Inflation: please explain

[Juton]

Questioning the Government's inflation statistics isn't a bad thing. For instance in Canada the official figures show inflation hovering around 2% for the last 8 years, but my calculation shows around a 4% yearly increase.

Four percent seems a little low to my own mind, I don't have that large a basket of goods to draw a conclusion. The official 2% inflation only adds up around 17%, which just doesn't account for the increases in prices I've been seeing.

[Username17]

Questioning the Government's inflation statistics isn't a bad thing. For instance in Canada the official figures show inflation hovering around 2% for the last 8 years, but my calculation shows around a 4% yearly increase.

Four percent seems a little low to my own mind, I don't have that large a basket of goods to draw a conclusion. The official 2% inflation only adds up around 17%, which just doesn't account for the increases in prices I've been seeing.

Your calculation of what?

You apparently have a "gut feeling" that prices are rising in Canada. What actual evidence of that do you have? In the last few years, the Canadian dollar hit rough parity with the American dollar, and at least some things have stopped charging more for Canadian dollar purchases. Thus, the only prices I'm aware of changing drastically in the frozen north are ones that dropped ten to twenty percent. That's my anecdote of Canadian inflation and the only one I know.

Canada is of course not part of the BLS, so I have no CPI data for them and the only information I can find on the subject is this.

But you're not winning a lot of sanity points throwing your hat in with CPI doubters. Doom was claiming that CPI Doubting was not an anti-science lunatic conspiracy theory because it was exactly like global warming denial. I assume he is a Moon Landing Skeptic, an ID Proponent, and an Anti-Vaxer. If you want people to take challenges to Canada's (or any country's) CPI data seriously, you need to do better than "I remember shit costing less money!"

-Username17

[Juton]

Questioning the Government's inflation statistics isn't a bad thing. For instance in Canada the official figures show inflation hovering around 2% for the last 8 years, but my calculation shows around a 4% yearly increase.

Four percent seems a little low to my own mind, I don't have that large a basket of goods to draw a conclusion. The official 2% inflation only adds up around 17%, which just doesn't account for the increases in prices I've been seeing.

Your calculation of what?

You apparently have a "gut feeling" that prices are rising in Canada. What actual evidence of that do you have? In the last few years, the Canadian dollar hit rough parity with the American dollar, and at least some things have stopped charging more for Canadian dollar purchases. Thus, the only prices I'm aware of changing drastically in the frozen north are ones that dropped ten to twenty percent. That's my anecdote of Canadian inflation and the only one I know.

Canada is of course not part of the BLS, so I have no CPI data for them and the only information I can find on the subject is this.

But you're not winning a lot of sanity points throwing your hat in with CPI doubters. Doom was claiming that CPI Doubting was not an anti-science lunatic conspiracy theory because it was exactly like global warming denial. I assume he is a Moon Landing Skeptic, an ID Proponent, and an Anti-Vaxer. If you want people to take challenges to Canada's (or any country's) CPI data seriously, you need to do better than "I remember shit costing less money!"

-Username17

I did my own basket of goods assessment, for a few months in 2004 I tried to be more responsible with my money so I entered every expense into a money managing program. A lot of stuff I can't really compare, rent for instance, I live in a much nicer building now then back then. I also can't compare lump sums of things like groceries because my diet has improved since then. If you really, really want I can type out my data for you.

You mention our rising dollar, that actually has made things like novels and video games cheaper than they where 8 years ago. A lot of the individual food stuffs I've noted increased way more than that 4% average, some have nearly doubled like chocolate bars.

My experiences, anecdotal as they are, are not explained by the Canadian government's data, so that's why I don't entirely buy them.

[Maj]

some have nearly doubled like chocolate bars.

It's important to take what you're looking at into consideration, though. Chocolate, for example, costs significantly more because civil war broke out in the Ivory Coast (where 43% of the world's chocolate comes from).

