They should do inflation by quintile. I am lucky financially. I earn more than I spend. I am shocked at Rib Eye prices. But I like a Rib Eye. Expressed as a percentage of my earnings it is meaningless, so I still buy them. Fewer though. But….Single Mom with two kids can’t NOT buy hamburger and it is up 50% over the last few years. Considering new furniture prices and new car prices into her specific basket of goods can give a very skewed picture because she isn’t buying new cars or new furniture. She buys hamburger and large boxes of cereal. For inflation to be meaningful it should be done by quintile of income looking at the items each quintile spends money on.
And of course taxes have to be considered. Food and energy have to be considered. And income growth. 15% income growth over 5 years with 50% food cost increases the Single Mom is way behind. It doesn’t matter if August’s bump was less than expected. She is already 35% behind where she was. So now she is 34.8% behind. Big deal.
Consumer prices aren't broadly income sensitive. Meaning the price of steak is not more because the person buying it makes more, nor is the price of hamburger less.
HOWEVER
What can be done -- and what I have done in a couple of my inflation articles, is you can assess real income effects by using the various subindices as a deflator.
This is also why the subindices are relevant, and arguably more relevant than the headline figure. If you build a deflator from the food index, or the shelter index, or even the energy index, you can get some dramatically different results.
You get different results if you use the Zillow Observed Rent Index (ZORI).
The GDP deflator that the BEA uses to calculate "real" GDP and "real" incomes attempts to incorporate all possible influences, including corporate profits and things like intermediate goods prices--stuff which doesn't directly impinge on final demand.
The GDP deflator might make sense for assessing economic growth overall, but I have in a couple of articles now recalculated "real" incomes and "real" wages using the CPI as the deflator.
One can argue how close to reality such calculations come, but I think for the consumer whose most price sensitive, deflating real income based on actual observed price inflation makes the most sense.
I realize hamburger costs me the same as it costs a single Mom. But if hamburger is .0001% of my budget it is meaningless to say it increased 10% in cost. If it is 1% of my budget and it increased 50% it tells a different story. My point is the basket of goods concept gives an overview but a basket of actual spending goods per quintile will tell you who is being hurt.
Case in point, my lefty pensioned acquaintances were all for increasing minimum wages. All for it. I said it will hurt more people than it helps and YOU PEOPLE will be most hurt. Their pensions have gone up a bit as they are somewhat indexed. But their spending income has dramatically shrunk. They have no housing costs in terms of rent/mortgage. Their costs were food, entertainment, travel and gas. They all go out about 1/3 the times they previously did.
Do a per quintile looking at what each quintile spends and I think real
The question would be what percent of income does one spend on food and necessaries broken down by quintile.
I know between the BEA and the BLS the income side of that is captured, but I don't know how much of the expense side is broken down appropriately.
I'm sure there have been economic surveys to that effect done in the past, but I'll have to dig to see if there's a way to present that information using current wage, price, and inflation data.
It is more complex than than "the preferred narrative", thank you. Shopping at Walmart and Aldi sure do show high inflation which is cognitive dissonance from the headlines. I also think the labor/hourly wage pressure is increasing prices in the arena where most people shop - convenience food, Aldi, etc. I used to think transportation costs were a factor in increasing food costs, but with energy costs lower, labor costs are probably exerting more pressure?
Quite possibly. Regional inflation data is problematic, so it's hard to develop reliable subindex analyses per MSA or even state, but where there is legitimate wage pressure there could be a knock on effect in food or other prices.
Peter, you are just the BEST! We consistently get the most complete and accurate picture of the economy from your data and analysis, so thank you once again!
I am also usually left with minor questions evoked from the data. For example, why should new car prices start going up after months of deflating? Is it because the big car companies have been losing billions from making EVs that nobody wants, and so they are desperately trying to make profits elsewhere? Do they figure that for the declining sector of the populace that can still afford a new car a few extra bucks on the price tag won’t matter? I don’t expect you to know; the data just raises speculation in me.
And I see this more accurate picture of the economy as being helpful to Trump’s election chances. Nobody likes to be lied to, right? People can sense when a candidate like Harris is feeding them massaged data and, well, bullfeathers. It’s annoying to feel like someone is trying to con you. Annoyed people don’t feel inclined to vote for the con artist. Trump wins!
Demand curves shift all the time. And keep in mind that new car prices rising after deflating for an extended period merely means the market bottom has been reached.
In the case of energy we probably have not seen the market bottom yet (and this has major implications for global energy producers as well).
And if you saw my note about John Ginsburg's question about COLA for SSI, that's an excellent real world example of the distortion effect inflation has on consumer behavior, which is an argument I have been making for years.
Yes! And the distortion effect is hugely important. It’s one of the reasons that command economies cannot work, and one of the reasons that most economic forecasts end up being wrong, and wrong in unexpected ways.
I should clarify - I’m referring to ‘distortion’ in the largest possible macroeconomic picture. When government uses certain data (or rates, or whatever), and bases calculations on that, the results of which affect other assumptions or calculations, well, it just snowballs. You end up with predictions that don’t materialize as planned, because the beginning metric of the chain of calculations was the wrong version to use.
Thank you Peter. Now let’s see what the PPI is.
