# News What is the real rate of inflation?

1. Feb 23, 2010

### edpell

What is the "real" rate of inflation?

What is the "real" rate of inflation?

The U.S. Federal Government used one formula to calculate before the Clinton administration and now uses a different formula. The two give answers that often differ by a factor of two. Which, if either, is the right one?

2. Feb 23, 2010

### Staff: Mentor

Re: Cpi

Please post a link so people know what you are referring to.

3. Feb 23, 2010

### Gokul43201

Staff Emeritus
Re: Cpi

It would be nice if you could show us the two formulas, or provide a link that does.

Here's a related reference: Weinstein, Broda and Leibtag, “The Role of Prices in Measuring the Poor’s Living Standards” Journal of Economic Perspectives, Spring 2009, pp. 77-97

Abstract:
Almost 50 years after President Lyndon Johnson’s famous 1964 State of the Union speech that introduced the “War on Poverty,” two facts stand out in the current debate about poverty. First, since David Caplovitz (1963) wrote his path-breaking book, The Poor Pay More, numerous researchers have confirmed that the poor indeed pay more than households of higher income for the goods and services they purchase. Second, official poverty rates as measured by the U.S. Census have remained essentially flat since the late 1960s, raising questions about the success of the policies implemented to reduce poverty. In this paper we revisit these two facts by paying close attention to the price data underlying these findings. By examining scanner data on thousands of household purchases we find that the poor pay less—not more—for the goods they purchase. In addition, by extending the advances on price measurement in the recent decade back to the 1970s, we find that current poverty rates are less than half of the official numbers. This finding underscores the importance of correctly measuring the evolution of prices to determine the appropriate poverty thresholds over time. Both findings are contrary to the conventional wisdom established in the last few decades.​

http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.2.77

4. Feb 23, 2010

### edpell

5. Feb 23, 2010

### edpell

Re: Cpi

For lengthy but vague information on the formula currently in use see the Bureau of Labor Statistics http://www.bls.gov/

Last edited by a moderator: Apr 24, 2017
6. Feb 23, 2010

### Staff: Mentor

Re: Cpi

Even if that site detailed how they did the calculation (they don't), that still would likely not be an acceptable source (in their second graph down, on a different topic, they say they provided their own estimates). Do you have a source that actually does the calculation?

Last edited by a moderator: Apr 24, 2017
7. Feb 23, 2010

### Staff: Mentor

Re: Cpi

That's a very interesting abstract! It certainly is counter to the conventional wisdom we've all been taught. I may have to buy it!

8. Feb 23, 2010

### edpell

Re: Cpi

The first graph is the result of the calculation using both the governments pre-Clinton formula and the post Clinton formula. The fact that they choose to calculate a new metric of their own design in figure two does not invalidate figure one.

For the current CPI number see BLS.gov so this leaves us to find a second source for the pre-Clinton CPI numbers. I will look around.

9. Feb 23, 2010

### edpell

Last edited by a moderator: Apr 24, 2017
10. Feb 23, 2010

### edpell

11. Feb 23, 2010

### Staff: Mentor

Re: Cpi

This isn't an f=ma thing. It's not a simple plug and chug exercise (otherwise, you'd be able to find an actual "formula"!). The CPI is primarily a survey. And it is very complex. I'm not sure it is even possible to convert data from the two methods because the raw data collected may not even be from the same sources. An example from your link:
That's a very complex process applied to one specific product. The entire exercise takes a team of economists to do it.

Either way, the website with the criticism did not explain how they did what they did. That would at least be a start that would enable us to evaluate their (your) claim. Right now, we have nothing.

12. Feb 23, 2010

### Staff: Mentor

Re: Cpi

Here's an article about the author and his website:

On that link is a description, from him, of the changes:
Those changes seem perfectly reasonable to me. Do you disagree? Why?

13. Feb 23, 2010

### Staff: Mentor

Re: Cpi

Here's an article the guy wrote about his methodology:

Near as I can tell, he doesn't say what sampling he's done. But he shows a graph with three sets of data:

-The official CPI
-A version of the CPI corrected by the BLS for previous methodology.
-His version of the CPI corrected for previous methodology.

