CPI index | Inflation | Finance & Capital Markets | Khan Academy

ruticker 07.03.2025 23:38:59

Recognized text from YouScriptor channel Khan Academy

Recognized from a YouTube video by YouScriptor.com, For more details, follow the link CPI index | Inflation | Finance & Capital Markets | Khan Academy

Everyone's talking about **inflation** and **deflation** these days, including myself. That's because it's important, and in order to really have an informed view on it, I think it's essential to actually look at how inflation is defined. Right here, I actually took a screenshot from my Bloomberg terminal of the basket of goods that makes up the **Consumer Price Index (CPI)**—the index that sets everything from the coupons on Treasury Inflation Protected Securities. This is the index that dictates what social security payments are going to and how fast they're going to grow. I'm sure a bunch of union agreements and pension agreements are dependent on the CPI. This is the underlying basket of goods that really tells us what inflation is. At a first level, it's just fun to look at because you can compare your own household to what the government thinks is a typical household. For example, the government says that the typical household spends **15.7%** of their disposable income on food and beverages. That seems reasonable, but it's even more interesting that they break it down. They get very granular; they try to figure out how much you spend on eggs, fish, poultry, and bakery products. That's good because, let's say everything else stays constant, but the price of eggs goes through the roof because the Atkins diet becomes popular again. Then you can actually make an informed decision as to why inflation is going up or whether inflation will go up going forward. If you look at the major categories: - **Food and Beverages**: 15.7% - **Housing**: 43% - **Apparel**: 3% - **Transportation**: 15% (this includes things like new vehicles: 4%, used cars and trucks) I think the way they calculate this is to say, "Oh, what percentage of Americans are driving new vehicles versus used vehicles?" They put fuel in here, and just to the point that a lot of people, when I have this inflation-deflation argument, make the argument that China and India are going to continue growing. Because of that, commodities like oil and fuel will continue to increase. Although people were making that argument more last summer, even now people are making that argument. In a developed country, you see that really motor fuel, even though it kind of hits your pocketbook on the margin, isn't that big a part of your total expenditure, especially when you compare it to things like housing. If you keep going down: - **Medical Care**: 6% - **Recreation**: (they break it down, and you can look this up; I think the Bureau of Labor Statistics has this broken down as well, though it was much easier to get it on the Bloomberg terminal) - **Education**: an average of 3% (obviously, if you're sending your kids to college, that's a much higher number, but on average, if you take the average household) - **Other Goods and Services**: tobacco, etc. So that one is just interesting to look at. Whenever you have a discussion on the things that might drive inflation, it's important to weight them by these weightings that the CPI gives them to actually figure out what the actual impact on how we measure inflation really will be. With that said, if you think about it, the biggest portion of this is the housing piece. Housing is a large percentage of most people's disposable income, especially in a Western society. You can imagine if you live in a third-world country, and you're barely getting by, food might be a huge part of your expenditure, maybe rivaling housing if you've just built a house somewhere. But in a developed society, housing is a huge percentage of it. I want to focus on one thing, and this is something a lot of people have talked about. Mish, once again from Global Economic Analysis, really encouraged me to highlight this. Within housing, obviously, some people rent, some people buy, and they give a **6% weighting** of the whole basket to rent. Then they give roughly **24-25% weighting** to something they call **Owner's Equivalent Rent of Primary Residence**. This is essentially their attempt to measure how much it costs to live for people who own houses. What's interesting, and you probably have caught on to it, is that they use the term **Owner's Equivalent Rent**. What they do, and this is the current methodology, is they don't say how much is your mortgage. They don't say how much does it cost you to buy that house and amortize it over the reasonable life of the house. They actually just say how much would it cost to rent that house. They've kept waffling back and forth; sometimes they just look for equivalent houses and say, "Well, how much would that cost to rent?" At one point, they were actually surveying people and asking them how much it would cost to rent their house, which is probably an even worse number. But the bottom line is they're not factoring in actual mortgages. You can even see it in the weighting. Right when I looked at these numbers, I was like, "Well, you know, roughly 66% of people own houses. How come this number isn't 66 relative to this number?" It's closer to 80. I was like, "Oh no, that's fair because more people actually live in homes." You could say that 66% of overall households own, but in general, homes are bigger; there might be more people in them. So you could think of it on a person basis or maybe on a square footage basis. It makes a little bit more sense to weight houses higher. But what's interesting here is that this number, especially if you add these two, housing in general is about **30%** of disposable income. Traditionally, that was kind of the rule that a bank would use to decide whether you can afford a house. It shouldn't be more than a third of your disposable income, or at least the mortgage payment shouldn't be more than a third. But we know, especially over this last real estate bubble, that that has become a much larger percentage of people's actual disposable income. So you wonder, why is this weighting only **30%** of disposable income? Well, that's because they use Owner's Equivalent Rent. They didn't actually say what people's mortgage payments are. Even though mortgage payments might be going through the roof, even though the price of a house might be going through the roof, it does not get reflected in the CPI number. As of the early 80s, I'll actually go to this—this is straight from the Bureau of Labor Statistics website. They wrote, and they're actually using doublespeak here: > "Until the early 1980s, the CPI used what is called the asset price method to measure the change in the cost of owner-occupied housing." That makes sense, and I'm not sure what they did. They just looked at how much houses cost this year relative to last year, and then they put that into the weighting or determined the weighting based on people's average mortgage. But in general, that's a good way to measure it—either your mortgage payment or how much houses cost. They said, "The asset price method treats the purchase of an asset such as a house as it does the purchase of any consumer