CPI Composition
 

Well,

here we have the composition, item by item of the CPI as reported december 2006 (it is reported every december but can be used from any point in time to any other point in time):

CPI RI 2006

and here we have the page that explains how to use the #s above.

BLS_CPI Relative Importance Archive

Basically, you can see the relative importance of every item in the consumer price index and see how it changed over time.

the reason this was so hard to find is simply because it doesn't come up unless you look for "relative importance" rather than just contribution or composition.

One thing that stands out is the 6.28 relative importance of medical services vs. recreation (5.5) and transportation (6.0). this means that we spend on average about as much on transportation and recreation as we do on our medical care. considering that it is widely viewed that we spend too little on medical care (i.e. that there are too many uninsured), it seems it we cut back on fun, we could have more health [img]/images/graemlins/tongue.gif[/img]

questions, comments, thoughts?

Barron

Re: CPI Composition
 

This is interesting. I would have thought that the reason health is so high relative to transportation and recreation is because of the monthly insurance payments that have to be paid. But health insurance is actually a minuscule cost relative to everything else.

Why, instead of house prices, do they list, “Owners Equivalent Rent of Primary Residence”? Housing prices have soared recently, but for some reason this information isn’t included in CPI.

Re: CPI Composition
 

[ QUOTE ]
This is interesting. I would have thought that the reason health is so high relative to transportation and recreation is because of the monthly insurance payments that have to be paid. But health insurance is actually a minuscule cost relative to everything else.

Why, instead of house prices, do they list, “Owners Equivalent Rent of Primary Residence”? Housing prices have soared recently, but for some reason this information isn’t included in CPI.

[/ QUOTE ]

as i understand it all of these things are derived from survey questions asked of home-owners or home-rentors.

in order to "level" the field of these two groups, they ask questions like "how much rent do you pay each month" of rentors and "how much could you get if you rented your home right now unfurnished?"

so "owner's equivalent rent" does include owned homes, just normalized to monthly rent (i.e. to try to capture the "cost of living in a home" question)

this is reflected if you look back in time at the contribution of this #. there was an increase (far less than the overall "median housing price" increase) from previous CPI RIs to this one.

one reason is simply due to calculation. the "average" owners equivalent rent would likely be far different than the "median" owners equivalent rent.

Barron

Re: CPI Composition
 

[ QUOTE ]

Why, instead of house prices, do they list, “Owners Equivalent Rent of Primary Residence”? Housing prices have soared recently, but for some reason this information isn’t included in CPI.

[/ QUOTE ]

I believe this is known as an imputed cost. You have to live somewhere, but we aren't in the market for a house every day, so since housing costs are such a major part of our expenses, this is the way they do it.

The reason they do rental price rather than purchase price is that purchasing a home involves to some degree the idea that there will be a capital gain in the price of the house, it's not a pure consumption item. Rent is pure consumption. FWIW, rent vs. buy comparisons for homes has always been a pretty good test of whether or not housing prices are too high in a given area. In many areas, even though housing prices soared, rents did not, meaning that a great deal of the housing price increase was an investment driven price rise, not a consumption driven price rise.

Re: CPI Composition
 

I just heard paul craig roberts, economist under reagan, father of "reaganomics", and he said the cpi underestimates true inflation, so you know, it's not just a bunch of "kooks" or whatever.

Re: CPI Composition
 

[ QUOTE ]
I just heard paul craig roberts, economist under reagan, father of "reaganomics", and he said the cpi underestimates true inflation, so you know, it's not just a bunch of "kooks" or whatever.

[/ QUOTE ]

i just finished reading studies that accused the CPI of overstating inflation.

the debate rages on for both sides of the issue (though i'd be more likely to think that understating is an issue vs. overstating)

either way, you can look at it and judge for yourself.

my overall point before hand though is that you can trust the market of academics to bemore informed than legislators and i thought it odd for borodog to quote a legislator rather than respected economists/journals etc.

just my thoughts.

personally, i doubt highly that if CPI is understated, it is done so on purpose.

