[Daniel]

Oh, Joe Middle Class certainly experiences the 12% increase, no doubt about that. I’m arguing that it’s a fair increase (not inflation), because he’s fatter and older than he used to be, and he gets MRIs and CAT scans that he didn’t used to get.

So yes, in a nutshell, the overall cost of living is going up faster than the CPI, because people’s standards have gone up. They consume more of everything. Even if inflation were absolutely zero, people would still pay way more on health care now than 10 years ago, because they go to the doctor way more often and gobble pills like there’s no tomorrow.

That’s my main point: the increase in cost of living that people “feel” is not necessarily inflation. They do get more or better goods or services.

And on to your last point: of course they’re not the same goods as 20 years ago. They don’t make Oldsmobiles anymore. But as long as the change is continuous, the CPI makes sense. Let me give you an example: say the Olds Cutlass is in the CPI basket. It costs $11,000 in 1990, and same model costs $11,220 in 1991, so the 1991 CPI is 2%. But they stop making it in 1992. What to do now? Answer: change the car to a Camry. But a Camry costs much more (say, $14,420) in 1992, is that fair? Answer: find out how much the same model Camry cost in 1991 and use that info. If the Camry was $14,000 in 1991, then the 1992 CPI is 3%. Joe Middle Class, who bought a Cutlass in 1991 and a Camry in 1992, feels a much bigger price increase than 3%, but he changes from one car to another. Only 3% is inflation. The rest is improvement.

[Daniel]

Oh, Joe Middle Class certainly experiences the 12% increase, no doubt about that. I’m arguing that it’s a fair increase (not inflation), because he’s fatter and older than he used to be, and he gets MRIs and CAT scans that he didn’t used to get.

So yes, in a nutshell, the overall cost of living is going up faster than the CPI, because people’s standards have gone up. They consume more of everything. Even if inflation were absolutely zero, people would still pay way more on health care now than 10 years ago, because they go to the doctor way more often and gobble pills like there’s no tomorrow.

That’s my main point: the increase in cost of living that people “feel” is not necessarily inflation. They do get more or better goods or services.

And on to your last point: of course they’re not the same goods as 20 years ago. They don’t make Oldsmobiles anymore. But as long as the change is continuous, the CPI makes sense. Let me give you an example: say the Olds Cutlass is in the CPI basket. It costs $11,000 in 1990, and same model costs $11,220 in 1991, so the 1991 CPI is 2%. But they stop making it in 1992. What to do now? Answer: change the car to a Camry. But a Camry costs much more (say, $14,420) in 1992, is that fair? Answer: find out how much the same model Camry cost in 1991 and use that info. If the Camry was $14,000 in 1991, then the 1992 CPI is 3%. Joe Middle Class, who bought a Cutlass in 1991 and a Camry in 1992, feels a much bigger price increase than 3%, but he changes from one car to another. Only 3% is inflation. The rest is improvement.

[Daniel]

Oh, Joe Middle Class certainly experiences the 12% increase, no doubt about that. I’m arguing that it’s a fair increase (not inflation), because he’s fatter and older than he used to be, and he gets MRIs and CAT scans that he didn’t used to get.

So yes, in a nutshell, the overall cost of living is going up faster than the CPI, because people’s standards have gone up. They consume more of everything. Even if inflation were absolutely zero, people would still pay way more on health care now than 10 years ago, because they go to the doctor way more often and gobble pills like there’s no tomorrow.

That’s my main point: the increase in cost of living that people “feel” is not necessarily inflation. They do get more or better goods or services.

And on to your last point: of course they’re not the same goods as 20 years ago. They don’t make Oldsmobiles anymore. But as long as the change is continuous, the CPI makes sense. Let me give you an example: say the Olds Cutlass is in the CPI basket. It costs $11,000 in 1990, and same model costs $11,220 in 1991, so the 1991 CPI is 2%. But they stop making it in 1992. What to do now? Answer: change the car to a Camry. But a Camry costs much more (say, $14,420) in 1992, is that fair? Answer: find out how much the same model Camry cost in 1991 and use that info. If the Camry was $14,000 in 1991, then the 1992 CPI is 3%. Joe Middle Class, who bought a Cutlass in 1991 and a Camry in 1992, feels a much bigger price increase than 3%, but he changes from one car to another. Only 3% is inflation. The rest is improvement.

[Daniel]

Oh, Joe Middle Class certainly experiences the 12% increase, no doubt about that. I’m arguing that it’s a fair increase (not inflation), because he’s fatter and older than he used to be, and he gets MRIs and CAT scans that he didn’t used to get.

