Examining Inflation

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JCD
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Re: Examining Inflation

Post by JCD »

@Hristo Botev
But inflation is what we're talking about. This isn't a Luddite vs. Technophile discussion just for the hell of it; it's a discussion for how you examine inflation when like for like is so hard to do. Put another way, we can talk about how the price of a radio has gone up or down; but who even needs a radio when you've got a piano (or a guitar or mandolin or fiddle or whatever) and learning how to play it is just part of your education?
I wanted to just +1 your point as I think it is deep, even if I don't have much to add. I wish I had written these words, they are so good. Inflation baskets only tries to capture like-for-like rather than lifestyle differences. Even taking two baskets really only captures the economics differences. My effort to compare average Americans/westerners to Jacob like lifestyle seemed to be mostly economic, but I really did miss the personal growth aspect, which is hard to capture in dollars. Thank you for pointing it out. I would say you win an Internet, but you probably only want a Wikipedia, which is free already. My hats off to you.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

Well, I only had to read what you and @Qawzer said about 3/4x before I started to understand it (a bit); but that didn't stop me from commenting throughout the thread after having only done an initial first read of what you'd said, skipping over parts where I thought I knew where you two were going (turns out I didn't). Needless to say, this is all well over my head--it's why I love this forum so much; so many smart people who find so many of the same things fascinating that I find fascinating, including lots of stuff that I didn't even know I found fascinating.

[Edit to delete the rest; cuz it was nonsensical.]

Qazwer
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Re: Examining Inflation

Post by Qazwer »

https://www.in2013dollars.com/inflation-cpi-categories

For funzies you can imagine in the link catagort above near substitutions in what CPI tracks

@BH actually your post before deletion was interesting in figuring out as BLS does to come up with their linked methodology of what constitutes substitutes - streaming is different and cheaper than cable but can replace it pretty well. BLS moved to also include substitutes fir that reason when thinking about inflation
Now if you were using rabbit ears you still would be using rabbit ears (to show my age)

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

Qazwer wrote:
Thu Feb 25, 2021 4:46 pm
@BH actually your post before deletion was interesting in figuring out as BLS does to come up with their linked methodology of what constitutes substitutes - streaming is different and cheaper than cable but can replace it pretty well. BLS moved to also include substitutes fir that reason when thinking about inflation
Sorry, I am really trying to be a little less "wordy" in this forum, as in life. I'm one to process my thinking by writing, and on this forum (unlike in my legal writing career), I tend to not go back and edit after the fact, once I've kind of processed my thinking. And that's not really fair to the forumites, especially when I'm not posting on my journal but on someone else's topic.
Qazwer wrote:
Thu Feb 25, 2021 4:46 pm
Now if you were using rabbit ears you still would be using rabbit ears (to show my age)
It's a digital antenna for me! Though, admittedly, we tend to do month-long streaming service subscriptions a few times a year, depending on what sport is in season or if there's a hot show that's run its course that we want to binge watch; but no more than one at a time. Also, when we are in periods of no streaming subscription, like now, we tend to rack up quite a few Redbox and even Apple on demand movie rentals.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

That's a fun resource.

Taking the JAFI basket:

-homeowners' insurance: 1.77% per year average inflation rate from 1997 to 2021
-property taxes: N/A
-healthcare insurance: 3.64% from 2005 to 2021
-water and sewer and trash collection services: 4.02% from 1997 to 2021
-electricity: 1.45% from 1913-2021
-gas: 3.13% from 1935-2021
-internet: -1% from 1997-2021
-food: 3.11% from 1913-2021
-car depreciation: N/A
-entertainment (Netflix/library): Netflix only? This would probably start at $7.99 in about 2013 and currently be at $13.99, like for like (or $8.99 for "basic")

JCD
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Re: Examining Inflation

Post by JCD »