Barron

Re: CPI Composition
 

[ QUOTE ]
personally, i doubt highly that if CPI is understated, it is done so on purpose.

[/ QUOTE ]

well part of cpi assumes that people will lower their standard of living when facing rising prices, eg, if the price of beef goes up, according to cpi, people will switch to chicken.

so it seems to me that if you are on a fixed income tied to cpi, then you are assured a lower and lower standard of living, assuming generally rising prices (which they've been for the last what, 70 years at least).

do you agree with that?

Re: CPI Composition
 

[ QUOTE ]
well part of cpi assumes that people will lower their standard of living when facing rising prices

[/ QUOTE ]

can you cite where you got this from? i must have misse dit

assuming that is correct:

[ QUOTE ]
so it seems to me that if you are on a fixed income tied to cpi, then you are assured a lower and lower standard of living, assuming generally rising prices (which they've been for the last what, 70 years at least).

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i dont think i agree iwth that on the face of it unless i've missed something, which is entirely possible. if you have a fixed income based on CPI, then the relative contribution of any individual item in CPI is inconsequential so long as what you say is correct.

if the income is tied to cpi (like bieng long an inflation linked bond), then your purchasing power will not change. you may have to adjust your consumption in reality (i.e. buy chicken instead of beef), but your overall consumption (absent utility) will not change.

you are not forced into a lower standard of living. you are forced into a totally stagnant living given your statements, assuming they are factual.

Barron

Re: CPI Composition
 

[ QUOTE ]
if the income is tied to cpi (like bieng long an inflation linked bond), then your purchasing power will not change. you may have to adjust your consumption in reality (i.e. buy chicken instead of beef), but your overall consumption (absent utility) will not change.

[/ QUOTE ]

? I don't get it.

but look up hedonics. if food goes up 10% then the food section of cpi doesn't go up 10%, they adjust it to say 3%, because they figure people will buy cheaper food.
But if you are forced to buy cheaper food, aren't you lowering your standard of living? if you have to take the bus because a car is too expensive, aren't you lowering your standard of living? if a new tv is 250% more expensive but they only count it as 75% more expensive because it is better, then you're still not going to have enough money to buy a new tv if your old one breaks, etc.

My main point is that these things are cumulitive given that inflation is never negative, so that after 20 years someone on a fixed income cpi adjusted deal may have .5 to .75 the standard of living of when they started. I mean, you can only downgrade every year so much

Re: CPI Composition
 

[ QUOTE ]
[ QUOTE ]
if the income is tied to cpi (like bieng long an inflation linked bond), then your purchasing power will not change. you may have to adjust your consumption in reality (i.e. buy chicken instead of beef), but your overall consumption (absent utility) will not change.

[/ QUOTE ]

? I don't get it.

but look up hedonics. if food goes up 10% then the food section of cpi doesn't go up 10%, they adjust it to say 3%, because they figure people will buy cheaper food.
But if you are forced to buy cheaper food, aren't you lowering your standard of living? if you have to take the bus because a car is too expensive, aren't you lowering your standard of living? if a new tv is 250% more expensive but they only count it as 75% more expensive because it is better, then you're still not going to have enough money to buy a new tv if your old one breaks, etc.

My main point is that these things are cumulitive given that inflation is never negative, so that after 20 years someone on a fixed income cpi adjusted deal may have .5 to .75 the standard of living of when they started. I mean, you can only downgrade every year so much

[/ QUOTE ]

first off, know that we're dealing in averages here. if you are an average american w/ an income tied exactly to average CPI then the CPI applies to you. but the average is a poor descriptor of the individual. for some, it will mean that they are living better off and for others it will mean that they are living worse off as you point out. in some cases the differences will be quite extreme.

what you say makes sense if the bold part above is true.

can you cite where the CPI assumes that a rise in food prices isn't passed entirely through to the index?

if average milk prices increase 10% (and nothing else changes) and households overall report that as such, then the relative importance of milk will rise by 10% and food will increase by 10%*milk's contribution to food if my understanding of the CPI construction is sound.

cna you provide some cite to the contrary?

thanks,
Barron

Re: CPI Composition
 

Not sure about Bernanke but I believe Greenspan's favorite inflation metric was the implicit price deflator.

