are areas that are hardly ever covered in the media and have a significant impact on the CPI measurement. They are the black art of the CPI.

A sample in hedonics is the effect of quality improvements on productivity. Is a car with better headlights increasing NET productivity if the freeway I am sitting on is extremely congested? Is it therefore justified to reduce the price of the car and by how much?

Similarly in computers, how much more NET productivity does a improved GUI provide? How much should be attributed to the network and how much to the CPU if any? Is the measurement task completion or increased knowledge?

HOW exactly is this evaluated?

So many questions, so few answers...
RE | 05.08.08 - 11:39 am | #

DonKei writes:
The CPI is nice, but meaningless, when trying to ascertain how valuable or worthless the currency is becoming--which should be the fed's primary concern.

The fed should use a basket of commodities, and a basket of currencies (not linked to the dollar) to set its monetary policy. The CPI, showing prices of goods after all the ever changing productive inputs--like soup w/ a chinese meal--can't begin to measure inflation, i.e., the value of the currency relative to the output it is intended to represent.

When we were on the gold standard (pre-1971), currency values were easy to measure. If currency was overvalued (there was too much of it), gold was flowing out of the treasury, and we knew we had, or would have, inflation. Now we look at things like "full-service restaurant meals". Jeez.
DonKei | Homepage | 05.08.08 - 11:39 am | #

Anonymous writes:
By coming here to CR, I feel I am your bitch, and I'm not sure how I feel about that. Do you have more stories? Is Tanta up yet?
Anonymous | 05.08.08 - 11:41 am | #

Anonymous writes:
“It was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess." – Fed Chairman Alan Greenspan before the Economic Club of New York, New York City December 19, 2002 "Issues for Monetary Policy"
Anonymous | 05.08.08 - 11:48 am | #

Anonymouse writes:
CR,

Since this is the first post of yours I can recall directly relating to CPI calculations, would you care to give your opinion on if and how much CPI (ex nothing) is understated?

TIA
Anonymouse | 05.08.08 - 11:53 am | #

Bowie writes:
If the OER component of CPI is simply the rental value of owner occupied homes, why is there a separate rental costs component? Why not just a combined "housing" cost component that represents rental costs (including the hypothetical costs of owner occupied homes).
I must be missing something. Can someone help me. Thanks.
Bowie | 05.08.08 - 11:54 am | #

barely writes:
te walmartz: ["The economy continues to get tougher and the 'paycheck cycle' is more pronounced for customers than in past months," Eduardo Castro-Wright, head of Wal-Mart's U.S. store division, said in a statement.

"As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past."]

Sebastian, is this another BULLISH sign of slow growth, as consumers kick like hell to struggle to stay above the water line? When do they go under?
barely | 05.08.08 - 11:55 am | #

Charles II writes:
Tim Duy might be right from a purely methodological standpoint: the home buyer is paying the premium over what he could rent the house for because s/he sees it as an investment and investment is not measured by the CPI.

But statistics need to be anchored in reality. The collapse of the savings rate, for example, could mean that we've all become irresponsible spendthrifts. Or it could mean that real wages are somehow being miscalculated. The rise in bankruptcies could be because there's not enough moral stigma against it... or it could be because people don't have enough money. Americans might work longer hours (versus the 1960s) because we hate our spouses... or it could be that we're desperately trying to stay afloat.

When one looks at the broad mass of statistics describing Americans, we look like a people getting poorer and poorer, at least in the lower four quartiles.

And a factor that would provide a unifying explanation is a miscalculation of the inflation index.
Charles II | Homepage | 05.08.08 - 11:57 am | #

km4 writes:
Some useful gas/housing GDP sensitivity analysis from a new Milken report:

- Each 10 percent decline in housing sales correlates in an 0.8 percent decline in real GDP.
- Each $10 increase in oil price reduces real GDP by 0.2 percent.

Also The U.S. is in recession, and the California budget deficit is spiraling from $9-billion to $20-billion (Milken)
km4 | 05.08.08 - 11:58 am | #

Anonymous writes:
The cost of protecting corporate bonds from default rose to the highest in two weeks in Europe and Asia as record oil prices triggered investor concern that accelerating inflation will hurt company earnings.

Credit-default swaps on the benchmark Markit iTraxx Europe index of 125 investment-grade companies jumped 3.75 basis points to 78.5 today, the highest since April 24, according to JPMorgan Chase & Co. The Markit iTraxx Japan index increased 8 basis points to close at 79, Morgan Stanley prices show.
Anonymous | 05.08.08 - 11:59 am | #

Fast Eddie writes:
Great graphic but where are the taxes - state, local, federal, excise, property, etc., etc., etc, & etc.?
Fast Eddie | 05.08.08 - 12:02 pm | #

NorkaWest writes:
All this talk about rental equivalence versus house prices is a diversion, sorta like the magician's smoke and mirrors while he performs his trick.

As cahuenga, RE and others have pointed out, the real problem is what they do with the price numbers once they have them (hedonics, substitution, etc.).

It makes historical comparisons of "real" time series statistics difficult or worthless. Is a 1945-1985 recession the same thing as a 1986-2008 recession? Is it comparing apples to oranges?

In the 1930s, political and economic leaders were flying blind, but they knew it.

In the 2000s, political and economic leaders are still flying blind due to politicized data, but they believe their bogus statistics so they will tell you with exacting certitude what they is "know" is happening in the economy.

We then get to listen to a big chorus of "Hoocouldnoode" when reality catches up with the numbers.
NorkaWest | 05.08.08 - 12:04 pm | #

Anonymous writes:
To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call "inflation" the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying "catch the thief." The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.

Ludwig von Mises
Anonymous | 05.08.08 - 12:08 pm | #

Estragon writes:
The key point here isn't whether BLS CPI is "accurate". The real issue is that it only measures consumption goods, not assets (the price of which is really the option premium for a call on future consumption).

Removing the investment component of housing is correct in calculation of the dollar value of current consumption, but the pricing of the investment component may tell us something about expectations for the future dollar value of consumption.
Estragon | 05.08.08 - 12:12 pm | #

Ranger writes:
The question is do we want to measure inflation of goods we want to buy and have utility to us or do we want to measure the lowest price substitute which may have less utility. I think the BLS stopped measuring true inflation years ago.
Ranger | 05.08.08 - 12:14 pm | #

Rob Dawg writes:
...The debate is whether or not the Fed should include assets prices, such as home prices...

There's the problem. By the same logic food prices should not be included. I mean after all you go to the store and buy a weeks worth of food and go home. Do you eat it? No, you put it in refrigerator and thus it becomes a personal asset. What? Why are you all looking at me like that? I'm not crazy, I'm just using Dr. Duy's methodology to make him look foolish. The house you live in is not an asset and therefor should not be excluded from CPI anymore than the price of bread should be excluded just because there are other people who are speculating in the grain markets.
Rob Dawg | Homepage | 05.08.08 - 12:15 pm | #

ipodius writes:
Wow, that was as cogent a post as I've seen on the subject. Every time someone brings it up, I am taken back to a grad school macro course (also where the prof was involved in the re-do of the Panama Canal, but that's a whole different thing) where we dissected the CPI components including the equivalent rent in sickening detail. We also discussed how to do it better and no one provided a compelling argument that would alter this. This post is pretty much a synopsis of all that work/discussion.

Again, you can argue with the basket (I have thoughts about some things that are in there), the fluff for extra features/cost, and some nitpicking on the methods, but in the end you're probably going to have something close unless you have some political ax to grind. And I might add that the discussion of "average" was spot-on, as all of us and what we see aren't "average" for the most part so the inflation we experience is different. But should the index be skewed to that? Should policy be?
ipodius | 05.08.08 - 12:16 pm | #

Dr. (F___K ) Know writes:
OT: Boom in 'Dark Pool' Trading Networks
Is Causing Headaches on Wall Street

http://online.wsj.com/article/ SB...=googlenews_wsj

The pools are booming in popularity as big institutional investors look for ways to trade blocks of stock without triggering ripples in the share price, as can happen on traditional stock markets such as the NYSE and Nasdaq Stock Market. But all that darkness is causing nightmares on Wall Street.


