More on Inflation

There has been an ongoing discussion among some unit owners about "inflation" and the effects on our association, and some interesting comments posted on this blog.

Here are several charts from the St. Louis Federal Reserve. These show the effects of inflation in the recent past, and how it increased the cost of goods and services. This information is from data provided by the U.S.Bureau of Labor Statistics, or BLS. Each month, the BLS surveys prices for certain products and then publishes the cost of those products as a number, called an "index".

What general information can I determine from the charts? If we use the "All" data, which includes food and energy, then since September of 1978 to September 2009, the CPI increased from 67.1 to 215.791. This is an average increase of 4.97% per year. However, the government ignores food and energy in making its "core" CPI calculations because of an argument that goes this way. "If food increases in price, then people will substitute hamburger for steak". In other words, if prices increase, I'll adjust the thermostat in my unit to expend less energy, drive my car less and eat cheaper alternatives, such as beans and rice. 

So what is the "CPI"?

According to the government, "The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services."

This "index" is defined as a "number used to measure change". The Consumer Price Index was 100 in 1984. Today it is 215.791.

This means that if the prices of goods in the basket was $1.00 in 1984, those same goods in the same basket would today cost $2.16. In the 15 years since 1984 the price of those goods has more than doubled. That is inflation. 

It is possible for prices to decrease. The chart shows that in mid 2006 the CPI fell. It did so again in late 2008. During those periods, the prices of certain goods decreased. That is deflation. 

This chart shows the change in price for the most recent five years for "all items" which included food and energy. We all know that gasoline increased dramatically in 2007, and has since moderated in price. The chart indicates this (Hint: click on the image to enlarge it, and then use the "back" or "return" button to return to this blog):

NOTE: In the above chart and also with the following charts, the "gray" areas are an "economic recession".

Here is a similar chart, but this one uses the BLS data excluding food and energy. If we ignore these, prices for most consumers didn't "spike":

Finally, here is a chart showing "All items less food and energy" since the 1950's. Note all of the "gray" areas, which are "economic recessions". No matter what the politicians tell us, they occur frequently:

And here is a similar chart showing "All Items" since the 1950's:

What can we learn from these? They can provide some guidance for future planning. I might not be able to determine how much a refrigerator will cost in the year 2015, but I can get some idea of the average price increases. I can then use those for determining how much I should be saving today to afford living in the future.


Of course, I could simply make the assumption that my income will increase by an amount sufficient to pay for the increases in goods and services due to inflation, but that might be dangerous. Or I can simply assume I'll spend less in the future. But that means that I'll have to sacrifice in the future. Question: Why should I assume that I'll be able to make financial sacrifices in the future, if I am unwilling or unable to make them today? 


For an association, the argument goes something like this. I want and expect manicured lawns, a secure roof over my head, paved streets and driveways "today". However, I may not be willing to save to provide for these things in the future. So unit owners may elect individuals to the board of managers in an attempt to forgo saving for the future. The plan is that "We'll do with less tomorrow". Of course, eventually "tomorrow" becomes "today". 


Does that sound familiar to anyone?


On October 21 I added Reference 4, which is a site which can be used to quickly determine the current inflation rate, the current CPI and also compare how inflation has changed our buying power. "The US Inflation Calculator measures the buying power of the dollar over time. To begin, just enter any two dates between 1913 and 2009, an amount, and click 'Calculate'."


Reference:
 1) St. Louis Federal Reserve CPI for Urban Consumers:  http://tinyurl.com/yf2fgzl
 2) Bureau of Labor Statistics: http://www.bls.gov/CPI/
 3) Shadow Government Statistics: http://www.shadowstats.com/
 4) US Inflation Calculator: http://www.usinflationcalculator.com/

For those who are interested, there are some strange methods in the CPI calculations, including geometric weighting and even something called "hedonics". It is my understanding that "Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS. " (Reference 3)