[Juton]

Like I've mentioned earlier in this thread, tracking inflation is actually a pretty difficult proposition. Aside from civil war the price of chocolate is affected by demand, where they bring the cocoa in from, how efficient the transport network is, did the factory unionize etc.

When comparing my new and old records I can't attribute the increase in price of gasoline, electricity, rent or tuition solely to inflation because there are so many big factors involved. Is it honest to use any of those in a calculation of inflation? They certainly make my dollar less valuable, isn't that inflation though?

[Username17]

They certainly make my dollar less valuable, isn't that inflation though?

No. If you're spending a dollar competing for a resource which is now scarcer, you are getting something which is literally more valuable. So you get less of it for a dollar that has the same value.

If chocolate becomes twice as expensive because people with chocolate want your dollars less, that's inflation. If chocolate becomes twice as expensive because half the world's supply of chocolate is on fire, that is not inflation.

But basically: argument from incredulity (AKA the "Fucking Magnets" argument) is worth zero points.

-Username17

[Juton]

No. If you're spending a dollar competing for a resource which is now scarcer, you are getting something which is literally more valuable. So you get less of it for a dollar that has the same value.

If chocolate becomes twice as expensive because people with chocolate want your dollars less, that's inflation. If chocolate becomes twice as expensive because half the world's supply of chocolate is on fire, that is not inflation.

But basically: argument from incredulity (AKA the "Fucking Magnets" argument) is worth zero points.

-Username17

I don't think that argument works, the value of chocolate is in the eating of it, for it too become twice as valuable it would have to be twice as delicious. The cost has doubled, but not the value. You seem to be conflating expense with value.

My understanding of inflation is that it takes more money to procure the same value today as opposed to however many years ago. I think we are all in agreement that the phenomenon of inflation exists, the only matter now is how do we quantify it. I take it you are of the opinion that we should exclude some factors which affect cost from the calculation of inflation? I am of the other mind, it doesn't really matter what factors caused chocolate to increase in price, what matters is that one dollar will by less chocolate than it did before.

[Ancient History]

More like, chocolate is fucking expensive to produce. If the world produces 100 tons of chocolate one year, and the next year the world produces 50 tons of chocolate, the reason you're paying the same for less chocolate is because there is less chocolate.*

* Of course, this assumes that the demand for chocolate remains the same and the price rises to reach the demand. If you manufactured buggy-whips when people were switching over to automobiles, the demand for buggy-whips would go down with the supply.

[tzor]

I don't think that argument works, the value of chocolate is in the eating of it, for it too become twice as valuable it would have to be twice as delicious. The cost has doubled, but not the value. You seem to be conflating expense with value.

I think you are confusing value with utility. The cost of anything is based on supply and demand. Value is defined as "a fair return or equivalent in goods, services, or money for something exchanged." If either the supply decreases or the demand increases the price will rise. The "value" will rise as well because if it was no longer "fair" then the demand would in fact fall as fewer people would find the price "fair."

Inflation is therefore when the price goes up for reasons other than supply and demand. For this reason it's hard to really measure the value of inflation of any commodity that has drastic fluxiations in either supply or demand (with the possible exception of when those fluxiations can be tied directly to seasonal variations ... Christmas tree sales, for example).

[Juton]

I think you are confusing value with utility. The cost of anything is based on supply and demand. Value is defined as "a fair return or equivalent in goods, services, or money for something exchanged." If either the supply decreases or the demand increases the price will rise. The "value" will rise as well because if it was no longer "fair" then the demand would in fact fall as fewer people would find the price "fair."

You're right on that, I am not an economist, I was using cost and value as they are used in common parlance, I never considered they would have a differing technical definition.

Inflation is therefore when the price goes up for reasons other than supply and demand. For this reason it's hard to really measure the value of inflation of any commodity that has drastic fluxiations in either supply or demand (with the possible exception of when those fluxiations can be tied directly to seasonal variations ... Christmas tree sales, for example).