Yo No Hablo Español
Dr. (F___K ) Know | 05.08.08 - 12:16 pm | #

Average Joe writes:
I think the FED is stuck since they know that they are not creating inflation by printing money. So the inflation could only be happening by an increase in the supply of credit. But credit is no longer increasing theoritically, and since they know how much they are printing, they assume that the destruction of credit that is happening will eliminate money and thus inflation.

The problem is that they are preventing the destruction of money because all the losses are in the financial sector. Average Joe doesn't have less money with the housing crunch (if he's still employed), in fact many people have more money since they have defaulted and are living free, are still only paying teaser rates, found a nicer place for less rent, or have bought a house cheaper than they could have last year. Aside from job losses, money in the consumer's world is still there. The collapse of the financial world should have sent the price of new money skyrocketing. Interest on home loans should be 10%.

But this would cause a collapse in new lending and thus a further collapse of home prices and then further pain to financials and so on. So they prevent the losses from the housing bubble collapse from actually occuring and sucking the money and credit out of the economic system and offseting inflationary pressures.

They don't fear inflation because at any time they can step aside and suck huge amounts of cash and credit from them market by removing the shell games they've been playing.
Average Joe | 05.08.08 - 12:17 pm | #

pclema writes:
So now that the bubble has shifted from real estate to commodities, how long will it be before they calculate some sort of "owners equivalent rent" for oil and corn. Let's calculate what the "real value" would be if people weren't buying them to protect against the falling dollar. Of course the core numbers already remove food and energy. This whole argument of excluding house prices because that includes an "investment" component is ridiculous.
pclema | 05.08.08 - 12:18 pm | #

pclema writes:
The ultimate end point will be to define inflation as wage increases. No worries!
pclema | 05.08.08 - 12:20 pm | #

ipodius writes:
I mean after all you go to the store and buy a weeks worth of food and go home. Do you eat it? No, you put it in refrigerator and thus it becomes a personal asset.

You've twisted the argument there Rob, although it was a nice try. When you buy your groceries, you do not expect to sell them later on. You put them in the fridge expecting to consume them. They have a cost, and then the good is used up. A house is NOT "used up" no matter how much you try to put that argument out. You expect to sell it some day and get the equivalent, inflation adjusted, back.

Furthermore, the calculation about a house should include equivalent rent. You do this here in the comments all the time when you say "a house should cost x times median salary". What you are doing is expressing the housing cost in terms of equivalent rent. So the economic impact is what is being teased out here. You'd have to live somewhere and pay rent. So fine, the economic impact is the rent you would have been paying, but are now "paying to yourself". Anything above that is investment and not counted. That may or may not work out but the equivalent rent did because it was consumed.

As I said, after studying that component in gross detail, I don't have an issue with it.
ipodius | 05.08.08 - 12:22 pm | #

tg writes:
"Mr Steil points out that cash equities growth is to an extent constrained by the number of companies coming to stock markets - a number that has dwindled in recent months amid economic and market gloom.

Yet exchanges with a derivatives business avoid - or at least can hedge against - this because the growth potential of derivatives contracts is limited only by an exchange's ability to come up with innovating products.

"Derivatives exchanges have great growth prospects for precisely this reason. You invent your supply," Mr Steil says."

http://us.ft.com/ftgateway/ super...720082256412915


Making bets, booking their fees and causing inflation for the rest of us. If they are wrong they can always double down.
tg | 05.08.08 - 12:22 pm | #

Dr. (F___K ) Know writes:
Re: "It implies that the construction of monetary policy is flawed. In effect, the BLS is unfairly criticized for the Fed’s policy error."

>> Every model out there today is either broken, flawed or false and misleading!

Beyond the Banking Crisis: A Strategy Crisis

http:// discussionleader.hbsp.com...cro_crisis.html

Competitive advantage is fundamentally about making markets work less efficiently. One catastrophically effective way to do that is to hide and obscure information – to gain bargaining power relative to the guy on the other side of the table.

In finance, those lessons achieved a profoundly perverse apotheosis: it was, ironically enough, Wall St itself that finally succeeded in making markets fail faster, harder, and more intensely than anyone dreamt possible.

How? By building what Nouriel Roubini and Paul Krugman have aptly called a shadow financial system: a parallel value chain created to actively obscure and trap information.

The shadow financial system reached its inevitable - and absurd - endgame with the rise of dark liquidity pools – trading networks set up to explicitly and actively hide information, and prevent true price discovery from taking place. A healthy financial system, of course, needs dark pools about as much as a fish needs a bicycle.

Dark pools, the shadow system - all these elaborate ruses of orthodox strategy, of course, have gotten finance players nowhere but directly into deep losses and strategy decay. Witness a once-proud Bear Stearns catastrophically blown up with frightening speed and ruthless precision.

So what do we do when orthodox strategy has taught even the market-makers to subvert markets – but still no advantage is to be found? Is the answer simply more regulation? Nope. No amount of regulation can lock interaction down when I can trade from on any beach in the world from my iPhone - and no amount of regulation can put advantage back into broken value chains.

There’s only one real answer: rethinking strategy itself. A world of cheap, abundant, always-on interaction, where value is shifting to the edges, demands a fresh understanding of what’s truly strategic and what’s not.
Dr. (F___K ) Know | 05.08.08 - 12:22 pm | #

crispy&cole writes:
In a new report, the Milken Institute says the recession has arrived nationally and especially in California.

The Southern California think tank says Thursday that if the U.S. economy has the sniffles, California’s economy has a full-blown cold ? with all the associated aches and pains.


According to the report, “The Economic Outlook for the United States and California: Slow Growth or Recession?” the combination of a housing market correction, soaring oil prices, a weak labor market, overextended consumers and credit markets turmoil outweigh any gains seen in the export markets.




http://www.centralvalleybusiness...es/001/? ID=8673
crispy&cole | Homepage | 05.08.08 - 12:23 pm | #

donna writes:
Yeah, I'm a bit tired of the "house as asset" thing myself. I bought my house to live in. I knew we were in trouble when a friend bought a big house "for their retirement", with plans to sell it as their retirement money. That was when I realized we were screwed.
donna | Homepage | 05.08.08 - 12:23 pm | #

Anonymous writes:
With comments like this:

>>You expect to sell it some day and get the equivalent, inflation adjusted, back.>>

And people wonder why we have "issues"

Hold and Hope....works for the I-banks too.

What a fool....

Ciao
MS
Anonymous | 05.08.08 - 12:26 pm | #

Anonymous writes:
Take a 7 year war, fund it with 2 trillion dollars of borrowed money, which gets deposited in a fractional reserve banking system based on a fiat currency and there is going to be inflation just about everywhere. The BLS is a government lackey and the FED is the enabler.
Anonymous | 05.08.08 - 12:26 pm | #

Chris writes:
If currency was overvalued (there was too much of it), gold was flowing out of the treasury, and we knew we had, or would have, inflation. Now we look at things like "full-service restaurant meals". Jeez

Well the reason the dollar went off the gold standard was that in the early 1970s all the gold was fast flowing out of the country and Nixon had to shut the gold window to stop the exodus until there was none left.
Chris | 05.08.08 - 12:37 pm | #

Average Joe writes:
"Take a 7 year war, fund it with 2 trillion dollars of borrowed money, which gets deposited in a fractional reserve banking system based on a fiat currency and there is going to be inflation just about everywhere."

I think Anon has a good point.

Generally speaking when people borrow money they do so to invest and create wealth in the form of assets or increase the value of existing assets, example: good roads to the countryside increase the value of the land since now people can live out there.

When you create money to create assets, then you get more money but you also get a greater supply of things to spend it on, preventing inflationary pressures.

So if the money in this war were to create a viable country which became an oil producing, consumer producing, functioning democracy, then there would be an increae in the value of assets to offset the increased money to buy them. But this war turned out to be a massive bust. The trillions spent didn't create anything better. Now there is all this money out there but no value added.
Average Joe | 05.08.08 - 12:38 pm | #

Dr. (F___K ) Know writes:
. . . [A]s William Randolph Hearst taught us a long time ago, the goal is to sell newspapers, not to report the news.
There isn’t media bias in favor of Hillary (my friend Jeff is the first to point that out). Nor is there media bias in favor of floods. There’s media bias in favor of drama.