@Campitor
CPI appears to be a smoke and mirrors calculation to convince the uninformed citizen that inflation is low in order to stimulate consumer spending.
While outside the topic I mostly was trying to cover, in the general interest of examining inflation, one element that all methodologies seem to miss is the actual unit of measure itself. The cost of money (e.g. Interest rates) is itself a inflationary or deflationary element not really examined by CPI, except perhaps via indirect imports/exports or mortgages/rent. You might say, wait, that doesn't matter, but if you want to accuse CPI of being too simple and needing to factor in everything... well here is one of the biggest elements there is. That idea of course leads to what would cause the cost of money to change? Since imports and exports are clear elements that cause cost of money to change, we might start to examine trade imbalances. Once you think of trade imbalances, you might start down wage in/deflation. At this point we really need some big boy macro-economic pants on to dig deeply into the issue but the point is, once you go down the rabbit hole of what counts as inflation you end up in some pretty confusing places. To give one more simplified example, should house price increases count as part of inflation if the cost of a mortgage goes down? CPI appears to be a honest, effort to generate a simplified view of price changes without deeply examining the "who" is impacted or "what" is important. It definitely has problems, but any approach to generate a more generally applicable inflation gauge starts demanding a more complex model, and most folks complain about our world being too complex already (with academics using smoke and mirrors to hide the plain simple truth).

The other problem is, we end up in places where ideology reins. We could just as easily start talking about the tendency of a falling rate of profit and thus the need to make up new "fake" value-adds like apple headphones vs any other style of headphone which maybe just as good... Perhaps that tendency is why heavily marketed ideology like consumerism exists--to prevent that tendency from occurring? Of course me citing a Marxist idea as a tangentially connected justification for ERE-lifestyle inflation calculations shows just how quickly this enters the political sphere, with all the passions that creates. We could of course just as easily go MMT, Keynesian or Austrian with different assumptions, the point is these world views have impact on what and why you measure what you measure and who you measure for.

At least in my reading of CPI, instead of being deeply political, economists come up with bland models, ignore a lot of the complexity and hope it is good enough an estimate to capture for purposes the government has deemed important. I would urge you to reject the CPI if you feel it fails to measure you or your needs, but don't reject the CPI because the measure is a lie. Reality is complex and our understanding is limited. Humans keep coming up with new ways to play the same old games and that causes some weird side effects. Will those side effects ruin CPI? Who knows, but it isn't clear to me that CPI is that bad a measure based upon my personal survey. If you have specific examples of why it fails on the mission CPI claims to be on, I'm all ears.

Campitor
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Re: Examining Inflation

Post by Campitor »

@JCD

I certainly look at CPI but I take it with a grain of salt. And I certainly don't use it as a barometer for much of anything important. As we age, our spending patterns change. We may need expensive medicine, pay for a visiting nurse, contract labor to do work we used to do when younger such as lifting and positioning a 40ft aluminum ladder to replace the gutter or downspout ripped off by ice/snow accumulation. These are things the general public doesn't think about.

Those who know about CPI and what it does and doesn't include in its calculations know they must look at other indicators for long term financial planning and present day financial decisions. CPI certainly has some value but only as a canary in the coal mine - if you see large inflationary numbers in the CPI, that means the train has gone off the rails in a supremely catastrophic fashion. And decreases in the CPI, such as the price of energy, mask the hidden costs of externalities that occur when energy prices drop. These externalities eventually add to the cost of living as they either need to be mitigated, fixed, or paid out as fines with money taken from the taxpayer.

So what is the CPI supposed to be for? The answer changes depending who is using it and for what purpose. However I'm pretty sure the general public has no idea what CPI actually represents or the limits of its usefulness. I've only seen CPI used by politicians on news programs to bloviate on the success of their economic policies based off the CPI numbers.

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Sclass
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Re: Examining Inflation

Post by Sclass »

Prices will rise to what people can pay.

I’ve only had problems when the items I want are those that are coveted by richer people. Money and wealth are relative not absolute after all.

I have seen people go on the fools errand of trying to understand inflation by observing prices then and now for some goods. It can all be easily explained if one can imagine that inflation has been raging unnoticed for decades right under out noses. We’ve been pretty much blinded by naive definitions of what it is.