Just for my understanding, say the war in Ivory Coast went a long time and somehow destroyed their ability to grow or supply cocoa. In the long term the global supply contracts while demand stays constant, so prices go up. If it is a long term and relatively stable increase in price is that inflation?

[Doom]

But you're not winning a lot of sanity points throwing your hat in with CPI doubters. Doom was claiming that CPI Doubting was not an anti-science lunatic conspiracy theory because it was exactly like global warming denial. I assume he is a Moon Landing Skeptic, an ID Proponent, and an Anti-Vaxer. If you want people to take challenges to Canada's (or any country's) CPI data seriously, you need to do better than "I remember shit costing less money!"

-Username17

Uh, no, never said it was exactly like global warming, that was misread, badly. That not just ignorance, that's willfully lying, eh?

No, I'm not a moon landing skeptic. I don't even know what an "ID Proponent" is, and not real sure what an "Anti-Vaxer" is. Man, you sure do know alot of conspiracy theories. You going to call me a [EDITED] now and see if that sticks?

Luckily, I provided considerable data, but I concede it's merely a matter of opinion whether $28, compounded at 2% over 3 years, really is $47 (admittedly, that's only one price, but since actual data doesn't count, may as well...).

I'm not saying Frank's gut is wrong, but extensive data (note: they also say Shadowstats is high) beyond what's already been shown says otherwise.

[Doom]

Questioning the Government's inflation statistics isn't a bad thing. For instance in Canada the official figures show inflation hovering around 2% for the last 8 years, but my calculation shows around a 4% yearly increase.

Four percent seems a little low to my own mind, I don't have that large a basket of goods to draw a conclusion. The official 2% inflation only adds up around 17%, which just doesn't account for the increases in prices I've been seeing.

Keep in mind, 'inflation' can have more than one meaning; it's quite possible, price inflation (what you are directly observing) is more than the 'inflation' number you're being told by the Canadian government (and can only confirm with a gut check).

But this doesn't mean the number you're being told is wrong....it just measures something else entirely.

In the US, the BLS indicates yearly premiums for health insurance per family are are $240 and that premiums have been falling steadily the last few years.

I know that's not what I've been paying, but that's just an anecdote...anyone out there paying that little? Anyone had their premiums reduced?

Shadowstats is one guy in a garage making calculations, his numbers for price inflation being high doesn't change that it's a fucking joke to use BLS inflation (sic) numbers to estimate price inflation.

[Ancient History]

Inflation is therefore when the price goes up for reasons other than supply and demand. For this reason it's hard to really measure the value of inflation of any commodity that has drastic fluxiations in either supply or demand (with the possible exception of when those fluxiations can be tied directly to seasonal variations ... Christmas tree sales, for example).

Just for my understanding, say the war in Ivory Coast went a long time and somehow destroyed their ability to grow or supply cocoa. In the long term the global supply contracts while demand stays constant, so prices go up. If it is a long term and relatively stable increase in price is that inflation?

No. Inflation is a general rise in prices - mostly due to an increase in the money supply rather than a contraction in supplies. The effect is that you need more money to buy the same or equivalent goods.

Example time!

It is the year 0, and there are 100 gold pieces (gp) circulating in the fantasy economy. A bushel of wheat might cost 1gp. Near the end of year 1, a gold mine is found, and when smelted and minted there are now 200 gold pieces in the economy. The effects of this are not noticeable right away, because the guy with the gold mine has all the gold - but that guy is filthy fucking rich by year 0 standards, and he can buy basically whatever he wants.

At this point, several things can happen - I'll cover three different actions:

1) The filthy rich guy buys all the wheat (at 1gp a bushel), which he can do because he is filthy rich, and then starts charging 2gp a bushel for it. Everybody else has to pay because he has instituted an artificial restriction on the supply, while demand remains constant.

2) A greedy merchant knows filthy rich guy is coming and changes his prices to 2gp a bushel, claiming his wheat is magic and will make filthy rich guy live longer. Filthy rich guy is stupid and wealthy enough to pay it. Other merchants take notice and start charging 2gp for each bushel of their wheat too, and 2gp becomes the new standard price for a bushel of wheat.