Monday! ;)
Classic behind the scenes setup
Dodd Cox bill shut inflation rate out allowed glass/steagle suspended We were robbed every citizen
They should do inflation by quintile. I am lucky financially. I earn more than I spend. I am shocked at Rib Eye prices. But I like a Rib Eye. Expressed as a percentage of my earnings it is meaningless, so I still buy them. Fewer though. But….Single Mom with two kids can’t NOT buy hamburger and it is up 50% over the last few years. Considering new furniture prices and new car prices into her specific basket of goods can give a very skewed picture because she isn’t buying new cars or new furniture. She buys hamburger and large boxes of cereal. For inflation to be meaningful it should be done by quintile of income looking at the items each quintile spends money on.
And of course taxes have to be considered. Food and energy have to be considered. And income growth. 15% income growth over 5 years with 50% food cost increases the Single Mom is way behind. It doesn’t matter if August’s bump was less than expected. She is already 35% behind where she was. So now she is 34.8% behind. Big deal.
Consumer prices aren't broadly income sensitive. Meaning the price of steak is not more because the person buying it makes more, nor is the price of hamburger less.
HOWEVER
What can be done -- and what I have done in a couple of my inflation articles, is you can assess real income effects by using the various subindices as a deflator.
https://newsletter.allfactsmatter.us/p/lets-get-real-inflations-impact-on
In particular, that treatment showed that based on food price inflation, real incomes have decreased the most under the (Biden-)Harris Administration.
https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fa8ead357-0fe5-47c3-a2f7-158c08b48436_1023x489.png
This is also why the subindices are relevant, and arguably more relevant than the headline figure. If you build a deflator from the food index, or the shelter index, or even the energy index, you can get some dramatically different results.
You get different results if you use the Zillow Observed Rent Index (ZORI).
The GDP deflator that the BEA uses to calculate "real" GDP and "real" incomes attempts to incorporate all possible influences, including corporate profits and things like intermediate goods prices--stuff which doesn't directly impinge on final demand.
The GDP deflator might make sense for assessing economic growth overall, but I have in a couple of articles now recalculated "real" incomes and "real" wages using the CPI as the deflator.
One can argue how close to reality such calculations come, but I think for the consumer whose most price sensitive, deflating real income based on actual observed price inflation makes the most sense.
I realize hamburger costs me the same as it costs a single Mom. But if hamburger is .0001% of my budget it is meaningless to say it increased 10% in cost. If it is 1% of my budget and it increased 50% it tells a different story. My point is the basket of goods concept gives an overview but a basket of actual spending goods per quintile will tell you who is being hurt.
Case in point, my lefty pensioned acquaintances were all for increasing minimum wages. All for it. I said it will hurt more people than it helps and YOU PEOPLE will be most hurt. Their pensions have gone up a bit as they are somewhat indexed. But their spending income has dramatically shrunk. They have no housing costs in terms of rent/mortgage. Their costs were food, entertainment, travel and gas. They all go out about 1/3 the times they previously did.
Do a per quintile looking at what each quintile spends and I think real
Impacts would show five different stories.
The question would be what percent of income does one spend on food and necessaries broken down by quintile.
I know between the BEA and the BLS the income side of that is captured, but I don't know how much of the expense side is broken down appropriately.
I'm sure there have been economic surveys to that effect done in the past, but I'll have to dig to see if there's a way to present that information using current wage, price, and inflation data.
By the way, I like your articles.
Thank you! I'm glad you find them useful!
Thank you.
It is more complex than than "the preferred narrative", thank you. Shopping at Walmart and Aldi sure do show high inflation which is cognitive dissonance from the headlines. I also think the labor/hourly wage pressure is increasing prices in the arena where most people shop - convenience food, Aldi, etc. I used to think transportation costs were a factor in increasing food costs, but with energy costs lower, labor costs are probably exerting more pressure?
Quite possibly. Regional inflation data is problematic, so it's hard to develop reliable subindex analyses per MSA or even state, but where there is legitimate wage pressure there could be a knock on effect in food or other prices.
Peter, you are just the BEST! We consistently get the most complete and accurate picture of the economy from your data and analysis, so thank you once again!
I am also usually left with minor questions evoked from the data. For example, why should new car prices start going up after months of deflating? Is it because the big car companies have been losing billions from making EVs that nobody wants, and so they are desperately trying to make profits elsewhere? Do they figure that for the declining sector of the populace that can still afford a new car a few extra bucks on the price tag won’t matter? I don’t expect you to know; the data just raises speculation in me.
And I see this more accurate picture of the economy as being helpful to Trump’s election chances. Nobody likes to be lied to, right? People can sense when a candidate like Harris is feeding them massaged data and, well, bullfeathers. It’s annoying to feel like someone is trying to con you. Annoyed people don’t feel inclined to vote for the con artist. Trump wins!
Demand curves shift all the time. And keep in mind that new car prices rising after deflating for an extended period merely means the market bottom has been reached.
In the case of energy we probably have not seen the market bottom yet (and this has major implications for global energy producers as well).
And if you saw my note about John Ginsburg's question about COLA for SSI, that's an excellent real world example of the distortion effect inflation has on consumer behavior, which is an argument I have been making for years.
Yes! And the distortion effect is hugely important. It’s one of the reasons that command economies cannot work, and one of the reasons that most economic forecasts end up being wrong, and wrong in unexpected ways.
I should clarify - I’m referring to ‘distortion’ in the largest possible macroeconomic picture. When government uses certain data (or rates, or whatever), and bases calculations on that, the results of which affect other assumptions or calculations, well, it just snowballs. You end up with predictions that don’t materialize as planned, because the beginning metric of the chain of calculations was the wrong version to use.
Inflation rate vanished under Clinton Bush Dodd Cox voodoo economics