JCD
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Re: Examining Inflation

Post by JCD »

@Sclass
I’ve only had problems when the items I want are those that are coveted by richer people. Money and wealth are relative not absolute after all.
I want to make sure I understand what you are saying. Let me start with a pedantic aside just to make sure we share vocabulary. Wealth is absolute in my mind, while I agree money is not absolute. Wealth being the objects you legitimately lay claim to. Money is a medium used to trade positions of wealth with, but it is not really wealth. Money itself is variable, given time and even the act of exchange may change the value of money. During most times, money can be exchanged for wealth and visa-versa at low friction via market places, which gives the illusion that money is an absolute measure. I'm fairly certain this is what you mean, but I'm being pedantic just for clarity.

If I understand you correctly, you're saying that living with low inflation is about avoiding things other people, particularly the wealthy want? So buying computers in the 1990s was to experience high inflation because wealthier people wanted them, but they have deflated now that rich folks don't want them? Will food go to 0 inflation (other than short term events like crop failures and energy related events) once those poor of China, Africa, India, etc. become effectively middle class? Also, what do you think regarding Jacob's contention:
I'll accept that but turn it around and ask rhetorically what technological wizardry the upper classes are currently buying at the cost of a small car (2021) that the hoi polloi will eventually see in 2071 for the price of $50?

(I can think of a few science fiction ideas like gene sequencing and CRISPR cures for some genetic disease... but as far as I know, they're just that. It's not for sale at the local CRISPR shop for $2500 ... like a 1987s XT computer was.)
Does this explain the low inflation CPI suggests we've experienced over the last decade or so? Does this imply systems like FIRE/ERE only work when there is nothing exciting to buy? Will the audience go away once there are fun play things only the rich have but the middle class want? Perhaps flights to Mars, good VR tech, holodecks or some such will push inflation up and interest in ERE down?

If your view is just to look at demand side impulses, I like it as a useful mental shortcut, but is that useful for measuring long term changes? I have no idea what housing demand looked like in the spring of 1993, even though I was alive at that point. However, I can get sales prices from Zillow on specific houses back then to measure the rate of change. Is there a way to measure that sort of change via demand side thinking?

@Campitor
I've only seen CPI used by politicians on news programs to bloviate on the success of their economic policies based off the CPI numbers.
This is not to disagree with your point, but should we outlaw shovels because bad guys use them as deadly weapons then bury the victims? Or outlaw the internet because lots of stupid things are said and done via the internet? All tools have good and bad about them. Perhaps CPI is not a great measure, but given the problem space and a desire to not go too overboard with solutioning, it seems like a pretty decent compromise. Of course if the ultimate intended uses of CPI are things you are against (another place where politics enters) I can understand you might be against CPI. A sort of "starve the beast" approach of attacking the tools that enable activities you are against is a rational position, but it isn't clear that is the position you hold.
As we age, our spending patterns change. We may need expensive medicine, pay for a visiting nurse, contract labor to do work we used to do when younger...
One of the things Adam Curtis, a documentary filmmaker notes how much we revel in our sort of "independence" as unique individuals. To quote him,
I'm saying that, with the rise of individualism, you tend to get the corrosion of the other idea of social bonds and communal networks, because everyone is on their own... If you ask me what my politics are, I'm very much a creature of my time. I don't really have any.
Without going into it too deeply, one of the legitimate attacks against CPI is that our society, starting back in the 1960s, started to embrace the individualism which makes measures more difficult. You get things like intersectionality and you start saying, you can't even do CPI based upon region or age group. If your attack on CPI is to say that our culture is much more splintered than when CPI as a measure was adopted, I'm with you on that. If then you say, that there are legitimate issues CPI is trying to solve, but fails to fully solve, I must ask, what are the alternative approaches you suggest? If a bit like Curtis, you reply you don't have any better alternative ideas, I understand your point, but I think it takes a model to beat a model. Just saying "x is no good" without resolving the underlying needs with alternatives strikes me as no solution at all. Either you are against the needs or you are against the model and if you are against the needs, you need no alternative, but if you are against the model, you must have an alternative model.