Most of us are inclined to believe that government officials, doctors and the media are making an effort to tell us the truth. Actually, just like all marketers, they tell us a story.

http://www.buzzmachine.com/

No Hablo
Dr. (F___K ) Know | 05.08.08 - 12:39 pm | #

Chris writes:
Inflation numbers are very like earnings numbers. You can get almost any number you want depending upon what you put in or take out of your calculations.
Chris | 05.08.08 - 12:43 pm | #

Ranger writes:
What about consuming a suit.........I may have the same suit for 5 to 6 years.........that's an asset as much as a house is an asset.....again, the CPI has turned into a measurement of cost of living not inflation!
Ranger | 05.08.08 - 12:47 pm | #

Lucky Jim writes:
ipodius, I see your point, but it seems to me that the definition of what is an asset versus a consumption good is arbitrary and consists mainly as defining long-lasting things that go up in price as assets and those that don't as goods. What about a new car, for instance? Most people buy them with the intention of later selling them and buying another. But everybody knows cars don't increase in value, so they're goods, without an "investment" component. Likewise a textbook. Most of us buy them and then sell them later, and the damn things last forever, but none of us expects their value to increase, so they're not "investments". What, really, is an investment? If we define all the things on whose prices we periodically speculate out of the CPI, then it seems to me we'll understate price increases in boom times and overstate them during busts.
Lucky Jim | 05.08.08 - 12:50 pm | #

ipodius writes:
What about consuming a suit.I may have the same suit for 5 to 6 years.that's an asset as much as a house is an asset.

A properly built suit is an investment, not a consumable! Egad. What has happened to humanity???!
ipodius | 05.08.08 - 12:52 pm | #

shargash writes:
Allow me to wax cynical for a moment. Whatever its original intent, the CPI now serves two purposes. The first is to suppress payments for cost of living adjustments. The second is to allow for unfettered fiat money creation.

To accomplish the latter purpose, the Fed & government define inflation as price increases and measure it through CPI. They then can take whatever steps humanly possible to make the CPI look small (e.g. supressing wages). This allows them to inflate the money supply at will while claiming all the while that "inflation is under control."
shargash | 05.08.08 - 12:53 pm | #

Ranger writes:
Have you ever heard of an instance where the BLS has imputed the quality of a good to have fallen and therefore raised the price?
Ranger | 05.08.08 - 12:53 pm | #

Anonymous writes:
IT just gets better the level of sheer lunacy here:

>>A properly built suit is an investment,>>

So you're going to sell that suit for a profit??? since it IS and investment..and since you do not buy "investments" to loose money on....well may be you do.

Good luck with that.....

Ciao
MS
Anonymous | 05.08.08 - 12:56 pm | #

Yal writes:
DSL -12% new low today
Yal | 05.08.08 - 12:56 pm | #

Ranger writes:
Well, do you think you're going to sell that house for a profit?
Ranger | 05.08.08 - 12:57 pm | #

Troy writes:
A house is NOT "used up" no matter how much you try to put that argument out. You expect to sell it some day and get the equivalent, inflation adjusted, back

An important component of the house purchase is the title to the land itself. Georgists like me want to separate these two transactions by instituting land value tax high enough that land transactions are not lump sum investments but rather taxation paid to the local administrative body.

(Given sane government this land value tax could & should replace income, sales, and even gift taxes.)
Troy | 05.08.08 - 1:00 pm | #

k harris writes:
Rob Dawg -- "I'm just using Dr. Duy's methodology to make him look foolish."

Yep, making Dr. Duy look foolish, or trying to anyhow, is what you were doing. As is often the case, efforts to serve one objective get in the way of other objectives, like getting the analysis right.

Food is not a durable good. There is not much of a resale market for food items owned by consumers. There is a market for investing in food to be delivered in the future, but not one item in that market is packaged for deliver to the consumer market. Try to get a bank loan for food. Try to use the stuff in your pantry as collateral for a loan. Figure out why the tax code needs a one-time exemption for capital gains on the sale of a primary residence if primary residences aren't an investment. I'm sure you understand all this, which makes me think your desire to "make him look foolish" has pretty much run you brain off the tracks.

Tell you what. Go read "Money Magazine" from back before the housing bubble. Read BusinessWeek. Read Forbes. Read personal investment books. From before the bubble. You will run into plenty of references to primary residence as an investment. You can disagree with all those publications, but who cares? You don't get to declare whether housing is an asset. You aren't a market force or a complex of human tendencies. You're just some guy whose making up rules and definitions. If lots of other people thought they were investing in an asset when they bought their homes - and there is plenty of evidence they did (even among comments here) - then they were investing in an asset.

Being facetious is fun and all, but we need to stop pretending that facetiousness is analysis. It's just a way to make the other side look bad without really addressing the other side's arguent.
k harris | 05.08.08 - 1:00 pm | #

peanutbutter writes:
Thought this was interesting:
http://www.washingtonindependent...raud-fueled- the
peanutbutter | 05.08.08 - 1:01 pm | #

pclema writes:
"Have you ever heard of an instance where the BLS has imputed the quality of a good to have fallen and therefore raised the price?
Ranger"

Yeah, I've wondered about that too. It seems, especially in the case of many services, quality has decreased. How about airfares being adjusted for increased time sitting on the runway, no food, no ticket jackets in the case of Delta (Ha, ha).
pclema | 05.08.08 - 1:01 pm | #

sterlingerl writes:
CNN is reporting war has beeen declared by Lebanon against Hezbollah. Too early to say if it will amount to anything but could be worth watching. Seems to me there were spikes in gold (750-ish) and oil (to almost 80) in the summer of 2006 (the July War).

http://en.wikipedia.org/wiki/ 200...006_Lebanon_War
sterlingerl | 05.08.08 - 1:01 pm | #

anon writes:
CR or any other housing experts here,

On another blog, it was posted for Orange County, CA the total stock of homes is roughly 1 million (NY Fed), and the total sale transaction in the last 20 yrs also adds up to ~1 million transactions. It could mean on average each house has been transacted once in the last 20 yrs. Yet, not every house in the total stock has been exchanged, not in my neighborhood of baby boomers at least. So it could be argued that the residents in the county basically have been trading houses at the margin with great velocity, under low-rate, easy-credit environment to prop up prices beyond its fundamental justification (Median income:Median house ~ 75K:500K/Q108, 75K:650K/Q307) to extract wealth.
anon | 05.08.08 - 1:02 pm | #

Matt writes:
The definition of consumer price is the cost of supporting oneself if one owned none of the capital.

It is the interest rate on an infinite term bond, measured in some value unit that has small variance relative to the goods measured.
Matt | 05.08.08 - 1:02 pm | #

ipodius writes:
Lucky Jim, I admit it's a bit arbitrary, or can seem so. But in order to produce something meaningful you have to pick some line in the sand. On housing cost, though, it seems fair that the way to look at the economic impact is equivalent rent...something everyone would be paying anyhow irrespective of circumstances.

And that point that you make is why housing is treated this way. It isn't "consumed" in the classic sense. It doesn't "depreciate" in the classic sense either. So how do you measure the economic impact that accounts for all the variants across the housing spectrum? I think rent is the only way you can.
ipodius | 05.08.08 - 1:04 pm | #

Troy writes:
Well, do you think you're going to sell that house for a profit?

Land purchases are generally (say, 7 years out of every decade) an excellent inflation hedge. Hell, even the house itself is, given that people pay for the replacement cost for a house, not the original construction cost, is an excellent inflation hedge.

I'm looking to buy a house in either Fresno or Las Vegas now. Houses in my price range in these two locales are tanking at about $1,000 per day at the moment, but just as trees don't grow to the sky, valuations will find a bottom eventually.

ALL of my friends did very well buying in the mid-90s, me, I was stuck in Japan so missed that particular buying opportunity.
Troy | 05.08.08 - 1:05 pm | #

TCA writes:
So you're going to sell that suit for a profit??? since it IS and investment..and since you do not buy "investments" to loose money on....well may be you do.


No. In the case of buying a suit for an interview, the suit is an investment in hopes that it will lead to a good impression on your new boss and will hopefully lead to a new job and the benefits that imparts.