3) Filthy rich guy spreads the money around. As he spends money, he has less, but other people in the economy now have more gold to spend on the same old shit. This create an artificial surge in demand - not because people suddenly need more stuff, but because they can now afford more stuff - while supply is constant, so prices rise.

In cases 1 and 2, the increased in price of a single good can have a domino effect - everybody needs wheat, but with wheat twice as expensive, not everybody can afford it. So people demand higher wages so they can afford the same amount of wheat, and merchants charge more money for their wares so the can pay the higher wages and still be able to eat themselves. This can become an ongoing, vicious cycle where wages and prices continue to play catch-up - although usually there are other factors that come into play.

In modern times, inflation is linked to the government printing more money - just like in year 0 when a new gold mine is discovered - but also to the interest rate. Loaning money at interest leads to an increase in the effective amount of money available over time. People who harp on about the gold standard deny this; those people are wrong. I will bitch about the gold standard at some later time.

Say you have $100 in 2010. The interest rate at your savings account in your bank is 2%. After saving your money in the bank for a year, you have ($100 + $100 * 0.02 =) $102 in your account. For that year you did nothing with your $100, that money did not sit idly as 100 one-dollar bills in a bank account somewhere. The interest you earned is the fee that the bank pays you to use your money. They took your $100, and the $100 from nine other people, and lent $1,000 to your friend Joe so he could live his dream of owning a lemonaid stand. Except they charged Joe 4% interest on his loan. They have to charge more, because they're paying you, the bank has operational costs (building, tellers, etc.), and most importantly, the bank is a business that wants to turn a profit.

But look what just happened! In 2010, you had $100. In 2011, you had $102. Where did that extra money come from? Well, Joe kept up his payments. He paid out $1,040 on a $1,000 loan. But the thing is, on paper you had $100 in that bank, and Joe had $1,000. You could have gone to that bank at any time and taken out all of your money. So the initial $1,000 scraped together from your account and nine others effectively became $2,000 because on paper each of you had $100 and Joe had $1,000 (10 x $100 + $1000 = $2000).

Please note: above bit was simplified and did not get into all the actual mucky equations usually used for calculating stuff like that. For instance, I said nothing about the fact that the bank must keep a certain amount of the cash deposited "in reserve" just in case you decide to cash out your account. This is called fractional-reserve banking.

[tzor]

Just for my understanding, say the war in Ivory Coast went a long time and somehow destroyed their ability to grow or supply cocoa. In the long term the global supply contracts while demand stays constant, so prices go up. If it is a long term and relatively stable increase in price is that inflation?

Here is the question. How much is the average person willing to pay for coca. If it goes above that price then they won't pay for it. (Hell, I would love a good Russian Caviar, but not at the curent price so I'm not buying any.) If gas, (another example) goes up to $7 in the US, how many people would be cutting down drastically on their driving?

Never the less, this is not "inflation." You are just willing to live with giving more resources to acquire that good. In real inflation everything goes up, more or less. It's not like you have to work an extra five minutes to afford the item, because not only is everything more expensive, but so to is your own value in terms of labor. A month's labor still buys the same value (well not really since we are talking "average" and few people are average) but all the numbers are larger. The biggest looser in inflation is savings, the biggest gainer is debt.

This is why depressions can trigger the exact opposite, deflation. Too few dollars (in the hands of people) chasing too few goods, resulting in people lowering prices just to move inventory sitting and possibly spoiling. Everything is cheep but you ain't got no fucking money. (But if you had money you would be in the gravy train.)

This is mitigated to some extent by banks charging interest based on "official" rates. I've got $5,000 in my savings account (it's not my only source of assets). The bank is giving me $0.50 per month in interest. (ARE YOU FUCKING KIDDING ME?) Clearly I'm loosing money over time since that is clearly below the current inflation rate, but I'm loosing less than not getting anything, I suppose.