Incidentally, I include myself in this, with my solution to the problem of using raw CPI is to try to use exemplars to judge yourself against, as a sort of checksum against CPI. CPI is probably good enough for those who don't care that much on the topic, but for folks like myself, exemplars look a bit more precise and give a bit more insight into the problem. It is why I wrote this topic. It is why I point at using Jacob as a method of evaluation. I will admit everyone doing it themselves is probably more accurate, but I think exemplars are the right mix of efficient and specific enough. A "Am I like Jacob?" is probably good enough to then go measuring your own inflation, particularly over a mid-term timeframe (e.g. 20-30 years). For 60 years, you might want two different exemplars, Jacob and a older similarly conservative spender. That is the model I'm suggesting.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

Funny what popped up on my recommended reading list today (the Internet is always watching; and it's getting much better at it!): https://www.bloomberg.com/opinion/artic ... ket-newtab
I also think measures of price inflation are almost useless over the long run, because a person today consumes a very different bundle of goods than one in, say, 1950.
I mean, dammit if that isn't EXACTLY what I said in this thread yesterday.

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Sclass
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Re: Examining Inflation

Post by Sclass »

JCD wrote:
Fri Feb 26, 2021 2:24 am
@Sclass
Wealth is absolute in my mind, while I agree money is not absolute.

If I understand you correctly, you're saying that living with low inflation is about avoiding things other people, particularly the wealthy want?
This is what happens when I think out loud without thinking things through first. I mistakenly used the words interchangeably without even thinking. Dumbass me. I’m not too good at writing down what I’m thinking. Maybe I’m no good at thinking either. I really should stay away and stick to the fixit log.

So what I’m trying to say is I don’t like to describe inflation using metrics created to describe a market dynamic between supply and demand of currency and goods. The conventional figures take you further away from the reality of the situation. Figures a bunch of old guys in threadbare tweed coats (the kind with leather elbow patches) come up with. Misdirected oversimplification of a simple market phenomenon. Too much currency chasing too few goods. I think Friedman (old tweed type) might have said this.

I feel it’s all around us. I don’t track the price of tomatoes. I’m paying $3.99 for those this morning because I don’t like the green ones offered to the commoners at the food bank. $3.99 for a big red sweet and flavorful tomato or $20,000,000 for a house on the Newport Coast. It’s only taken a few CA billionaires to blow up the price of rocks between Newport Beach and Crystal Cove Marine reserve. That’s the relative part. It’s all about having more than the guy next to you who wants the same thing.

Personal story (as in up close personal in my face): there are very few beachfront properties on the Newport Coast because of marine nature preserves. Billionaires are collecting up multiple plots to make their private coastlines in insane bidding wars...because a few small landowners don’t want to sell the one home that links their block of holdings together into a unified strip of land. Locked illiquid market + too much currency = insane price appreciation. But no goods changing hands. One neighbor has a billion and one has a hundred million. The winner gets the beachfront estate, the loser needs to walk on an easement trail through the villa to get to the beach and be reminded of the relative value of his money.

The real estate agents call it appreciation of hot property. I call it inflation. Same thing with dividend stocks this week. Maybe the secret isn’t staying out of Richie Rich’s market but rather getting there before him. That’s all I meant about avoiding Richie Rich.

Sometimes it takes the upper and lower limits of a phenomenon to get us to actually see it. That’s why I always gravitate towards these examples. Some of the most interesting assets probably cannot be bought with script.

Time to get my lazy self outta bed and buy some delicious overpriced tomatoes with the commoner’s precious script.

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Sclass
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Re: Examining Inflation

Post by Sclass »

JCD wrote:
Fri Feb 26, 2021 2:24 am
Wealth is absolute in my mind, while I agree money is not absolute.
I have ten goats. You have two. Relative or absolute?

Why can’t anyone come up with a figure on Google search for “what is considered wealthy”?

white belt
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Re: Examining Inflation

Post by white belt »

This money vs wealth discussion reminds me of this post about whether frugality is relative or absolute: viewtopic.php?p=165254#p165254

I like Mike Green’s definition of an economy, which is that an economy is just a bunch of people doing favors for each other. Money is just a convenient accounting system for these favors, but has no intrinsic value. You can look across history at different civilizations using different forms of money (fiat, precious metals, stones) to keep track of these favors.

white belt
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Re: Examining Inflation

Post by white belt »

Let me introduce another layer of complexity. The ERE individual knows that financial capital is just one form of capital and is likely to leverage several forms of capital in his web of goals.

