Re: Lies, Damn Lies and Government Inflation Statistics

On Jul 21, 7:46 pm, mg <mgkel...@xxxxxxxxx> wrote:
On Jul 21, 8:01 pm, Islander <nos...@xxxxxxxxxxx> wrote:



mg wrote:
On Jul 21, 12:14 pm, Islander <nos...@xxxxxxxxxxx> wrote:
Gary wrote:
On 21 Jul 2008 16:59:54 GMT, aw...@xxxxxxxxxxxxxxxxx (arthur wouk)
wrote:
of course, those of us who follow williams/shadow statistics know that the
official CPI is nonsense. if we followed the original definitions of cpi
and gdp, we would know that we have been in a recession for most of the
past eight years. this has been hidden from the upper 10% or so of the
those on the economic ladder, but not for anyone else. those of us who are
retired have in general noticed the continued sharp drops in the real
purchasing power of our retirement funds.
I wonder if there is any group (AARP ? etc ) that will champion the
cause of restoring the SS COLAs to where they represent actual
inflation instead of "core" they now use.
Does anybody have any idea when they began to fudge the numbers ?
Williams blames it on changes made during the late-Carter and early
Reagan years. The effect of this became significant during the Clinton
years when objections began to surface.

There are two aspects of the change that are very controversial. Both
have to do with changing the weights based on changing consumer
behavior. As prices rise, people purchase smaller quantities. As
prices rise, people substitute alternative less expensive products.

I can understand that as the cost of electronics declines that a
consumer may elect to purchase more functionality for the same price. I
have no problem with taking that into account in changes to the CPI.

I'm not even entirely comfortable with that. It occurs to me that such
changes can have a big effect on the quality of life, but I don't
think they necessarily have an effect on the cost of living. When buys
a new computer with a CPU that's many times faster he doesn't have any
choice and if he did, the new software wouldn't run very well on a

slow CPU anyway, in fact it might not even be compatible with his old
OS.

Let's take an extreme example and say, for instance, that industry
comes out with a new kind of kitchen flooring that lasts 100 times
longer than the old floors, but only costs 10 times more. Then let's
also say that is the only flooring now being sold so it's not even
possible to buy the old stuff. Now an accountant with a sharp pencil
comes along and says, "Wow, that means flooring is now 10 times
cheaper than it was. :-)

Here's another sorta humorous example I just thought of. Say industry
comes out with new paint that has no lead in it (they already have of
course) that costs 30% more. Now the accountant with the sharp pencil
says grabs some medical reports and calculates the total savings for
medical costs (which are skyrocketing) and says, "Wow, this new paint
is a lot cheaper than the old paint"! :-)

However, when consumers switch to hamburger instead of steak, I don't
think that it is fair to substitute hamburger for steak in the market
basket that is used to compute the CPI. Given that approach, will they
ultimately substitute soy beans for hamburger (with apologies to the
vegetarians among us)?

The result of these kind of changes has reduced the CPI by estimates of
30% to 50%.

Good examples! I suppose that if something in the market basket is no
longer available, a substitute has to be found, but I cannot think of an
example right off the top of my head. The opposite case is where
something becomes available that wasn't available before. In the case
of computers, personal computers weren't even available during the
Carter administration! Personal calculators were barely available.

Here is a great graph of the composition of the market basket.http://www.nytimes.com/interactive/2008/05/03/business/20080403_SPEND...

I'm getting hot now :-)

Say, for example, the U.S. only has domestic cars that go 100,000
miles (or less) and then self destruct. Then Japan introduces a line
of cars in the US market that goes 200,000 miles. In the meantime,
though, car prices have gone up 20%. The proverbial accountant with
the sharp pencil, then does some calculations and says car prices have
now gone down by 30%!
:-)

Not one involved in the CPI calculations.

The informed accountant (the one that can actually do math) would
argue that the cost per mile went down 40%. The CPI economist would
change the weight in the market basket from 4.6% to some number less
than that (since people will be buying fewer new cars) and adjust the
price accordingly.

That's how these numbers are calculated.

The CPI is a great tool and has many uses - except when you politicize
it and make it out to be something that isn't.

al
al
.

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