Do you believe posted inflation rates?

In My Humble Opinion
1

It is clear we live in unusual times and governments are presumably doing their best. The business environment is often challenging and the price of many items has stayed the same. But a lot of staples in Canada seem to be currently selling at high prices for different reasons - gas due to Michigan’s pipeline concerns, building supplies, plenty of groceries. Business is trying to stay afloat or increase profits. Lots of money supposedly being saved. Housing prices have exploded and all the big banks are soon raising most fees soon.

When the government says something like inflation is up to 2%, do you tend to believe them?

2

Yes, I do.

3

Why wouldn’t I? There are multiple different sets of numbers published, and the methodology is public.

4

More or less, but remember, they base the rates on a handful of selected consumer items. I do not think toilet paper (for example) is one of them.

So, when they say “hovering around 2%” sure, I accept that. But if some pundit says “exactly 2.14%” my eyebrow goes up.

5

Not really. I believe their calculations are calculated correctly. But I don’t believe the underlying methodology is sound.

6

But unless your eyebrow goes up by more than 2.14%, on an inflation-adjusted basis it has not moved.

7

Very funny. I chortled. :laughing:

8

To the OP:

The basket used for CPI calculations is published, all the methodology is transparent. I assume that you don’t think they are just lying… that would be easy to discover.

So the question is really whether you agree that the CPI basket is appropriate. And to a large extent that’s a subjective question. It depends on what you personally tend to spend money on, and in what area you live.

With routine everyday or periodic purchases, I think to some extent people tend to be susceptible to selective memory & confirmation bias, paying much more attention to stuff that goes up in price.

Then there’s the question asset price inflation - housing in particular. Is it really true that young people can’t afford to buy a home? There’s some truth to this, but it’s not as extreme as you might think if you look at this long term chart of the ratio of house price to income. The ratio was pretty steady around 4.5 from 1970-2000, it’s now around 6. But much lower long term interest rates are probably sufficient to explain that. It’s more of a problem for a young person in the U.K. (further down the page). And of course in certain areas (parts of California for example) it’s more extreme.

Home Price to Income Ratio (US & UK) - 75 Year Chart | Longtermtrends.

9

Absolutely. The people who compile the stats are career government employees, they don’t cook the books to make any political party look good

10

I personally do believe the numbers. They are public and easy to verify. But governments can have incentive to minimize inflation. I believe the “basket” they use to determine the numbers is not always the most representative choice. Of course, any choice is arbitrary. One might say the same thing of many statistics.

11

Also large nations can have significant differences in prices in different areas, so a national average might seem very wrong to someone living in a particular area.

12

I believe the numbers. I haven’t seen much inflation in the last decade and the CPI shows there hasn’t been much. Now I’ll be surprised if q2 numbers show there hasn’t been any inflation.

13

Part of the problem is that different groups have different inflation rates. Young people spend more on entertainment, while older people spend more on medication for example. Disposable income makes a great deal of difference for obvious reasons.

14

The argument over whether the basket truly reflects inflation has been loud and constant for decades. Many people have suggested alternative baskets. The problem with those is exactly the problem with the CPI: they represent what the maker thinks is important, which can be taken apart in a similar way.

The better question would be, is there an alternative measure of inflation that tracked the economy in the past but now shows a sudden change unrecognized by the CPI? I’m not aware of one, but I’m no expert. And if there were, how would we be able to tell whether it’s real or a one time fluke until several years have passed?

We know the CPI “works” because we have hindsight. The economy has not noticeably veered away from the CPI’s measurements in a way that would force a reassessment. The numbers may not bee perfectly accurate, whatever that means, but they aren’t wildly off either or all the economists would have been screaming about them.

Moreover, the Fed, the one organization that uses numbers to guide future value, doesn’t just rely on the CPI, but looks at a whole pile of measurements that go way past consumer prices. So they are a distraction from all real analysis.

15

We’d love to hear your proposal for a better one.

16

How would they know that a specific basket minimizes inflation over time? If they changed the basket after doing measurements then I’d be suspicious, but that isn’t how it works.
Also, inflation recently has been below target, so if they are hacking the numbers they are doing a bad job of it.

17

Fair enough. Obviously, changing the basket is like changing accounting methods. It can be viewed with some suspicion. With the same basket, there is at least consistency.

I generally trust the Canadian government. I personally trust their inflation number is honest. Canada is not undergoing hyperinflation - and the Canadian government is not one which has any incentive to misrepresent this. I was thinking of a few specific places where the economic figures are widely deemed irrreliable.

The numbers will differ by area and by individual expenses. Prices seem pretty high to me at the moment. No doubt there is lag time in calculating figures and Covid has certainly caused disruptions.

18

Any ‘aggregate’ number is at best an approximation. Inflation is a complex phenomenon, and even harder to pin down than some other aggregates like the unemployment rate.

However, so long as the criteria don’t change from quarter to quarter, the CPI makes for a good comparative number. We may not know exactly what the inflation rate is, but we can tell how much it’s changing for the same basket of goods. Whether it’s the correct basket is an endless debate.

All that said, I think 2% is a very low number, and inflation is likely higher than that. The real question, in my mind, is not how high inflation currently is, but whether it is transitory. If the inflation is simply due to supply chain issues and labor shortages brought on by Covid, then we can tolerate quite a lot, knowing that prices will come back down after the effects of Covid have been erased.

On the other hand, if inflation is high because of the mad money-printing going on in Canada and the U.S. then we are in big trouble. It’s very hard to unwind that without a lot of pain. And we can’t use interest rates as a weapon like we used to, because a decade of very low interest has created the mother of all global debt traps.

Thr mere mention of possible interest rate increases now causes markets to puke. A few dys ago Janet Yellen said that if inflation kept rising they might have to look at interest rate increases, but then had to come running out a while later to disown her own statements after the Nasdaq and the S&P 500 dropped.

If inflation is caused by money printing, then both the Biden and Trudeau administrations are in big trouble because they are planning to spend so much money that the only way to do so is to print it.

One way to tell will be to see how markets react if any of these giant spending bills get passed. Normally, the promise of free money boosts markets. But if the market decides that the new spending will just crowd out private spending and boost inflation, the reaction will not be so positive, I would think.

Also, do we count inflation that is imposed through taxes and tariffs? The Trudeau administration plans to annually raise carbon taxes on fossil fuels by the equivalent of $15/bbl of oil, which will raise input costs for almost every good made, shipped, and sold in Canada. All else being equal, we would see some inflation just fom that. And if Enbridge 5 is shut down, the East in the U.S. and Canada are going to see some large increases in energy prices this summer.

19

I will bet huge sums of money that you are merely remembering things that have increased in price without looking at things that have decreased or stayed the same. And I’ll bet that those things higher in price are a teeny tiny percentage of all the things you encounter in a year.

This selectivity of memory is also why demagogues so often win over the masses. It must be vigorously fought at every moment.

20

I acknowledged the price of many things was the same. But I am certainly aware of selection bias and you are probably right to some extent. Still, I suspect the inflation rates will be increasing on future postings.