Let’s say you leverage social capital with a neighbor to share childcare duties. Their kids come over to your house once a week after school and your kids go over to their house once a week after school, so in that way you each get a free afternoon once per week to spend as you please.

However, increasing food, healthcare, education, and transportation costs without a commensurate increase in wages means your neighbor over time is finding it harder to make ends meet. He’s not an ERE adherent, just a typical consumer. He comes to you and says that he needs to take on a part time job or more work hours to cover these costs, which means now he can no longer watch your kids once a week.

In the above example we see how inflation can indirectly affect the ERE individual, even when that individual has extremely low spending. I’m sure you can come up with better examples of the same phenomenon.

Edit: Actually a better example would be your neighbor is a retiree with fixed savings they are living off of, so they need to take on a part time job because that is the only way for them to offset their loss in purchasing power.

Campitor
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Re: Examining Inflation

Post by Campitor »

This is not to disagree with your point ... you hold.

@ JCD

I'm not against CPI. I'm just stating that CPI is immensely skewed to urban markets and purchasing patterns and the items used to calculate CPI may or may not include real world items that you may need to purchase or have been purchasing.

Here is what the US Bureau of Labor Statistics states about how CPI is calculated: https://www.bls.gov/cpi/questions-and-a ... Question_4
4. How is the CPI calculated?
The CPI is a product of a series of interrelated samples. First, using data from the U.S. Census we select the urban areas from which data on prices are collected. Next, another sample (of about 14,500 families each year) serves as the basis for a Telephone Point-of-Purchase Survey (TPOPS) that identifies the places where households purchase various types of goods and services, forming the basis for the CPI outlet sample. Using data from the Consumer Expenditure Survey, BLS statisticians assign quotes in the CPI item categories to specific outlets.A specific item is then chosen for selection using a process which bases the probability of selection for an item on the share the item composes within the outlet’s revenue in that item category.

Recorded price changes are weighted by the importance of the item in the spending patterns of the appropriate population group. The combination of carefully selected geographic areas, retail establishments, commodities and services, and associated weight, gives a weighted measurement of price change for all items in all outlets, in all areas priced for the CPI.
Here is what the Bureau of Labor statistics has to say about CPI: https://www.bls.gov/cpi/factsheets/aver ... differ.htm
The Consumer Price Index (CPI) is a measure of the average change in prices paid by urban consumers for a market basket of goods and services. Because the CPI is a statistical average, it may not reflect your experience or that of specific families or individuals, particularly those whose expenditure patterns differ substantially from the "average" urban consumer.
So if you're not an average consumer (no one really is), or an urban dweller, your experience (past/present/future) with inflation may be vastly different than the numbers CPI benchmarks. Does this mean CPI has NO utility - of course not. What it does mean is that CPI should NOT be used as any kind of weighted standard for making personal financial decisions or as a means of prognosticating future financial capital needs.

Your stated aim when starting this thread:
Being fascinated with the finance side of the world, I read/watch way too much around finance and have been interested in the inflation/deflation debate. Those who quote CPI often get responses like "inflation is 5 or 10% unlike what the government says." Then those who defend the government stats say things like "it is near enough" or "tech has really deflated" or some such comment. I've listened to plenty of back and forth discussion like this or this and felt like it would be worth my time to get a feel what inflation is really like.
You yourself suspected something was fishy in Denmark in regards to CPI or why would you even bother starting this thread? My own belief is that CPI is underreporting inflation for anyone who isn't the average urban consumer or within the 14,500 families surveyed.