Implicit Price Deflator

Re: CPI Composition
 

The price deflator is one of any number of metrics that are helpful in policy decisions, but it is inappropriate for use in automatic cost of living adjustments, eg for Social Security benefit increases. There are too many goods in the GDP basket that irrelevant to retirees standard of living.

Re: CPI Composition
 

DcifrThs,

Interesting discussion. I just have a quick question. Could you point me to where Transportation is stated as 6?

Thanks.

Re: CPI Composition
 

[ QUOTE ]
DcifrThs,

Interesting discussion. I just have a quick question. Could you point me to where Transportation is stated as 6?

Thanks.

[/ QUOTE ]

whoops. yea, that is a glaring mis-cite. transportation is like 17. cars, fuel, parts, insurance etc. is like 7 or 8 or 9 if you add it all up.

anyways, i just thought medical care and recreation being anywhere near each other was funny.

Barron

Re: CPI Composition
 

I'm surprised that Medical Care is that low. Does that include "Health Insurance" that everyone complains they can't pay for?

Also, when it says Medical Care is 6.281%, what is that actually telling us? If I wanted to tell someone that it is that %, how would I explain it?

Re: CPI Composition
 

[ QUOTE ]
I'm surprised that Medical Care is that low.

[/ QUOTE ]

exactly my point. more specifically, that recreation is close to the cost of medical care in contribution!!

i'd like to know the elasticities. that would be interesting since you'dt hink you'd be far more sensitive about your health than your fun but who knows.

Barron

Re: CPI Composition
 

[ QUOTE ]

i'd like to know the elasticities.

[/ QUOTE ]

Is there a way to determine this?

Re: CPI Composition
 

[ QUOTE ]
I'm surprised that Medical Care is that low. Does that include "Health Insurance" that everyone complains they can't pay for?

Also, when it says Medical Care is 6.281%, what is that actually telling us? If I wanted to tell someone that it is that %, how would I explain it?

[/ QUOTE ]

It is just the percentage of the CPI market basket that is spent on health care. It includes direct OOP expenses of the consumer, including insurance premiums, and includes the employer cost of health insurance coverage for the employee. It does not include costs of government administered coverage, eg. Medicaid and Medicare Part A.

As I think you are stating ironically, health insurance is not extremely expensive. If you consider that 6% of CPI expenditures represents a much smaller percentage of total expenditures, and that for those who itemize expenses > 2% of gross income are deductible, health insurance is in reach of anyone who needs it and isnt getting it.

Re: CPI Composition
 

[ QUOTE ]
[ QUOTE ]
I'm surprised that Medical Care is that low. Does that include "Health Insurance" that everyone complains they can't pay for?

Also, when it says Medical Care is 6.281%, what is that actually telling us? If I wanted to tell someone that it is that %, how would I explain it?

[/ QUOTE ]

It is just the percentage of the CPI market basket that is spent on health care. It includes direct OOP expenses of the consumer, including insurance premiums, and includes the employer cost of health insurance coverage for the employee. It does not include costs of government administered coverage, eg. Medicaid and Medicare Part A.

[/ QUOTE ]

How would I explain it to someone who has no idea about these kinds of statistics, or what the CPI even is? Basically, my girlfriend is in medical school and she is very interested in health care reform. I think this statistic is very interesting and I want to tell her about it, but in a form that she can understand.

Re: CPI Composition
 

[ QUOTE ]

As I think you are stating ironically, health insurance is not extremely expensive. If you consider that 6% of CPI expenditures represents a much smaller percentage of total expenditures, and that for those who itemize expenses > 2% of gross income are deductible, health insurance is in reach of anyone who needs it and isnt getting it.

[/ QUOTE ]

I got to you too quick, but you bring up a good point. I'm having trouble understanding what you are saying because I don't think I'm understanding economics at the same level that you are. However you say that "health insurance is in reach of anyone who needs it and isn't getting it." Why then do people say they can't afford health insurance?

