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Sunday, January 6, 2013

Cost of Living Measurement

The US government publishes data on Consumer Price Index (CPI) and calculates annual inflation.  The purpose of calculating annual inflation is to provide a measurement of cost of living adjustments required annually to keep up living standards.

The concept is sound, and reasonable.   Everyone knows prices change over time.  Some change due to technology and efficiency.  Some change due to resource scarcity, and yet some is currency valuations.  I am sure if you search the web, you can find some pretty interesting theories on drivers of basic living costs changes.

In truth, probably each one has some play in prices, the emphasis on weight of the contribution is really the debate.

But one thing that has come under hot debate is the measurement of cost of living changes.  To me its pretty simple.  Cost for food, energy, and shelter should be the core components, with a smaller component related to basics realities in a modern world that everyone must face to compete.  The smaller component I will ignore, since it is pretty much impossible to gain consensus.  (Example, must you have one of these: house phone, cell phone, or internet?  In my opinion yes to be gainfully employed in a job above minimum wage).

The economic aspect that concerns me the most is the Baby Boomers in the USA.  This demographic has dwarfed my entire life experience as I travel in their wake.   The inflation 70's, to gogo 80's, and the bubble 2000 can be traced back to their influence.  As they retire, its certain their economic impact will be staggering.

The government entities are painfully aware of the dwarfing economic challenges this presents.   Stand-up politicians who talk straight on these issues are not to be found, for those that do are un-electable.
Thats OK, its life.  People vote for the story they want, reality of trouble is not welcome.

But for my lifestyle, it is important to keep an eye on the dwarfing aspects of the baby boomer retirement ahead.   And one way the government can 'kick the can' a little is to play games with the CPI.

How? A continual slow under-reporting of CPI ensures that the baby boomers don't get the value out of their Social Security dollars.  To those getting benefits, no one 'cut' their promised entitlement.  They are getting what is promised in monthly checks.  But if the cost of living is higher than reported, the net is the baby boomers must live with less than what was promised decades ago.

This in a strange way, benefits me.  For I am not a baby boomer, and that generation gets less, which in turn means I have to pay less of my work contribution to sustain their living standards.

But this also hurts me potentially.  As the CPI is used to determine what is a fair annual raise, inflation-adjusted interest rates, and other gauges that will also curtail my own future living.

So what to do?  You can keep an eye on TRUE annual inflation to gauge your own living standards for your own future.

A web site called Shadow Government Statistics does this for you.  The site maintains a deluge of information bases on 'old government  metrics that were created at a time the goal was to actually accurately measure statistics.  These old standards when used to current situations gives an interesting gauge of current reporting vs older reporting.

One can argue, and there is truth to this, that the weight of economic changes shifts in importance as the living of USA citizens shift focus on different items.  For example if US Postage stamps had a part of CPI, in today's current world, it is immaterial.  When in the 1890's, it may have been more material to citizens.

In any event, I highly recommend looking at Shadow Government Stats inflation charts, if anything to give perspective.

Below is two graphs, first is 1990 CPI, second is 1980 CPI government computation methods.  Both compared against current computations.
The 1980 shows 10% annual inflation, while 1990 shows 6% inflation, compared to 2% today.
Keep in mind, the USA had the highest average gasoline prices on RECORD in 2012, yet inflation is 2%.
Fuel costs are passed into the entire supply chain, alternate fuels are not substantially inplace yet.
I happen to think inflation is BETWEEN 2% and below 6%.  I think there is truth to the changes made over the years.  I don't think the government as ahead of its time for changing process to match reality, so I am sure changes were needed.

But one thing is certain, if your a baby boomer, in 1979 when promised your future social security benefits, the CPI that was used when that promise was made is not nearly comprised of the same components of today.  And I suspect it will be modified again in the next 5 years even further.

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