Hristo Botev
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Re: Examining Inflation

Post by Hristo Botev »

Personal anecdote (I know, what else is new?): DW's in-laws are selling their intown condo and the car they keep at the condo. We bought our current house on the assumption that we'd have the condo as our "guest room," so that we'd be good in a smaller place. And we went to being a 1-car family because we had the in-laws' car for back-up for those times when we've got kids at different sports fields at the same time, etc. Anyway, the in-laws are selling the condo because the carrying costs are too high because property values keep going up and so do property taxes, and so does their HOA, and because they think there may be a bubble burst and they want to sell while they can do so at a premium. I think their reasoning makes sense; I always wondered why they thought having a condo up here made sense. But because of "inflation" (I guess?), we're out of our "social capital" solution to a guest room and a second car. The guest room isn't a big deal (is that some form of "shrinkflation"?), as Airbnb will be fine for when we have in-town guests. But we did end up buying a second car as a result of the decision, and the prices in the used market right now are INSANE! (A friend who is involved in the used car auctions said a lot of dealers aren't even sending the cars to auctions right now because prices are so high, they are just keeping them and flipping them themselves.) So, at least where prices hit us, it sure seems like sh@# is getting more expensive.

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Re: Examining Inflation

Post by nomadscientist »

"but this dinosaur is not aware of anything that a smartphone can do that one couldn't already do on other devices in 1980."

Track and mind control whole nations in real time.

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Sclass
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Re: Examining Inflation

Post by Sclass »

white belt wrote:
Fri Feb 26, 2021 10:39 am
Let me introduce another layer of complexity.

Let’s say you leverage social capital with a neighbor to share childcare duties. Their kids come over to your house once a week after school and your kids go over to their house once a week after school, so in that way you each get a free afternoon once per week to spend as you please.
Yes. The world is complex. What you’re saying here is basically what Ben Bernanke said about the falling US dollar a few years ago. He said it wasn’t an issue if we didn’t rely on imported stuff. I think it was in the middle of the fracking bubble which promised to slow down purchases on imported oil.

While somewhat naive, there is a ring of truth in it. Isolating and creating your own economy is fine up until the point you break the seal. Then all hell breaks loose like Central America.

This is why I don’t talk about ERE or relative frugality with my neighbors. Isn’t this why we actually do this stuff? For an edge?

The whole CPI thing is just a sham. It’s like trying to learn about Covid 19 using the test positivity rate. While it sends you some real signals about the epidemic you’re a long way from understanding the mechanisms of the virus.

Putting a number on multiple markets to describe pricing across vast swaths of commodity goods and industrial supply as well as the denominator which is the cost/velocity/supply of money is silly. It’s worse than using an ill conceived average to describe 500 large companies in one little number. Common sense and information theory says it just cannot do what people are trying to do with it. One number. Sixteen bits. That ain’t enough info to gauge the animal spirits.

Massaging it to support a narrative is the game of academics.

Qazwer
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Re: Examining Inflation

Post by Qazwer »

@Sclass - since I sometimes resemble that last remark I will give it a shot :geek:

I want to have some relatively transparent measures that I can give people money to over decades (social security, COLA pension) - I do not want to have to constantly readjust and people question how to do it every year - if I do not adjust for inflation this will erode or I want to have some stable form of getting money that I need to keep stable (taxes)

Next group - I will be receiving such and need to know how the generic will apply in my particular situation

Third group - I want to answer a question that covers multiple decades of spending
In this case does ERE work due to a end of technological history thesis - a JAFI inflates at a lower rate than the CPI and general wages inflate - so you can live what is in a lot of ways a 1950’s middle class lifestyle spending 1JAFI
Basically that the monetary portion of ERE is not that extreme - it is only from a different time period - for that analysis you need definitions of inflation I think

white belt
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Re: Examining Inflation

Post by white belt »

Qazwer wrote:
Fri Feb 26, 2021 2:53 pm
I want to have some relatively transparent measures that I can give people money to over decades (social security, COLA pension) - I do not want to have to constantly readjust and people question how to do it every year - if I do not adjust for inflation this will erode or I want to have some stable form of getting money that I need to keep stable (taxes)
Do you agree that there is huge political incentive to downplay inflation numbers? Inflation upsets the masses and means you will have to increase payments of over-promised entitlement programs that are already a huge liability. Even downplaying official inflation numbers by a few basis points means substantial savings to the federal government in paying out entitlements.

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