[Doom]

Yeah, banks rates have been horrid lately (I've a money market paying 0.01 percent)...kinda why I favor investing in precious metals. They're usually a terrible investment (well, except for the last 10 years), but if you're not going to get any interest anyway...

[Kaelik]

Are you in a foreign country Doom? If you can only get .01 percent, you are being fucked robbed, money market or no. That you have that as the rate on a money market of all things, fuckin A. You must have negative dollars in that account to have such a shitty rate.

[Ancient History]

...you still shouldn't invest your money in precious metals. Find some other, more sane thing to piss your cash away on.

Gold has a few industrial uses; the rest goes into jewelry. The bulk of the demand for gold et al. is from numb-nuts that still think of it as money or that it has some intrinsic value. No major currency of the world today uses is based on a precious metal standard and there is a good reason for that. The gold standard/silver standard/etc. sucks. It's an artificial constraint on the economy, one we don't need and shouldn't want. Just think about it: if gold were really a perfect store of value why would people sell it to you? Why take the money they tell you is bad and give you the good money instead? Out of the kindness of their hearts? Shit, no. They want to get paid in real money - dollars, pounds, whatever the government decrees is legal tender. When Glenn Beck told people to buy gold, it's because he was one of the people selling the gold to them! He profited off the transaction!

Yes, the price of gold goes up as a function of demand. That the demand is caused by a bunch of idiots who think gold will survive if the economy crashes or something means nothing. The fact is, without that demand gold is a worthless and heavy hunk of yellow metal. There is no guarantee it will maintain its price; there is every guarantee that the price will probably go down. Why? Because we mine X tons of gold a year, we use Y tons (where Y < X). The supply of gold is ever-increasing, and unlike cocoa or cocaine the shit does not spoil. From a sheer scarcity standpoint, the cost of gold decreases a little each year, just because we keep digging more of the shit up.

Digital metal currencies today are even more insane and fraudulent, but let's save that for another rant.

[Username17]

Permanent changes in supply or demand are not inflation. If you want to eat a common animal, that is cheap. If you want to eat an endangered animal, that is expensive. Fishery depletion is not inflation - it is individual commodities changing category from "common animal" to "endangered animal" as supply contracts. The reverse is not deflation. If new fisheries are discovered (or farm fisheries created), the price category would change from "endangered meat" to "common meat" as the supply increased and prices would fall.

Similarly with demand. If a material becomes industrially important but supply doesn't change, the price will be bidded up because it suddenly changed category from a "non-valuable commodity" to a "valuable commodity". If a material becomes industrially obsolete, it stops being a valuable commodity and the price falls. But neither the rise or the fall is relevant to inflation.

Note however, that commodity production is also changeable. If prices rise, more marginal veins can be mined and will be. If prices fall, more marginal mines will close. And the same for agricultural products. People can plant beats instead of rice or vice versa, or something else. And they will if sufficient price incentives are dangled in front of them. But supply isn't the only thing that substitutes. Consumers will also try to figure out ways to use cheaper things instead of more expensive things. This means that permanent price changes are quite rare, and big price increases or decreases are often followed by big price corrections shortly thereafter.

Real life example: In 2006 Nckel (the metal) became in very short supply relative to demand and over the following year the price ran up to nearly seven times what it had been a year before. But with such a large price run up, people opened new mines and changed industrial techniques to use less nickel, and a year after that the nominal price of nickel had been cut in half.

So even if Ivory Coast burns to the ground and stays that way, the price of chocolate will not stay high. Consumers will start eating more carob and caramel and vanilla things, bringing down demand. Further, other agricultural producers will be attracted by the higher prices and start making more chocolate at the expense of other tropical goods - recovering some of the supply.

-Username17

[Zinegata]

Inflation is the rise and fall of the monetary value of all goods in the market.

Rising prices due to losing the world's largest source of chocolate is simply interaction between supply and demand.

In practical terms though, it's very difficult to distinguish between the two.

