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Author: SuisseBear Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: INFLATION Date: 11/12/2003 8:25 AM
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I think the relation of the CPI to real inflation for actual persons depends on where you are in life. Right now a college student experiencing tuition sticker shock is dealing with heavy inflation, especially since waiting tables isn't going to be generating more dough. Just about anyone paying insurance is getting hit, and those paying medical bills or for drugs or having to up-front more for employee shares of medical plans.


Seems like a fairly comprehensive list of inflation victims ;-)

On the other hand, if you want to buy a car or a computer, you aren't experiencing inflation.

Sure there is a balance. But there's more. As this rather outspoken article http://www.zealllc.com/commentary/damnlies.htm remarks:

This practice [hedonics] creates a huge disconnect with reality. The only real place to get good price information is in a free, unmanipulated market, which provides a price based on the current best expectations of millions of independent participants. By taking free market test data and obscuring it with arcane mathematics, the real price increases are filtered out.

The BLS has also reported having a practice of weighting CPI components that are dropping in price more heavily than components that are rising in price. They justify this practice by claiming consumers will substitute lower priced goods for higher priced goods when the prices of the more expensive goods are rising. The hedonics mumbo-jumbo coupled with calculations designed to overweight items dropping in price yields highly suspect understated inflation numbers.



Also consider the following:

It's all good to know that the 'hedonic' price of say a computer has fallen by say 50% over five years.

Yet, a computer with current technology may have gone down only 20% in price compared to a similar item five years ago.

Fine says the BLS, you got "quality improvement".

Alas, what if my hedonically-linked bond income doesn't generate the cash flow to pay for it though? After all, those 233 MX Pentium PCs with 32 MB have gone many years ago!

In other words, my outlays necessary to buy the same basket of goods are going to be significantly higher than the CPI suggests, or am I off base here?

How does that square with payments linked to the CPI, whether social security, or coupons?

SB
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