An investment is simply risking something of present value in hopes of reaping future reward. The money paid for a suit has value. The future reward is the new job.

And people don't "loose" money on investments, but they do sometimes "lose" money on them.
TCA | 05.08.08 - 1:05 pm | #

tyaresun writes:
I have always wondered why they have not used the revolutionary OER idea for other things. For example, think about every time a husband and wife have sex. Like OER why don't we price that like what a trick would cost on the street, sum up the entire thing and add it to the GDP. It will also have a countercyclical effect on the GDP.
tyaresun | 05.08.08 - 1:05 pm | #

Patrick writes:
so the real question here is whether wine is considered a consumable or an asset? Do we consider box wine a consumable while high end is an asset?

We have all kinds of wine collectors, many do not necessarily anticipate selling the wine later, but I wouldn't be surprised if they insure their collections and increase their value over time. After all, what if a wino raids their cellar?
Patrick | 05.08.08 - 1:06 pm | #

Sebastian writes:
Chris said: "Inflation numbers are very like earnings numbers. You can get almost any number you want depending upon what you put in or take out of your calculations."

Tim Duy actually gave me an idea, using yourself as a "consumer" to see what happens. So how about this:

Let's say that today I'm buying a $200k house, with 5% down and a 5.75% FRM. Financing $190k the P&I is $1108.79.

Now time-shift forward a few years when that same house is now $300k.

Leaving out all other transaction costs and equity build-up from mortgage payments for the sake of simplicity, if I were to sell my house and buy another similar one for $300k, what's my housing inflation "experience"?

Well, I'd roll my $110k equity ($300k sale price of my old house minus the $190k original mortgage) into my new $300k house, financing $190k again. If I get the same interest rate as on my old loan, my mortgage payment is exactly the same.

Yes, you can argue that I'm starting over with a new 30-year mortgage, but in terms of the difference in what I'm paying for shelter now, did I experience any housing inflation at all? Or did my homeownership essentially insulate me from housing inflation (except for whatever the difference might be from insurance and taxes)?


Sebastian
Sebastian | 05.08.08 - 1:07 pm | #

Ranger writes:
A house may or may not be used up during its use. You may or may not be able to sell it for any value (what you expect is not relevant). My suit may or may not be used up either and I may or may not be able to sell it to someone in the future.
Ranger | 05.08.08 - 1:08 pm | #

tg writes:
Real estate ie land for all intents and purpose will be there forever but the house is a consumable good with a slow rate of decay. A house is no diffferent than a sweater. Imagine if sweaters ran up in value. We could all put granite buttons on them. Let's say then our government created tax breaks for it. If banks then lent fancy loans and securitize them, we would have a sweater bubble. People would then say sweaters are not a consumable good but an asset.
tg | 05.08.08 - 1:09 pm | #

Kicker writes:
As I said, after studying that component in gross detail, I don't have an issue with it.

My nit-picks..

- The Boskin Commission re-jigger of the CPI in '95 was mostly driven by politics. The same with Japan's recent changes in their CPI. Political jiggering of CPI stats are never a good sign.

- Quality change bias is fine as long as customers still have the option to buy the inferior goods. I can't opt-out of buying a car with air-bags or staying with Windows XP. Essentially those without real wage increases are forced to do without.

- The CPI doesn't reflect that information decays in value. Sure, that book on Windows XP is selling for 10% of what it was in 2000 but the value isn't the same.

- Why the price differences if substitutes are really equivalent? It's very easy to hide a declining standard of living in "Substitution bias". Fish to beef, beef to pork, pork to chicken, chicken to tofu, tofu to insects, insects to soylent green. No inflation!

But, to Ipod's point all of them together only subtract a point or so from the CPI.

The real problem is with the Federal Reserve. Nobody was saying we needed to crank interest rates to avert the stock market and housing bubbles but once they pop...
Kicker | 05.08.08 - 1:09 pm | #

praetorian writes:
I'm not an expert and I don't play one on the internets. What I will say is that any measure of inflation that ignored what happened in housing over the last decade is preposterous.

Thems ain't fancy words, but thems right.

Cheers,
prat
praetorian | 05.08.08 - 1:10 pm | #

novice writes:
That graphic is great, always wondered what's in the basket. Like many I always thought, incorrectly, the BLS is underestimating CPI on purpose.

On a slight tangent, treasury set the I-Bond rate for the next 6months at 4.84% annual rate. INteresting thing is all of it comes from the so called "inflation component." My point of this is that the Feds (and the treasury) , despite their tame inflation talk over the last several months during the steep rate cuts, knew all along inflation is rocketing. Perhaps they colluded with the treasury to limit the I-bond maximum to $5K per person (used to be $30K prior to that) back in Dec in anticipation of the new rate to be set on May 1st. Becasue they knew with their high rate the investor will flock to I bonds and that will cost the Govt a lot more compared other debt instruments.

Very tricky folks indeed!
novice | 05.08.08 - 1:12 pm | #

Dr. (F___K ) Know writes:
There are huge shocks rolling across the global economic landscape. Here are just a few. Food prices are skyrocketing. The financial system is melting down. Energy, of course, is more and more toxic, and costly. We are all, make no mistake, dancing on the precipice of economic cataclysm.

It is the obligation of radical innovators to create new value by solving these problems - or cede capital and resources to those who can.

But today's revolutionaries are sheep in wolves' clothing. They're lost in the economically meaningless, in the utterly trivial, in the strategically banal: mostly, they're cutting deals with one another to...try and sell more ads. That is, when they're not too busy partying. .

I hate to say it - but this abdication of responsibility is an act of moral bankruptcy and moral hazard. It's a betrayal as deep, perhaps, as that of Wall Street. Not just of those across the globe who are suffering - but also, in the sterile language of yesterday's economics, of their own limited partners and shareholders.

http://discussionleader.harvardb...ness.org/haque/
Dr. (F___K ) Know | 05.08.08 - 1:15 pm | #

SweetHomeKilla writes:
From the article-

"The core inflation rate does have a purpose. Its movements help Federal Reserve officials base interest rates on underlying price trends, instead of being overly influenced by food or gas prices, both of which can be volatile."

What a load of bullshit. If food and energy are too volatile, then why not use a moving average?

The excuses of the mainstream shills and many people on this site make me want to vomit.

Nobody is discussing the weightings of the CPI. Who cares about OER when the costs of living for the average american is rising by double digits because of increases in food prices, energy prices, and medical costs.

And if we are going to do hedonics and substitution, then we should also consider rentals being taken off the market to be flipped, taking away locations that are close to ones job or school. If you can't find a place close by because they have all been bought by flippers, do they consider the rent to have increased because of the decreased value due to further driving distances, hell no. The adjustments are all one sided, anyone who trys hard to defend these numbers is at best an apologist.
SweetHomeKilla | 05.08.08 - 1:15 pm | #

ipodius writes:
chicken to tofu, tofu to insects,

no no no kicker! the vegetarians will never go for that. tofu is it's own thing, and i think the substitute would be, ummm...perhaps dirt or compost. which i'd rather eat than insects, btw.

excellent post though! i think that was the point of what we did. after we all argued about everything and tweaked it, we ended up with nothing that would be statistically significant from the original. Just tweaks that may work out better with what we saw as continuing trends.

but i'll still stick with "suit as an investment" theory :)
ipodius | 05.08.08 - 1:17 pm | #

Angry Saver writes:
The CPI doesn't remotely reflect my cost of living.

My largest expenses are: taxes (fed, state, employment, sales), inflation, interest (mortgage only), insurance and college tuitions.

CPI doesn't cut it as a cost of living measure for me.
Angry Saver | 05.08.08 - 1:18 pm | #

TCA writes:
A house may or may not be used up during its use. You may or may not be able to sell it for any value (what you expect is not relevant). My suit may or may not be used up either and I may or may not be able to sell it to someone in the future.

As with all things, intent is key. Did you buy that house to live in because you liked it and could afford it, or did you buy it simply to hold for a while and sell for a profit in the future. One is clearly a financial investment and one may or may not be. If I bought the house to live in and raise a family in, it still may be an investment in my family (insuring my children go to a good school and grow up in a safe location), but making money was not a primary motivation.

