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What did you think of Cutepuppy’s post at #31?

Regarding core inflation. I don’t know enough to make a lot of comments. I do however question its appropriateness as the inflation number most frequently cited in the media and as the only inflation number used by the Fed in evaluating monetary policy. After all we need to eat and we need energy. I also have a vague memory reading that focusing on core inflation leads to monetary policies that debase the dollar, but have to look up that information could be that this is something true more recently, but not in the past 20 -30 years.

The only chart I could quickly find comparing headline to core inflation, showed both consistently trending upward. This questions the validity of rationale that headline inflation demonstrated wild swings because it included food and energy.

Focusing on the rationale for using hedonics, quality adjustments, substitution effect, and geometric weighting only draws one’s attention away form the fact that the CPI has moved from evaluating inflation in terms of a certain standard of living to evaluating inflation in terms of a declining standard living. Since the uses of the CPI (economic indicator, deflator of other economic indicator, a standard to evaluate returns on investment, a standard to evaluate COLA adjustments to wages and other payments) require an apples to apples comparison they have no place in calculating the CPI, other than to artificially depress the CPI. These tools are constantly being used over more and more categories. By now they may have extended to all of them.

I believe it was Bill Gross of Pimco who said that the Owners Rent Equivalent instituted in 1983 suppressed the CPI ~1%. I remember reading that that number increased to about 3-4% when the housing market heated up.

While flat (or declining or no) income makes inflation seem worse than 30 years ago, I believe that there are other factors involved. All the ‘interesting’ things occurring on Wall Street and in the Financial industry have lowered the value and return of savings and retirement funds. Housing values have plunged. Inflation over the last 10+ years is no longer hidden by ready access to cheap credit, and cheap goods made in third world countries by workers getting 25¢ per hour.

You and Cutepuppy look at the same information with a reasonable understanding and come to differing conclusions. I can live with that. I understand the difference in perspective.

Now a slightly different question: Considering that a housing price bottom is still nowhere in sight, doesn’t that mean that actual Wealth (Net Worth, excluding recent stock gains) is still decreasing rapidly? Isn’t a continuous reduction in Wealth the equivalent of negative earnings, offsetting stagnant actual wages? Therefore, with relatively modest actual inflation (whether Headline or Core) and declining earnings (by my definition above), don’t we have an effective inflation rate of Prices / Earnings that is substantially higher than either Core or Headline CPI report?

I think the negative wealth effect of housing is killing families’ ability and willingness to spend their fewer and fewer asset / earnings dollars on the somewhat more expensive stuff of life.

That would perfectly explain the difference between CPI (modest increases) and Americans’ perceptions (we’re getting poorer and hosed.)

I think the bottomless housing market price indicts the “Owners Equivalent Rent” component of the CPI as optimistic. If Owners Equivalent Rent takes into account CURRENT market prices of houses which have declined, but the average American lives in a house and pays a mortgage based on a higher acquiring price of 5 years ago, then Owners Equivalent Rent understates what actually happens to peoples’ bank accounts. Mortgage payments that are hard to walk away from remain high, while the Owners Equivalent Rent component of the CPI declines. That’s just fakery.

The adjustable component of Owners Equivalent Rent only comes to particular individuals who default on their mortgages and walk away. In that way, only the morally suspect are rewarded with the actual reduction in Owners Equivalent Rent. Upstanding citizens who honor their commitments are killed by stagnant wages, reduced house asset value, and actual CPI. I don’t see how those folks aren’t completely hosed by current circumstance, in a way that effectively creates a massive CPI for them individually.

Your thoughts, gentlemen / ladies?