Re: CPI Composition
 

[ QUOTE ]
[ QUOTE ]

As I think you are stating ironically, health insurance is not extremely expensive. If you consider that 6% of CPI expenditures represents a much smaller percentage of total expenditures, and that for those who itemize expenses > 2% of gross income are deductible, health insurance is in reach of anyone who needs it and isnt getting it.

[/ QUOTE ]

I got to you too quick, but you bring up a good point. I'm having trouble understanding what you are saying because I don't think I'm understanding economics at the same level that you are. However you say that "health insurance is in reach of anyone who needs it and isn't getting it." Why then do people say they can't afford health insurance?

[/ QUOTE ]

If shes a med student I dont think she'll have trouble understanding that CPI represents changes in the cost of a market basket of expenditures most commonly consumed. Health care's weight is just the perecentage of the total expenditures.

As far as people saying they cant afford health insurance, I think the majority of that is political rhetoric, not what "people" are saying about their own situation. For those who do complain about it, I would attribute it to their priorities. Eg $3000 a year for comprehensive coverage to someone who believes they are healthy seems expensive compared to the latest 1080p HDTV, so they "can't afford" it.

Re: CPI Composition
 

[ QUOTE ]


If shes a med student I dont think she'll have trouble understanding that CPI represents changes in the cost of a market basket of expenditures most commonly consumed. Health care's weight is just the perecentage of the total expenditures.


[/ QUOTE ]

She has only been in Med School for a week and a half. She doesn't really understand this stuff at all. She's very smart, but not with economic knowledge. Could I say that Medical Care is 6% of the total CPI, which is a basket of goods that people spend their money on? Therefore, people spend 6% of their money on medical care out of all consumer goods.

[ QUOTE ]


As far as people saying they cant afford health insurance, I think the majority of that is political rhetoric, not what "people" are saying about their own situation. For those who do complain about it, I would attribute it to their priorities. Eg $3000 a year for comprehensive coverage to someone who believes they are healthy seems expensive compared to the latest 1080p HDTV, so they "can't afford" it.

[/ QUOTE ]

You are right. People who say they don't have enough money usually just have their priorities wrong. I try telling people that they need to save for things rationally. I wonder if there are statistics on incomes of people who have health insurance/seek medical care. Would you think that there is a particular income group (low) who are saying they can't afford medical care? I think this really pulls on demographics.

Re: CPI Composition
 

[ QUOTE ]
[ QUOTE ]

i'd like to know the elasticities.

[/ QUOTE ]

Is there a way to determine this?

[/ QUOTE ]

not directly from the CPI RI data since i don't think it is sensitive enough and tons fo things can cause it to change.

there are ways to determine this yes, but you need other surveys.

Barron

Re: CPI Composition
 

[ QUOTE ]
questions, comments, thoughts?

[/ QUOTE ]

I think we spend too much on bacon and sausage. It's not healthy.

Re: CPI Composition
 

[ QUOTE ]
first off, know that we're dealing in averages here. if you are an average american w/ an income tied exactly to average CPI then the CPI applies to you. but the average is a poor descriptor of the individual. for some, it will mean that they are living better off and for others it will mean that they are living worse off as you point out. in some cases the differences will be quite extreme.

what you say makes sense if the bold part above is true.

can you cite where the CPI assumes that a rise in food prices isn't passed entirely through to the index?

if average milk prices increase 10% (and nothing else changes) and households overall report that as such, then the relative importance of milk will rise by 10% and food will increase by 10%*milk's contribution to food if my understanding of the CPI construction is sound.

cna you provide some cite to the contrary?

thanks,
Barron

[/ QUOTE ]

did you google hedonics?

http://www.atimes.com/atimes/Global_.../HF27Dj01.html
[ QUOTE ]
However, in the early 1990s that transparent method of CPI calculation came under assault from Michael Boskin, then chief economist to the administration of US president George H W Bush, and Alan Greenspan, then chairman of the board of governors of the Federal Reserve System.