So yes, in a nutshell, the overall cost of living is going up faster than the CPI, because people’s standards have gone up. They consume more of everything. Even if inflation were absolutely zero, people would still pay way more on health care now than 10 years ago, because they go to the doctor way more often and gobble pills like there’s no tomorrow.

That’s my main point: the increase in cost of living that people “feel” is not necessarily inflation. They do get more or better goods or services.

And on to your last point: of course they’re not the same goods as 20 years ago. They don’t make Oldsmobiles anymore. But as long as the change is continuous, the CPI makes sense. Let me give you an example: say the Olds Cutlass is in the CPI basket. It costs $11,000 in 1990, and same model costs $11,220 in 1991, so the 1991 CPI is 2%. But they stop making it in 1992. What to do now? Answer: change the car to a Camry. But a Camry costs much more (say, $14,420) in 1992, is that fair? Answer: find out how much the same model Camry cost in 1991 and use that info. If the Camry was $14,000 in 1991, then the 1992 CPI is 3%. Joe Middle Class, who bought a Cutlass in 1991 and a Camry in 1992, feels a much bigger price increase than 3%, but he changes from one car to another. Only 3% is inflation. The rest is improvement.

[Daniel]

Just for the record, I disagree with this. I believe that, although the CPI is not perfect, it’s pretty close to reality compared to what others say. It would take a very, very long post to fully justify my position, and unfortunately I don’t have the time and energy to write it, so I’ll just mention the most relevant points:

– inflation is not the same everywhere; in San Diego, the local CPI has probably been substantially higher than the national CPI for a very long time. Think Europe: a few years back Ireland was at 7% inflation, while Germany was at 1%, both with same currency. I’m sure the Irish felt their inflation rate was higher than the 3% average reported by the ECB. That doesn’t mean the ECB was lying.

– most people don’t fully grasp what the CPI measures; it measures changes in the price of the SAME goods or services. The best example is health insurance. Most critics say “health insurance is going up 10%/year, how is that not inflation?”. Well, it is not. It is going up 10%/year because we “consume more health care” than we used to. The price of a single medical procedure doesn’t go up 10%/year. It maybe goes up 3%/year, but we get 7% more of them done. And that will continue, as the population gets older.

These, IMHO, are the main misconceptions. People assume that inflation is the same everywhere (which is not), and that all increased expenses are due to inflation, which is again not true. We simply consume more of everything than we used to (bigger cars, houses, etc), and that is reflected in the prices we pay.

PS: the majority here will probably disagree with my position. That’s fine. I mostly wrote this to raise awareness to the opposing point of view, not to win converts.

[Daniel]

Just for the record, I disagree with this. I believe that, although the CPI is not perfect, it’s pretty close to reality compared to what others say. It would take a very, very long post to fully justify my position, and unfortunately I don’t have the time and energy to write it, so I’ll just mention the most relevant points:

– inflation is not the same everywhere; in San Diego, the local CPI has probably been substantially higher than the national CPI for a very long time. Think Europe: a few years back Ireland was at 7% inflation, while Germany was at 1%, both with same currency. I’m sure the Irish felt their inflation rate was higher than the 3% average reported by the ECB. That doesn’t mean the ECB was lying.

– most people don’t fully grasp what the CPI measures; it measures changes in the price of the SAME goods or services. The best example is health insurance. Most critics say “health insurance is going up 10%/year, how is that not inflation?”. Well, it is not. It is going up 10%/year because we “consume more health care” than we used to. The price of a single medical procedure doesn’t go up 10%/year. It maybe goes up 3%/year, but we get 7% more of them done. And that will continue, as the population gets older.

These, IMHO, are the main misconceptions. People assume that inflation is the same everywhere (which is not), and that all increased expenses are due to inflation, which is again not true. We simply consume more of everything than we used to (bigger cars, houses, etc), and that is reflected in the prices we pay.

PS: the majority here will probably disagree with my position. That’s fine. I mostly wrote this to raise awareness to the opposing point of view, not to win converts.

[Daniel]

Just for the record, I disagree with this. I believe that, although the CPI is not perfect, it’s pretty close to reality compared to what others say. It would take a very, very long post to fully justify my position, and unfortunately I don’t have the time and energy to write it, so I’ll just mention the most relevant points:

– inflation is not the same everywhere; in San Diego, the local CPI has probably been substantially higher than the national CPI for a very long time. Think Europe: a few years back Ireland was at 7% inflation, while Germany was at 1%, both with same currency. I’m sure the Irish felt their inflation rate was higher than the 3% average reported by the ECB. That doesn’t mean the ECB was lying.