good." Fair enough. Because the asset price method can lead to inappropriate results, and this is the key line, "because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons." I agree with that. If something is purchased largely for investment reasons, if I'm purchasing gold, maybe that shouldn't be included in the CPI because it's largely for investment reasons or for stocks. But then they use this completely disjoint logic and say, "You know, because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring the price change for owner-occupied housing." To me, that makes no sense. Owner-occupied is not purchased for investment reasons. I would argue that's a fair enough argument if you're doing it for rentals or if you're doing it for vacation homes, but for actual owner-occupied housing, this sentence makes no sense based on their own rationale. There's no reason to transfer to this rental equivalent approach. The whole reason why I'm going here is because they've, in the early 80s, I think 1983, because they switched over to this kind of inflation, the price of houses, especially the real estate bubble we've seen in the last 10 years, in no way got incorporated into the inflation numbers. So it essentially understated them. You can see that here. This is well—two things: not only did it understate it, but it probably understated the weighting itself. Mish has made a couple of posts about this that you really should use something like the **Case-Shiller Index** on this line right here instead of doing this Owner's Equivalent Rent. But I'd argue one step further—not only should you use something like the Case-Shiller Index, but to actually gauge this weighting, you should actually survey people and ask, "What percentage of your disposable income is dedicated to your mortgage and other things related to owning a house?" Especially over the last seven years, I would guess—and I'm almost sure about this—that would be much larger than **30%** of your disposable income. So not only was this number being understated or the growth in that number because it didn't incorporate the increase in housing prices, but this weighting itself was understated. Just to get a sense of how much this is, the Case-Shiller Index—you could look up the Case-Shiller Index, but in my opinion, it's the best index for actual increases or decreases in the price of homes. You see from **2001 to 2006**, roughly houses were increasing by **10-15%** a year. So if you use that instead of the rental equivalents, and over the same time frame—I don't have a chart for rent, but rent was not increasing anywhere near this pace. If anything, people were leaving apartments to buy houses, so rent was actually staying pretty stable. But **10-15%**—this is year-over-year growth. If you weight that at **30%** of the CPI basket, then really the reported inflation number was being understated by **3-5%** a year. I had argued that this weighting should have grown over that time period because people were spending more and more of their disposable income on their mortgage payments. So really, it was probably understated by more—that this weighting should have been more like **40%**, and you could have said they were understating it by **4-6%**. If you look here, this is the actual reported CPI numbers. What I'm saying is over that time frame, the real inflation number should have been up here. Now that we have actual deflation in home prices, this is zero. The most recent Case-Shiller numbers say that housing has depreciated by **20%**. We're essentially understating the deflation now. So although the CPI has this at kind of the zero mark, if you actually incorporated the real prices of homes and you didn't use rents as a proxy for it, you would actually get a much more negative number here. Mish actually did that on his blog, and if you actually want to read his blog, which I highly recommend, do a Google search for Mish (M-I-S-H). This is directly from his blog. He actually charted the actual inflation numbers as reported (that's in blue) and then on top of that, he put what he calls the **Case-Shiller CPI Index** (that's in red). You see here, especially over the housing bubble, these are the inflation numbers we got from the government, which peaked out in the **4-5%** range, which isn't low by any stretch of the imagination. That's probably why the Fed started increasing interest rates right around here—arguably at the worst possible time. If you look at the **CS CPI** or the **Case-Shiller CPI**, you could almost say that the real inflation was actually peaked out, let's see that number in the **8%** range back here. You could argue that if this was the actual number that the Fed was using, it would have actually been a much better policy tool because they would have seen the inflation pop up back here in January of **2003**, and they would have known that they were keeping their monetary policy too loose back here. They could have avoided this whipsaw that they did in **2007** and **2008**. I'd argue even further that even this number is understating the reality because back here, as a percentage of the actual CPI basket, he just took the CPI numbers and replaced the year-over-year change essentially into the same weighting as the current CPI numbers. But if you actually weighed it based on the actual amount of disposable income people were spending on their mortgages, I would guess it would look something more like this. You would have seen actual inflation peak out here probably in the **10-11%** range. There's a lot of social commentary about this—why they do it. One argument is that a lot of the governments or even corporate liabilities are indexed to inflation. You have an inflation index, and on the other hand, the sale of homes essentially transfers wealth from one generation to another, especially when you have a huge increase in the price of homes. So if they did this on purpose—and I'm guessing that they did—it allows housing prices to increase dramatically. When housing prices increase dramatically, it essentially transfers wealth from the new buyer generation to the retiree generation. It helps subsidize the retirees, and at the same time, by taking it out of the actual CPI index, it keeps the governments and actually a lot of other corporate liabilities low. Now social security is indexed to inflation, indexed to the CPI numbers. So if the CPI numbers are not incorporating, or are not raising up here, you don't have to increase people's social security payments. You kind of get to project this farce to people that you say, "Oh, in inflation-adjusted terms, you're doing better than your parents' generation did." Oh, but by the way, you can afford one-third the house now. To some degree, that's been propagated to large—it’s obviously all falling apart now. But the big takeaway from this, if I had to give you just one, is that the CPI index is a government-created tool. It's based on a survey, and not only has it not been the same survey, but it's actively changed over the years in ways that significantly impact the actual numbers that are reported and, to some degree, play into what I think the government wants people to believe. See you in the next video.

Назад

Залогинтесь, что бы оставить свой комментарий