Their assertion was that the CPI calculation was much too simplistic and resulted in much too high a measure of inflation. They argued that the calculation needed to take into account the real-world phenomenon of substitution, whereby consumers who cannot afford more expensive items switch to buying the less expensive ones, and that the inflation calculation should switch to tracking the costs of the less expensive items whenever substitution was presumed to occur.

That generally would have required moving from the fixed basket of goods to a variable one, but initially, instead of that move the concept of weighting was introduced into the fixed basket in an effort to approximate the phenomenon of substitution.

Straight arithmetic weighting was gradually replaced by geometric weighting by 1999. In the geometric weighting favored by Boskin and Greenspan, the basket items with recently increasing ("volatile") prices receive less weight while those that decrease in price receive more weight. So the result is a lower overall number for inflation.

[/ QUOTE ]

http://en.wikipedia.org/wiki/Hedonic_regression
[ QUOTE ]
Some economists have criticized the US government's use of hedonic regression in computing its CPI, fearing it can be used to mask the "true" inflation rate and thus lower the interest it must pay on Treasury Inflation-Protected Securities (TIPS) and Social Security cost of living adjustments.

[/ QUOTE ]

http://moneycentral.msn.com/content/P92951.asp
[ QUOTE ]
Lastly, Gross points out who is penalized by this cheating: "They disserve, of course, all of those who receive Social Security, as well as other private pensioners dependent on an accurate accounting of prices paid. They disserve buyers and holders of TIPS -- inflation protected securities -- which adjust inadequately to a faulty and near fraudulently calculated CPI that one day could total billions of dollars per year for TIPS holders. And they disserve all owners of U.S. Treasury obligations -- including foreign central banks and institutions. . . ."

[/ QUOTE ]

Re: CPI Composition
 

thanks for the post. i didn't google hedonics until you posted.

seems like two prominent (and likely other) economists favored one system of calculation of CPI and there was a debate on which to use. finally, they adopted one that understates rather than overstates inflation.

i don't see the huge problem with this since it was done out in the open. especially since you can then argue that until it was done, the government was paying too much. now it is paying too little.

overall, i'm sure the reduction in payments past and future will far outweigh the overpayment made from inception to 1999.

but that will take a loonngngg time to occur in reality since i think CPI was used as the base until 8 years ago. i have to look into that.

there will always be people that cry conspiracy on either side. what do you think could have been said before they made the change? what about the poor taxpayers who are sponsoring those who invested in TIPS. inefficiencies will always arise, but it seems the decision was made fairly and in the open. if put up to the voters, obviously it would remain to be overstated.

you can never get something like this 100% correct so you have to choose your error. is it surprising that the government, whose interests are best served by understated inflation, to choose to understate rather than keep overstating?

ideally, it would be variable, but that would cost a ton more to administer.

anyways, i think you brought up a great issue and helped me understand where the change was made and why. now ig otta look into the cost to the government above "actual" inflation since inception of CPI to 1999.

Barron

Re: CPI Composition
 

you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.

Re: CPI Composition
 

[ QUOTE ]
you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.

[/ QUOTE ]

you're right. you know more than people that study it and biases they've found. look them up, here they are outlined in the shortest possible form:

Link

NOTE: this cite just summarizes the bias in the shortest manner i could find. innumerable papers written by authors for academic journals can be found and if i had access to JSTOR i'd cite them. you can look online for BLS and other ("biased") sites to find out the level of work put into finding those biases.

previously, i didn't htink it was understated based on reading those studies. reading greenspan's objection agreed with those studies (i.e. it was overstated). now that they seem to have changed the construction, it could be understated now, or, it could be close to even. i'd bet now though it is likely to be understated. but at least i'm gathering info and forming an intelligent opinion based on facts and studies.

glad you think i'm funny and can provide you with amusement.

Barron

Re: CPI Composition
 

you may find it helpful to compare the US CPI calculation and processes to the CPI of Australia.