None of us acts in such a way to make our lives more difficult in the future (at least not consciously). We are always trying to organize our time and money to meet our most critical needs and wants (which vary from person to person). In that sense, we are almost always investing in one way or another. Even going to work every day is an investment in our time. We are foregoing time we would rather spend doing something else in order to work for our employer and receive a future paycheck.
TCA | 05.08.08 - 1:18 pm | #

Shnaps writes:
OT:

Your glurge du jour: from howispentmystimulus.com
Shnaps | Homepage | 05.08.08 - 1:20 pm | #

Dr. (F___K ) Know writes:
Today's crop of investors and startups are perhaps even more economically autistic than megacorporations. Too many are willfully blind to today's deepest and most essential strategic truth: that the path to radical value creation isn't cutting more deals (dude, high-five!!) - but in rebuilding a flawed, false global economy: one which actively transfers wealth from the poor to the rich, from the sick to the healthy, from productivity to cronyism.
Dr. (F___K ) Know | 05.08.08 - 1:20 pm | #

mock turtle writes:
under the thread ...feldstein misleading stats

slg thanks for the link to phillips article in the st petersburg times...excellent

sonic seuss and spencer...thanks for the stats on that thread...smart
mock turtle | 05.08.08 - 1:22 pm | #

Dr. (F___K ) Know writes:
And that's why the failure to address these problems is a strategic bankruptcy as well. The self-indulgence of today's so-called revolutionaries in a darkening economic twilight is a recipe for strategic suicide.

So here's my challenge. If you're a revolutionary, then be one: put your money where your mouth is, and fix a big problem that changes the world for the better - if you really have the courage, the purpose, and the vision, that is.

In fact, I'll happily put my money where my mouth is. I think these problems are so important, I'll take a bit of time away from setting up my new lab, to advise five startups, funds, or companies that I think have the greatest insight into fixing them - you know how to get in touch with me.

http://discussionleader.harvardb...ness.org/haque/
Dr. (F___K ) Know | 05.08.08 - 1:22 pm | #

TCA writes:
no no no kicker! the vegetarians will never go for that. tofu is it's own thing, and i think the substitute would be, ummm...perhaps dirt or compost. which i'd rather eat than insects, btw.


Do you eat these things? What's the difference between shrimp and cockroaches? Not a lot that I can see.
TCA | 05.08.08 - 1:24 pm | #

barely writes:
Ahhhh you're all way too bearish

CROCs UP 25% TODAY!
GOOG Price target $700!

It's a BULL MARKET!
barely | 05.08.08 - 1:25 pm | #

Anonymous writes:
TCA-

go read the thread again....

He is saying a suit is an asset just like a house....

and yes I understand the "value" of a nice suit....I'm just not stupid enough to think I can sell it for more money than I paid for it....gee like some people actually think that way about a house....go figure (if you can't read or get the sarcasm here then you need a clue)

If I wrote an article and misspelled some words than fine call me out. The spelling police need to take a rest on comment section of a blog. But I see how that makes you feel better...

Ciao
MS
Anonymous | 05.08.08 - 1:26 pm | #

Angry Saver writes:
Inflation (however measured) is relative. If expenses are increasing faster than income it's an inflationary environment. For too many Americans this is a reality. Project the trend forward - the likely outcome is ugly. I'd prefer to tackle the problem now and I start with a ZERO inflation target and a smaller government. Asset values be damned.
Angry Saver | 05.08.08 - 1:26 pm | #

kis writes:
CPI doesn't cut it as a cost of living measure for me.

Does it really, for ANYBODY?

Who actually pays an ever increasing OER, instead of their fixed house payments?

Who pays for BOTH rent and OER?

Who buys a new car and a used car every year?

Who pays for both child care and college tuition?

You take those redundancies out, and gas and food become MUCH bigger shares of average spending. Thus the increases that people actually feel are much bigger than what CPI represents.
kis | 05.08.08 - 1:29 pm | #

Ranger writes:
What about the BLS substitution effect? Take the steak for hamburger example (I guess eventually we could all eat grass…….? I wonder how that would play into the numbers.) I guess they could do the same with housing………..I’m mean all we really need is a hut with a grass roof ….right? Anything beyond that is an excess and considered inflationary.
Ranger | 05.08.08 - 1:30 pm | #

barely writes:
Is the PPT a fair and unbiased entity? I mean, do the SELL the futures at the close when there has been an unsustainable rally?
barely | 05.08.08 - 1:30 pm | #

Harsh Realty writes:
If I can get my parents medical care in India for $1,000 a month, why would I pay $8,000 a month here unless I saw it as an investment?

I don't know what my point is, but my parents better start learning Hindi. I'm not a speculator.
Harsh Realty | 05.08.08 - 1:33 pm | #

SweetHomeKilla writes:
kis-

Exactly. Each percentage increase in the cost of essentials results in a larger percentage increase in overall cost of living for the average american. The rest of the stuff only matters for the ever decreasing number of people who actually have enough money for discretionary spending.
SweetHomeKilla | 05.08.08 - 1:34 pm | #

SurferDude writes:
Anonymous writes:
Take a 7 year war, fund it with 2 trillion dollars of borrowed money, which gets deposited in a fractional reserve banking system based on a fiat currency and there is going to be inflation just about everywhere. The BLS is a government lackey and the FED is the enabler.

anon has it right. wars are always inflationary. the only surprise is why has everyone been so slow to recognize this fact.

as mark twain said "hHistory doesn't repeat itself, but it does rhyme." does this not seem like the late 1960s, an unpopular and expensive war, domestic spending out of control, acclerating inflation, a fed debauching the dollar, and a democratic party convention that is on the verge of splintering. are we heading to a 1970s stagflation episode?
SurferDude | 05.08.08 - 1:34 pm | #

Anonymous writes:
Truck tonnage dropped in March, anybody watching this?

ATA TRUCK TONNAGE INDEX DECLINES 3.3 PERCENT IN MARCH
http://www.truckline.com/NR/ exer...32236290702.htm

Money quote: "ATA Chief Economist Bob Costello said the latest tonnage reading was a significant setback. “I’ve been concerned that the recent run-up in tonnage might not be sustainable, and clearly March’s figures confirmed that apprehension,” he said. The 3.3 percent drop was the largest month-to-month contraction since August 2006."
Anonymous | 05.08.08 - 1:34 pm | #

Patrick writes:
I want to see the truck tonnage and rail tonnage combined.

With the diesel price increases I would expect some movement from truck to train.
Patrick | 05.08.08 - 1:37 pm | #

SweetHomeKilla writes:
Regarding the war is inflationary topic-

Does everyone here realize that Iraq is nearly on the other side of the planet? Most of the supplies are carried by cargo planes, using enormous amounts of fuel.

Nearly all of the resources result in destruction of capital. This is highly inflationary, with the profits going to the rich elites, while the rest of us pay $4/gallon for gasoline.
SweetHomeKilla | 05.08.08 - 1:40 pm | #

Angry Saver writes:
http://video.google.com/ videopla...061137769305763

This is a good video detailing the pernicious effects of inflation. Somewhat long, but very much worth while.

With inflation, a few benefit at the expense of the majority.
Angry Saver | 05.08.08 - 1:42 pm | #

TCA writes:
Nearly all of the resources result in destruction of capital.

Yes, but think of all the jobs that will be created to fix everything we broke!

/broken window fallacy
TCA | 05.08.08 - 1:43 pm | #

Matt writes:
I looked up the elements of CPI.

As usual, as they do with government productivity, the BLS ignores federal government services to the public.

We do buy goods from government in ways other than excise taxes.
Matt | 05.08.08 - 1:44 pm | #

Anonymous writes:
"and a democratic party convention that is on the verge of splintering. are we heading to a 1970s stagflation episode?"

Probably we are headed for a sharp political left turn, tax the rich, repeal Shrubs tax cut including capital gains, rising protectionism, rising welfare spending, cuts in defense, end of a war, And a bigger not smaller budget deficit. Think this was infaltionary if they don't figure out a way to screw the boomers out of SS and Medicare soon you ain't seen nothing yet.
Anonymous | 05.08.08 - 1:44 pm | #

Angry Saver writes:
Surferdude,

Stagflation has been my view for a long time - since 2000. Very few see it. Everyone is too concerned about deflation.

