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).

[/ QUOTE ]

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