Both have similar cultures and similar standards of living, and info on the Australian CPI calculation is available here

Re: CPI Composition
 

[ QUOTE ]
Quote:
you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.



you're right. you know more than people that study it and biases they've found. look them up, here they are outlined in the shortest possible form:

Link

NOTE: this cite just summarizes the bias in the shortest manner i could find. innumerable papers written by authors for academic journals can be found and if i had access to JSTOR i'd cite them. you can look online for BLS and other ("biased") sites to find out the level of work put into finding those biases.

previously, i didn't htink it was understated based on reading those studies. reading greenspan's objection agreed with those studies (i.e. it was overstated). now that they seem to have changed the construction, it could be understated now, or, it could be close to even. i'd bet now though it is likely to be understated. but at least i'm gathering info and forming an intelligent opinion based on facts and studies.

glad you think i'm funny and can provide you with amusement.

Barron

[/ QUOTE ]
btw, I'm not making fun of you personally or anything. I think we have to recognize this little paradigm of denying something exists, and then when it's proven to exist, to say that it is good.

for example, the torture debate, at first oh no no torture no way we're americans, then the whole waterboarding stuff came out, then it was like, well ok, we do torture (legislation was passed legalizing torture even though it was called someting else), BUT NOW IT"S GOOD.

I think the same thing will happen with the north american union, right now everyone is still denying it even though there is a summit in canada right now to further it, most americans the next they will hear will be, ok , yes the NAU exists, *but it is good*.

notice the main thing is that the chance to debate is kind of taken away, eg, do we really want to be part of a NAU? that question should be being asked right now, since they are implementing it, but they are going to deny deny deny it even exists until it is a done deal, at which point it will shift to , it does exist, it's here, it's good, it's a done deal, get used to it.

It's total propaganda and a mockery of our american democratic system.

so anyway that's where i was coming from.

Re: CPI Composition
 

We spend twice as much on health care as the next highest industrialized nation. We also spend more on education, and a million other things.

P.S. Americans spent more on chewing gum then the 2004 presidential election.

Re: CPI Composition
 

[ QUOTE ]
[ QUOTE ]
Quote:
you're pretty funny. 1st you say cpi is not underestimating inflation, now you're saying that ok it is underestimating it, but that's a good thing. lol.

btw, I don't think it's true that cpi overstated inflation before, although that is not a hard opinion, it just seems like common sense.



you're right. you know more than people that study it and biases they've found. look them up, here they are outlined in the shortest possible form:

Link

NOTE: this cite just summarizes the bias in the shortest manner i could find. innumerable papers written by authors for academic journals can be found and if i had access to JSTOR i'd cite them. you can look online for BLS and other ("biased") sites to find out the level of work put into finding those biases.

previously, i didn't htink it was understated based on reading those studies. reading greenspan's objection agreed with those studies (i.e. it was overstated). now that they seem to have changed the construction, it could be understated now, or, it could be close to even. i'd bet now though it is likely to be understated. but at least i'm gathering info and forming an intelligent opinion based on facts and studies.

glad you think i'm funny and can provide you with amusement.

Barron

[/ QUOTE ]
btw, I'm not making fun of you personally or anything. I think we have to recognize this little paradigm of denying something exists, and then when it's proven to exist, to say that it is good.

for example, the torture debate, at first oh no no torture no way we're americans, then the whole waterboarding stuff came out, then it was like, well ok, we do torture (legislation was passed legalizing torture even though it was called someting else), BUT NOW IT"S GOOD.

I think the same thing will happen with the north american union, right now everyone is still denying it even though there is a summit in canada right now to further it, most americans the next they will hear will be, ok , yes the NAU exists, *but it is good*.

notice the main thing is that the chance to debate is kind of taken away, eg, do we really want to be part of a NAU? that question should be being asked right now, since they are implementing it, but they are going to deny deny deny it even exists until it is a done deal, at which point it will shift to , it does exist, it's here, it's good, it's a done deal, get used to it.

It's total propaganda and a mockery of our american democratic system.

so anyway that's where i was coming from.

[/ QUOTE ]

i think the discussion we were having about CPI and the evolution of my views on it are quite different than the examples of the paradigm you provide.

Barron

Re: CPI Composition
 

I don't remember where I read it but I read a pretty good explaination of "the problems with the CPI" swhich used supermarket baskets to explain it.
Might have been in "Economics in One Lesson"