I think stagflation is the natural result of a fed led victory over deflation.
Angry Saver | 05.08.08 - 1:45 pm | #

Dr. (F___K ) Know writes:
Stagflation is eating my brain!

We have money market yields going down (below 2%), gas going above $4.00 a gallon/$125 barrel, hyperinflation from commodities and a systemic crash being written off as being a good thing -- while the CPI/inflation component is used as a mechanism to boost EPS from higher sales. This is great!
Dr. (F___K ) Know | 05.08.08 - 1:48 pm | #

Anonymous writes:
Patrick,
http://www.dieselforum.org/where...iesel/railroad/

"History of the Diesel Train

Freight train engines rely almost exclusively on diesel."
Anonymous | 05.08.08 - 1:48 pm | #

Dr. (F___K ) Know writes:
Speaking of trains, over population, liquidity traps and CPI/inflation: http://www.youtube.com/watch?v=B...h? v=BE35onlIySk
Dr. (F___K ) Know | 05.08.08 - 1:50 pm | #

Patrick writes:
Anon,

My understanding was always that on a tonnage basis, freight rail is more fuel efficient than trucks.

Therefore the fuel component cost of travel begins to favor rail as the price of diesel goes up.
Patrick | 05.08.08 - 1:51 pm | #

Anonymous writes:
Sebastian,
I don't see your point? By being long a $200k house in year x you have obviously hedged youself against price increases in $200k houses in year x.
If I could store everything I use (or hedge), and had access to capital I could also insulate myself against inflation.
I just don't want to have to store 20000 loaves of bread, 7500 gallons of beer and 5000 pounds of lunch meat for the next 50 years and I don't plan to live in the same house for those 50 years either.
Anonymous | 05.08.08 - 1:52 pm | #

k harris writes:
Somehow, all that work I put in for Rob D's sake went for nothing with the rest of this "define it any way I want" crowd.

No, a sweater isn't like a house. Try and rent a sweater. No, just because a house isn't everlasting doesn't mean it isn't an investment good. Factories don't last forever and they represent real investment. Houses can and regularly do generate income for their owners. Your borrowing cost may be a mediating factor in the expense of your house and the overall set of financial circumstances that determine your ability to buy a new house, but your personal mortgage rate has no impact on inflation, at least under any useful definition of inflation.

Guys, an enormous amount of work and thought has gone into all this stuff over the decades. Suddenly you show up and, instead of doing what our host or ipodius (apparently) and some others here have done - read up on this stuff and learn why it's done the way it is - you just write down the first thing that strikes your respective fancies. Why on earth would do people believe that the first thought that enters their heads represents some improvement on existing knowledge?

Sweetwhatever,

Please, if you want to puke, go right ahead. Won't make you right, but it might make you feel better.
k harris | 05.08.08 - 1:54 pm | #

Dr. (F___K ) Know writes:
Can someone help me with a correlation between farm land value and urban land values with a connection to food costs, e.g, what was the ratio between land values in relation to something like wheat or corn during the last few recessions (when land was cheaper)?
Dr. (F___K ) Know | 05.08.08 - 2:01 pm | #

pclema writes:
Yes by all means let's just leave it to the experts. Economics does not have a lot of credibility because it is not a verifiable science. There are arguments for and against just about every pronouncement. Assume a can opener.

Hey how about taxi fare equivalent car prices?
pclema | 05.08.08 - 2:01 pm | #

Anonymouse writes:
k harris,

Do you comment on Barry Ritholtz's TheBigPicture blog? He's f@cking insane about inflation being understated to the point that he claims people like you are saying, "There is NO inflation," which is a distortion and something I don't think anyone claims.

When I pointed this out to him (politely but sternly) I was banned from posting on his blog. This is a very emotional subject.
Anonymouse | 05.08.08 - 2:05 pm | #

Ranger writes:
Because it's faulty knowledge! I can "rent" almost anything....especially my truck. Now what is it...comsumption or investment? Just because the BLS has spent some time "thinking" about things doesn't make them so. If that be the case people have been thinking things for centuries...that didn't prevent change.

Hedonic pricing, substitution and the like are worthless when measuring inflation.........maybe not cost of living but certainly inflation.
Ranger | 05.08.08 - 2:05 pm | #

Angry Saver writes:
From 1995 to 2008, MZM grew at 8.9% annually. During the same period, nominal GDP grew at 5.3% annually. That is a whole lot of excess money in the system.

It seems odd to think we won't have either CPI inflation or deflation. Since we won't allow a deflation, I foresee stagflation.

Bell bottom blues.
Angry Saver | 05.08.08 - 2:08 pm | #

Anonymous writes:
kharris-

talk to Ipod as he's the one who can't understand the difference between a house and a suit....

unless there is some market for used suits that all of us are unaware about.

You live in a house and that is much different than a disposable article of clothing...unless you plan on moving into that suit (alot of people will soon be considering that as an alternative) thanks to the sort of logic that equates them to be equal.
As if you needed a loan to buy a suit......

Effin a

Ciao
MS
Anonymous | 05.08.08 - 2:12 pm | #

Angry Saver writes:
A lot of people put a lot of thought into ARMS, ALT A, CDOs. CDO^^2, etc.

How can we "afford" to have inflation continually increasing faster than incomes?
Angry Saver | 05.08.08 - 2:12 pm | #

Anonymous writes:
"farm land value and urban land values with a connection to food costs"

U.S. Department of Agriculture study estimates that 69 percent of North Dakota’s farmland value may be attributed to this expected stream of government payments.

http://www.fdic.gov/bank/ analyti...kansascity.html

Of course none of that is infaltionary.
Anonymous | 05.08.08 - 2:13 pm | #

plschwartz writes:
reposted from Economists View post on Duy article:
I want to sort of nail down something that Kharris said:
"Once you recognize that housing serves more than one purpose - shelter, investment and whatever else it may do - then you are implicitly recognizing that putting a price on it for the purposes of assessing consumer prices is complicated."
I feel that it is an insight that goes beyond CPI to a truer understanding of housing and something that might possibly be considered when discussing a housing "bailout"

This distinction between house and land costs is one that I have not seen given much import (though this may be due to my limited knowledge). But it seems important in the discussion
of giving some subsidy to underwater home owners.
First, I would take the CPI notion that everyone is a renter. Extending it to assume that when we own a home we are renting from ourselves. (This is thinking that I in fact use in considering a summer rental of our second home.)
Second it is possible to approximate in most cases the cost of the house and land improvements from the cost of the land.And we should treat these two costs differently.I do not see any moral hazard in any government loan guarantee of an amount backed by payment of OER for the housing portion of the mortgage.
Second and more arguably, I would assume as a first approximation that most if not all of the housing bubble was changes in land value.
In so far as this latter assumption is correct then the loss in home value is a loss in land speculation.I realize that the estimate of the loss would have to be via a theoretic land sale rather then an actual one.
Thee was in the Senate a serious attempt to bail-out HBs by manipulation of business losses retroactively to earlier years.
I suggest that properly thought out the losses in land speculation can be seen as a tax problem. And that any mortgage could use the tax write-offs as another source of future income. Finally my faith in tax law is such that I expect these ideas are already used somewhere in the tax system.