– most people don’t fully grasp what the CPI measures; it measures changes in the price of the SAME goods or services. The best example is health insurance. Most critics say “health insurance is going up 10%/year, how is that not inflation?”. Well, it is not. It is going up 10%/year because we “consume more health care” than we used to. The price of a single medical procedure doesn’t go up 10%/year. It maybe goes up 3%/year, but we get 7% more of them done. And that will continue, as the population gets older.

These, IMHO, are the main misconceptions. People assume that inflation is the same everywhere (which is not), and that all increased expenses are due to inflation, which is again not true. We simply consume more of everything than we used to (bigger cars, houses, etc), and that is reflected in the prices we pay.

PS: the majority here will probably disagree with my position. That’s fine. I mostly wrote this to raise awareness to the opposing point of view, not to win converts.

[Daniel]

Just for the record, I disagree with this. I believe that, although the CPI is not perfect, it’s pretty close to reality compared to what others say. It would take a very, very long post to fully justify my position, and unfortunately I don’t have the time and energy to write it, so I’ll just mention the most relevant points:

– inflation is not the same everywhere; in San Diego, the local CPI has probably been substantially higher than the national CPI for a very long time. Think Europe: a few years back Ireland was at 7% inflation, while Germany was at 1%, both with same currency. I’m sure the Irish felt their inflation rate was higher than the 3% average reported by the ECB. That doesn’t mean the ECB was lying.

– most people don’t fully grasp what the CPI measures; it measures changes in the price of the SAME goods or services. The best example is health insurance. Most critics say “health insurance is going up 10%/year, how is that not inflation?”. Well, it is not. It is going up 10%/year because we “consume more health care” than we used to. The price of a single medical procedure doesn’t go up 10%/year. It maybe goes up 3%/year, but we get 7% more of them done. And that will continue, as the population gets older.

These, IMHO, are the main misconceptions. People assume that inflation is the same everywhere (which is not), and that all increased expenses are due to inflation, which is again not true. We simply consume more of everything than we used to (bigger cars, houses, etc), and that is reflected in the prices we pay.

PS: the majority here will probably disagree with my position. That’s fine. I mostly wrote this to raise awareness to the opposing point of view, not to win converts.

[Daniel]

Just for the record, I disagree with this. I believe that, although the CPI is not perfect, it’s pretty close to reality compared to what others say. It would take a very, very long post to fully justify my position, and unfortunately I don’t have the time and energy to write it, so I’ll just mention the most relevant points:

– inflation is not the same everywhere; in San Diego, the local CPI has probably been substantially higher than the national CPI for a very long time. Think Europe: a few years back Ireland was at 7% inflation, while Germany was at 1%, both with same currency. I’m sure the Irish felt their inflation rate was higher than the 3% average reported by the ECB. That doesn’t mean the ECB was lying.

– most people don’t fully grasp what the CPI measures; it measures changes in the price of the SAME goods or services. The best example is health insurance. Most critics say “health insurance is going up 10%/year, how is that not inflation?”. Well, it is not. It is going up 10%/year because we “consume more health care” than we used to. The price of a single medical procedure doesn’t go up 10%/year. It maybe goes up 3%/year, but we get 7% more of them done. And that will continue, as the population gets older.

These, IMHO, are the main misconceptions. People assume that inflation is the same everywhere (which is not), and that all increased expenses are due to inflation, which is again not true. We simply consume more of everything than we used to (bigger cars, houses, etc), and that is reflected in the prices we pay.

PS: the majority here will probably disagree with my position. That’s fine. I mostly wrote this to raise awareness to the opposing point of view, not to win converts.

[Daniel]

SDR,

The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.

So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).

[Daniel]

SDR,

The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.

So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).

[Daniel]

SDR,

The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.

So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).

[Daniel]

SDR,

The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.

So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).

[Daniel]

SDR,

The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.

So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).

[Daniel]

Josh,

Be careful with what comes out of those calculations. It may be worse than meaningless. First off, 1997 prices were so depressed in SoCal, we may not see those prices (adjusted for inflation) ever again. Don’t think 1997 was “fair”. 1997 was “dirt cheap”. Second, long term house prices don’t quite track headline inflation data (government or otherwise). They track the shelter component of the CPI, which, depending on location, could be way off the headline CPI number. After all, housing and rental prices in San Diego and Buffalo were not that much different 50 years ago, but they are now. That’s 50 years of different inflation rates between these two cities. Using US headline CPI for either case would be meaningless.

[Author]

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