[Username17]

Inflation is the rise and fall of the monetary value of all goods in the market.

Rising prices due to losing the world's largest source of chocolate is simply interaction between supply and demand.

In practical terms though, it's very difficult to distinguish between the two.

It really is. People self reporting their feelings of inflation are almost always wrong - and wildly so. And that comes down to selection bias. People only notice prices at all when they are offended by them, which means that price increases are noticed and price decreases are ignored. So if apples become more expensive and oranges become less expensive, only the apple price will be noticed. Furthermore, if apple prices rise and then fall, or vice versa, the price raise will be noticed and complained about but the price drop will not.

For this reason, I would suggest ignoring the price of "stuff" altogether when attempting to track inflation on your own. Track services instead. How much does it cost to get someone to paint your house, mow your lawn, or give you a blowjob? Painters and massage therapists are subject to supply and demand shocks, but when you're talking actual skilled human beings for the supply, the prices are a lot less volatile than ones that depend on whether a container ship came in today or not.

When people get upset about the cost of yard maintenance or cleaning services - that is inflation. When people get upset about the price of some commodity or another, that's almost always selection bias against periodic supply shocks.

-Username17

[Vnonymous]

...you still shouldn't invest your money in precious metals. Find some other, more sane thing to piss your cash away on...

Are you high? Gold has gone up a fucking ridiculous amount recently. If you invested last year and cashed out now you would have made a ridiculously large profit. While investing in it now may not be a really smart idea because the price has just about doubled compared to what it was a little while ago, but gold is a really fucking good investment when confidence in the dollar is fading. I'd expect it to go even higher, but you've already missed the big haul.

[Ancient History]

It is high because fucktards keep buying it for stupid fucking reasons.

[Zinegata]

The problem is that the current price of gold is ridiculously higher than what it's really worth. Therefore, the chance of the market popping is really, really high.

People should really fucking stop believing in get-rich-quick-schemes by other names. The only ones that work rely heavily on inside trading and other patently illegal activities. That's why Goldman Sachs laughed its way to record employee bonuses after the mortgage bubble popped.

[Doom]

Keep in mind, people have been saying that about precious metals for 10 straight years now. It's a stupid investment, perhaps, but lots of great investments have done worse in the last decade. I seem to remember having this conversation on this board six months ago...prices are up since then, yet again.

Stuff goes up, stuff goes down. Relative to goods and services, gold/silver don't do well or poorly, staying about the same. But to a falling piece of fiat currency, it's not too bad, moreso if there aren't any other safe options. I'd *love* to have something better to buy.

It's funny that Frank mentioned blowjobs as a service. In ancient times, armies would commonly move into an area where the troops didn't speak the local language. When troops were paid, they could get paid in pieces of silver stamped with the sexual favors the troops could expect to trade the silver for.

In terms of silver, a blowjob has been about the same price for several thousand years. In terms of paper, it goes up and up and up. So, if you know how many blowjobs you hope to purchase in the rest of your life, you could just put away that much silver...you don't have that option with paper, alas.

[tzor]

You know I keep hearing this crap about how dollars become "worthless" over time. That's crap. Yes a 2011 dollar bill is worth a lot less than a 1901 dollar bill, but that 1901 dollar bill is worth something today, especially since paper currency has a greater destruction rate than coins and gold.

The only book I have at my fingertips is from 1990, so it's 20 years old but that said ...

For uncirculated versions of dollar bills.
1862 US Note: $610
1874 US Note: $480
1917 US Note: $160
1923 US Note: $235

1934 Silver: $21
1935 Silver: $12
1957 Silver: $4.20

1963 Fed: $2.75
1974 Fed: $2.25
1985 Fed: $1.60

While very few people actually put money in a matress secure facility for the preservation of paper currency the notion that physical metals is better than "deposited" currency has as much to do with the fact that it is physical as well as it is metal. That's why the safest investment is probably metal currencies because even if the metal market isn't doing all that well, the collecting market would keep those values going. The two markets feed off each other.