Obviously what this would do is to to take todays problems and pay for them with lower future revenue.
To me this is a plus. For it may then sharpen the need for a discussion of the two alternatives of the classical idea "Guns or Butter" versus the Regeanesque and current idea "Guns and Butter".
plschwartz | 05.08.08 - 2:13 pm | #

plschwartz writes:
Sorry.
I started this post somewhat earlier and then returned to it without reading the intervening comments.
plschwartz | 05.08.08 - 2:16 pm | #

Ranger writes:
One thing to note. OER is an imputed price not a transaction price. Also, a good portion of the PCE deflator comes from imputed prices on services (although they now also report on the market based deflator....which is always higher......imagine that)
Ranger | 05.08.08 - 2:18 pm | #

sdtfs writes:
Great discussion. Interesting how passionate everyone is. People are taking this stuff very personally.
sdtfs | 05.08.08 - 2:19 pm | #

Wade writes:
Great Greenspan quote above. Too bad they won't play it and explain it on the 5:30 news.
Wade | Homepage | 05.08.08 - 2:25 pm | #

ipodius writes:
Somehow, all that work I put in for Rob D's sake went for nothing with the rest of this "define it any way I want" crowd.

k harris, this isn't about learning for these people. there was a time when this blog was. now you have to scroll through 25 insipid posts before you get something good, like yours. and people used to have educated disagreements too, not just "the official number lie because they don't match my political theory" arguments. Also people understood humor and ironic statements...especially about suits :)

i get the feeling that people here can't get past their personal circumstances to see the picture on the whole. looking at that diagram of CPI components, you should be struck with the idea that it is complicated and effects reach across demographics to try to come to a big picture conclusion.

Right now everyone is stuck on the "inflation is worse than the government states" meme. perhaps. but i'd be willing to put my personal money on those stats more than any i've seen coughed up here, as i've taken the time to study them and am satisfied that they are close enough to the truth to use as a benchmark. i'm supposing that the fed feels that way too, as do those people who've made a couple of billion on their investments in the last year ;)
ipodius | 05.08.08 - 2:35 pm | #

RE writes:
I actually have to questions Duy’s basic premise that we should ignore the investment component of housing in the CPI.

In the U.S. owners make up about 66% of households. This constrains available supply of attractive rental units and forces many into purchasing decisions irrespective of the investment intent. This in turn pushes up prices and forces people into an increased cost of living that is not reflected in the CPI.

Any thoughts?
RE | 05.08.08 - 2:42 pm | #

Ranger writes:
“try to come to a big picture conclusion” “but i'd be willing to put my personal money on those stats” “i've taken the time to study them and am satisfied that they are close enough”


Only counts in horseshoes…….I wouldn’t place real money on that bet. You’re not the only one whose “taken time to study” the issue. Do you really think there is a “conclusion” to this issue? Issues that have been debated since the 1960’s (if anyone has really done the studying) and now we’re going to make conclusions!
Ranger | 05.08.08 - 2:44 pm | #

Ranger writes:
RE your comments on availability of attractive rental units is exactly why they use an imputed price and not a transaction price........the sample size is just not statistically significant.
Ranger | 05.08.08 - 2:46 pm | #

poszi writes:
I think Fed should not target prices and the whole discussion "are houses investment or not and should count in CPI" and "should Fed target asset prices" is moot.

If Fed should target anything, it should be money supply. Why nobody discuss it? There was serious growth of money supply and it is coming on the surface right because it works with a lag. And money supply growth is cumulative. There is a huge oversupply of money no matter how you count it and even those who claim money supply is not growing right now (ipodius) should agree that it was growing a lot last several years and it was much faster (even after correcting by the economy growth) than any CPI measure. And Fed (and a lot of other CB) ignored it.

And Ben's helicopter speech suggest that there will be more.
poszi | 05.08.08 - 2:48 pm | #

Ranger writes:
There will be more mose certainly poszi. Just read the Treasury Advisory Report.

http://www.treas.gov/press/relea...eases/ hp945.htm
Ranger | 05.08.08 - 2:52 pm | #

RE writes:
Thanks for your thoughts Ranger.

The problem with imputed prices again is just like in hedonics and substitution that they become judgment calls and therefore subject to process and opinion and therefore politics.
RE | 05.08.08 - 2:52 pm | #

Sage writes:
Professor Duy is the one who doesn't understand inflation. He argues the cost of a home shouldn't be measured (the argument of first-time buyer versus second-time buyer is a red herring) since he has a 30-year mortgage. Well, Professor Duy, the fact that you don't need to buy a TV for 15 years after you bought one does not mean the price of TVs isn't going up. This example illustrates the rather substantial difference between, say, cost of living, and inflation, and points to one of the many weaknesses in trying to use one number - CPI - as the measure of all things (such as GDP deflator, inflation, COLA, etc.).

The question for inflation is how much does it cost to buy now versus at some prior time, not how often does someone buy that good. The latter is more relevant to COLA.
Sage | 05.08.08 - 2:53 pm | #

Anonymous writes:
>>“i've taken the time to study them and am satisfied that they are close enough”>>

therefore anyone with a different opinion is "politically motivated"

Yes I see how that works in a perfect society.....which one do you live in??? obviously not the one where cost(s) of goods mater.

or anything else other than the safety of mom's 401k matters.

Fuck you and your ego....

Ciao
MS
Anonymous | 05.08.08 - 2:54 pm | #

deutschBag writes:
easy there MS... take care of that temper
deutschBag | 05.08.08 - 3:02 pm | #

Rob Dawg writes:
k harris writes:
Somehow, all that work I put in for Rob D's sake went for nothing with the rest of this "define it any way I want" crowd.

I was gonna let you have the last words because I thought they were so weak but since you insist on proclaiming the rightness of your perspective I will reply.

First, you aren't wrong. This is a difference of opinion derived from a relatively common set of facts. That happens with complex subjects.

Second, Dr. Duy is foolish to ignore the basic physical nneds component of housing and describe homeownership as purely an investment. I'm sure if you confronted him with that assessment he's undoubtably quickly modify to claim that not all housing expenditures are investment. Fine, we can all hug and make nice again. Then we can fight over how much.

Rent in my 'hood runs $3-4k. At least 2/3rds of my neighbors are paying 20-80% of that number. Do you think the CPI is tracking the higher actual rent number? No way they have this wierd OER that takes the lower of the two and assumes lagging data besides.


A large portion of homeownership is consumable. Stop paying taxes, no painting, plumbing repair, etc and you'll see how fast any property deteriorates to 0. Just like refusing to refrigerate vegetables. Oh and while we are at it ttwo people said there is no investment component to food. Obviously these people have never heard of Costco or walked down the rice aisle recently.
Rob Dawg | Homepage | 05.08.08 - 3:02 pm | #

Ranger writes:
Taxes aren't directly an input into the CPI.
Ranger | 05.08.08 - 3:08 pm | #

bobn writes:
IMHO, no discussion of CPI is complete without reference to Consumer Price Index http://www.shadowstats.com/article/56

This is because of "adjustments" made to CPI reporting during the Reagan and Clinton eras.


"The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported."


"Traditional inflation rates can be estimated by adding 7.0% to the CPI-U annual growth rate (3.8% +7.0% = 10.8% as of August 2006) or by adding 7.4% to the C-CPI-U rate (3.4% + 7.4% = 10.8% as of August 2006). Graphs of alternate CPI measures can be found as follows. The CPI adjusted solely for the impact of the shift to geometric weighting is shown in the graph on the home page of www.shadowstats.com. The CPI adjusted for both the geometric weighting and earlier methodological changes is shown on the Alternate Data page, which is available as a tab at the top of the home page. "


This chart "reflects the CPI as if it were calculated using the methodologies in place in 1980."
bobn | Homepage | 05.08.08 - 3:09 pm | #

SweetHomeKilla writes:
"i'm supposing that the fed feels that way too, as do those people who've made a couple of billion on their investments in the last year ;)"


This is the problem exactly. Those people who "made a couple billion" mostly did so with access to large amounts of cheap credit. They made profit on other peoples money.

Us mere mortals generally do not have access to that cheap credit, and are forced to make risky investment choices in order to simply hold on to the real value of our past labors.

This search for yield due to constant monetary inflation, is what drove people to speculate in real estate, since it was the only avenue to get access to the credit that the big boys enjoy constantly.

Apologists like ipodius who obviously don't understand the long term destabilizing effects of currency debasement can make claims about their superior understanding of CPI all day long, but it's quite obvious to those of us who have read some history that the complicated CPI measurements exist only to mask the true nature of the problem.
SweetHomeKilla | 05.08.08 - 3:10 pm | #

bobn writes:
Oh, forgot to say: CPI increase is not the same as monetary inflation. The current financial system events are actually deflationary, but rising commodities prices still push up the CPI and artificially inflate GDP growth.
bobn | Homepage | 05.08.08 - 3:11 pm | #

Estragon writes:
Ranger,

Maybe I'm misunderstanding your use of the term "imputed".