His interpretation of the effect of the change in methodology is vastly different from what the BLS says. Without a good reason, you can't just dismiss that data. It's such a big difference, a simple gut check is all you need to tell you it must be bogus:

From his graph, the official stats have the CPI rising by about 30% over the last ten years of that data (ending in 2004). Over the same time, his shows about a 75% increase. From census income data (linked in the other thread), the middle bracket's (middle middle class) income rose 37% non inflation adjusted or 9% after inflation. By my calculation, (1-1.37/1.75), that equates to about a 22% drop in real spending power for the middle class. That's a pretty huge drop that should be very noticeable in the standard of living. So how has that affected some of the major purchases of Americans. The most expensive thing people own is a house, so you'd expect that to drive the home ownership rate way down. But it hasn't gone down, it has been steadily rising (not much, but some) and is above what it was in 1960 (62% then, 68% now): http://en.wikipedia.org/wiki/File:US_home_ownership_by_race.png

In terms of individuals, people tend to forget that historical income stats are just slices of the population and don't track individual people. Individual people have a tendancy to get richer throughout their lifetime. You start off at a job making a low wage and you get raises and promotions. So most people, when they retire, make vastly more than when they were younger. But a 75% increase in CPI would swamp that: it would require about a 7% average yearly raise just to break even. It would mean that on average most people get poorer as they get older. Kids wouldn't ever leave the house. Young workers who live in apartments would never be able to buy houses or afford a better car, etc.

Ie, page 13: http://www.census.gov/prod/2009pubs/p60-236.pdf
The median income for the 25-34 age bracket is $51,400 and the median income for the 45-54 age bracket is$64,349, an increase of 25% in 20 years of age difference, which is an increase of about 1% a year over inflation....but if inflation is vastly higher as this guy suggests, that 1% increase would become something like a 3.5% drop.

What he's suggesting just can't be true.

Last edited: Feb 24, 2010
14. Feb 24, 2010

### CRGreathouse

Re: Cpi

I discussed this with someone by email before. From my 2008-06-28 email:

I used what were, at the time, the latest finalized median income figures. Someone interested could calculate current figures, but they would surely be more extreme. Also relevant: http://www.bls.gov/cpi/cpiqa.htm, released in 2008 by the BLS in response to these sorts of claims.

In short, the ShadowStats inflation figures are deeply flawed.

Last edited by a moderator: Apr 24, 2017
15. Feb 24, 2010

### mheslep

Re: Cpi

Again from the source Russ linked above:
It seems the most illustrative example would be in computing. Today's desktop computer is a million times more powerful than one from 1980. Someone in 1980 would have had to buy a cargo ship full computers to match a single recent desktop. So for the 'alternate' CPI promoters to compare 1980 and today and say, "aha, the price of the desktop computer has inflated 20%" or whatever is simplistic to the point of silliness, at least in that case. Had the BLS continued with the old technique, they might have eventually found themselves attempting to price the equivalent of a stage coach trip from DC to Philadelphia.

On the other hand, I expect it must take some substantial familiarity with every product area to make those assessments, and thus require some substantial resources, or risk mistakes.

Last edited: Feb 24, 2010
16. Feb 24, 2010

### mgb_phys

Re: Cpi

Like most government statistics it's a con. The consumer price index is a basket of goods and services, and every year they change whats in the basket - or as mheslep said they would be pricing stage coach rides.

The new index was criticized for including Plasma TVs, which fall in price but you don't buy everyday, but it doesn't include mortgage or fuel costs or increases in tax.

17. Feb 24, 2010

### CRGreathouse

Re: Cpi

Here's his publication list. Any ideas as to what's being referenced?
http://www.gmu.edu/depts/economics/wew/publist.html [Broken]

Edit: See below. It looks like the reference was not to the economist whose page I liked to, but to the ShadowStats guy.

Last edited by a moderator: May 4, 2017
18. Feb 24, 2010

### CRGreathouse

Re: Cpi

It includes plasma TVs, mortgage costs, and fuel costs, but not tax increases.

Edit: I was referring to the *US* CPI. I'll have to look up the UK CPI; I don't know what's included there.

Last edited: Feb 24, 2010
19. Feb 24, 2010

### mgb_phys

Re: What is the "real" rate of inflation?

RPI includes mortgage and council tax, CPI doesn't
RPI is the more official one reported to the Eu.

20. Feb 24, 2010

### CRGreathouse

Re: What is the "real" rate of inflation?

I was discussing the US CPI; the UK CPI is not known to me.

Many taxes *are* included in the US CPI: sales taxes, excise taxes, and (indirectly) property taxes.

So that makes it pretty comparable to the RPI. I'll admit that I don't know the difference between a mortgage tax and council tax, though; I've never owned property in the UK (though I did live in Wales for some years).

Last edited: Feb 24, 2010