The index for OER is moved by changes in actual rental transactions. What's imputed (based on survey questions) is the weighting of the movement in rental transactions to reflect OER. The weighting is what avoids a situation where, for example, very low quality housing (unreflective of owner occupied)has declining rents but is over-represented in the unweighted rental sample relative to owner occupied.



More info, in case anyone actually wants to know more, can be found here.
Estragon | 05.08.08 - 3:15 pm | #

Ranger writes:
People buy things in nominal $ (I don't go to a car dealer and say I want to pay the hedonic price for the car). And it's those nominal prices that drive people to ask for a pay raise or change jobs for a pay increase. It also determines what people will consume and not consume.
Ranger | 05.08.08 - 3:16 pm | #

Estragon writes:
bobn,

GDP isn't affected by CPI directly. Assuming you're referring to the deflator that does affect GDP though, rising prices would only push up nominal GDP. The headline figure most people refer to though is the change in real GDP. If the deflator was "artificially" high, real GDP would be "artificially" low.
Estragon | 05.08.08 - 3:21 pm | #

RE writes:
"If the deflator was "artificially" high, real GDP would be "artificially" low."

This is where the Orwell's Ministry of Truth comes in.
RE | 05.08.08 - 3:24 pm | #

Ranger writes:
Page 8-10 of http://www.bls.gov/bls/fesacp1120905.pdf
this report indicate it is not a transaction but an assumed or imputed rate. There are very few rental homes of equivalent quality to use actual transaction pricing (or even close to transaction pricing). In a nutshell it is not an actual transaction price.
Ranger | 05.08.08 - 3:24 pm | #

Anonymous writes:
Sweethome-

You've nailed it there. Some of "us people" as so eloquently put by Ipod, have a different understanding of how it works. The reality of parsing data that is faulty to begin with is not what I want to spend my time doing. I happily leave that to people who have an infinite amount of time to prove they are "right"......and when they are done it's not about being right or wrong but where that faulty data is leading us to.

I scoff at people who fail to understand the reality of debasement while they are happily "making a few bucks"....

Hope you made them in something other than dollars.....

Whistling passed the graveyard is, apparently, a strategy along with hold and hope.

Ciao
MS
Anonymous | 05.08.08 - 3:27 pm | #

Ranger writes:
Approximately 75% of the prices used to calculate the GDP deflator come from the CPI. The weights are different as they are updated for consumption patterns (which in fact could be influenced by prices). If, we have been understating inflation then we have been overstating real growth. If we have been overstating real growth then why has the unemployment rate been falling and still below the average since 1947? I'm not making a case, just asking a question
Ranger | 05.08.08 - 3:29 pm | #

jg writes:
kh-, a house is an 'asset' as much as an automobile is an 'asset.'

Both require maintenance and upkeep. Both have useful life of greater than a few years. Both have a nice primary and secondary market. Both have readily viewed 'rental' (or lease) values. No need to 'impute' a rental value.

BLS uses hedonic adjustments for car pricing, and car pricing brings down the CPI.

I presume the underlying motive to moving to OER was to understate CPI for COLA.
jg | 05.08.08 - 3:33 pm | #

kyosaki says writes:
houses are a liability

cars are a tool

and asett's are things that pay you.
kyosaki says | 05.08.08 - 3:37 pm | #

Estragon writes:
Ranger,

As I said, I may have misunderstood your use of the term "imputed". The mechanics of OER calculation and the use of survey and rental transaction data is covered in some detail on page 22-23 of the link.

I have no strong opinion on whether growth has been overstated or not, was just pointing out the apparent inconsistency in bobn's comment.

To answer your question though, falling unemployment by itself wouldn't be definitive in saying whether real growth was overstated or not. Unemployment might still drop if the workforce declined for example, which could happen for lots of reasons. I'm also not making a case, just answering hypothetically.
Estragon | 05.08.08 - 3:45 pm | #

Kicker writes:
If Fed should target anything, it should be money supply. Why nobody discuss it?

What's money?

Should we include ABCP, Auction Rate Securities, and enhanced money market funds? A year ago those were held on balance sheets as "Cash and Cash Equivalents"

What about vanilla money market funds? They didn't exist before 1971 and are outside the banking system. Are they money? When exactly did they become money?

What if the Government introduces a 1 week T-bill. Is that money? Is th 3-month T-bill money?

Is Gold or Silver money? Many here argue that it is. Should that be included?

The traditional measures of the "money" M1-M3 are for the arbitrary and for the most part dated. About the only thing that still have relevance is the base.

And the Federal Reserve does target the base.
Kicker | 05.08.08 - 3:52 pm | #

Rob Dawg writes:
If we have been overstating real growth then why has the unemployment rate been falling and still below the average since 1947? I'm not making a case, just asking a question - Ranger

We no longer count discouraged workers and there are also legitimate reductions in the labor force due to wealth and other factors.
Rob Dawg | Homepage | 05.08.08 - 3:53 pm | #

bobn writes:
.
Estragon says:


Assuming you're referring to the deflator that does affect GDP though, rising prices would only push up nominal GDP. The headline figure most people refer to though is the change in real GDP. If the deflator was "artificially" high, real GDP would be "artificially" low.
Estragon | 05.08.08 - 3:21 pm |


If the "official" CPI is used as a deflator and "official" CPI understates actual CPI, than the deflator is artificially low and the real GDP is overstated.
bobn | Homepage | 05.08.08 - 3:57 pm | #

RE writes:
I try to ignore the unemployment rate and concetarte on the labor force participation rate. It provides a much better picture of what is happening in the real world. This is especially the case since 1990 as that seems to be the point where most women were absorbed into the work force.

Labor Force Participation Rate and Unemployment since 1970
RE | 05.08.08 - 3:59 pm | #

tg writes:
http://www.tampabay.com/news/ art...ticle473596.ece

Ranger an answer to your question. Link from SLG previous thread
tg | 05.08.08 - 4:02 pm | #

poszi writes:
Kicker, I get your point but:
1. Fed does target rates by changing the base and it's not the same as targeting the base.
2. IMHO, monetary base stopped to be relevant when they dropped reserve requirements on most accounts. Infinite multiplier implies that Fed cannot control broader money at all.
poszi | 05.08.08 - 4:12 pm | #

RE writes:
"... We no longer count discouraged workers and there are also legitimate reductions in the labor force due to wealth and other factors."

This is why I generally also add this chart. It has a really surprising slope for 65 and older.

Labor Force Participation Rate since 1990 with 65 & Over
RE | 05.08.08 - 4:15 pm | #

Emma Anne writes:
I am intrigued by the idea of a hedonic adjustment to airplane travel. Because it isn't just the lack of meals and the tiny seats that reduce the value. The system is so overloaded that people's flights are delayed or canceled much more frequently than they used to be. And you can't get on the next flight because it is full too. What is the value of missing a meeting? Or a wedding?
Emma Anne | 05.08.08 - 5:38 pm | #

dr strangemoney writes:
Inflation does not move uniformly through prices. It bubbles up somewhere like houses and spreads outwards from there as Benny Bernanke works feverishly to develop the everlasting Bubble Bubble-gum deep in the bowels of his Taffy Factory.
dr strangemoney | 05.08.08 - 7:28 pm | #

DannyHSDad writes:
OT: I saw a Japanese program on how China has been closing hundreds of factories this year alone due to strengthening Yuan. So I googled and found this:

Losses Mount In Chinese Export Industry
http://www.countercurrents.org/ l...ntier150408.htm
April 15, 2008

A recent survey by the China Cotton Textile Association found that 49.2 percent of firms in 17 Chinese provinces were considering shutting down, and 44.4 percent were trying to sell export-oriented products on the domestic market.

China’s shoemaking industry, which supplies 60 percent of world demand, is also shedding jobs. In Guangdong, approximately 1,000 firms (20 percent of the total) shut down in 2007. According to Li Peng, general secretary of the Asian Footwear Association, the industry laid off between 150,000 and 200,000 workers and cut roughly 15 percent of production capacity.

Factory closures are expected to continue in coming months,
DannyHSDad | Homepage | 05.09.08 - 2:06 am | #