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Official vs unofficial inflation
Topic Started: 29 Dec 2013, 10:08 AM (3,387 Views)
HardTruths
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Dr Hank
29 Dec 2013, 10:08 AM
What are peoples views on official inflation being 2-3% at the moment, and has been for a while

versus the unofficial inflation rate of i suspect 4-5%?? gas, electricity prob more

why was land taken from the cost of calculating cpi in 1998?? obviously to hide inflation but why???

cheers all
Inflation is not really a useful measure of anything, other than a way to set a cap on the serf's wage rises.

The problem with inflation is this. Let's say you are a bread factory and you employ 300 people to make bread, and each loaf of bread costs you 18c to make. If you live in a socialist country, then as the owner you really have no control over the wages you pay your 300 staff, the government determines that. If wages contribute 40% to the cost of making a loaf of bread, and wages rise 4%, then your loaf of bread now costs an extra 0.288 cents to make, and that gets marked up by the wholesaler and the retailer of the bread roughly 1100%, adding 3c to the retail price of bread, or 1.5%.

Lets now say you decide to automate your factory and fire 250 of your staff. Your new machines are no longer at the mercy of the cost of wages, but they are at the mercy of the cost of capital and energy. If the cost of capital and energy is lower than the cost of wages, the effect of automating your factory is deflationary and bread gets cheaper. Again, if capital and energy are 4% cheaper than wages, the retail price of bread should drop 1.5%, all else being equal.

If your economy has a high degree of automation then lowering interest rates will often have a deflationary effect, contrary to the expectations of neo-classical economists who expect lower interest rates will always have an inflationary effect. The JCB has experienced this for decades until a tsunami raised the cost of energy so significantly that Japan's highly automated industrial base experienced rising costs for a change.

In neo-classical economics, production depends on three factors, labour, energy, capital. However, there is a fourth factor, efficiency, that breaks the assumptions of neo-classical economics, not that many neo-classical economists have noticed. Efficiency, and especially efficiency through automation, changes the relationship between interest rates and inflation, because as you lower the cost of capital, automation becomes cheaper, and it's effect is deflationary on consumer goods. Unfortunately, it has the opposite effect on financial assets and limited resources such as land.

What this means is that an aggregate value of consumer goods and financial assets (or their derivatives like rent) is really meaningless. Ideally there should be a Agricultural Price Index,a Manufactured Goods Price Index, a Traded Goods Price Index (for imports), an Energy Price Index and a Financial Assets Price Index (for stock assets such as shares and land values). Those would be useful in a way that CPI will never be.
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Count du Monet
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skamy
29 Dec 2013, 05:01 PM
Land buying is not an everyday thing and rent is much more real to use in inflation measures. Since it was removed land prices fell for many years so if it was all about lowering inflation statistics they would have put it back in.
Wasn't the price of S/H homes or land on its own. It was the price of a new home calculated in to the CPI until 1998.
Pig Iron
29 Dec 2013, 04:51 PM
wriggle much?
What is it that I'm wriggling about?
Edited by Count du Monet, 29 Dec 2013, 06:25 PM.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Mallard
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The basket of goods included in the CPI is recalibrated every five years or so by the Household Expenditure survey. Talk of pocket calculators in the seventies is just forum bollocks talk.

The CPI was changed in 1998 to reflect its changing use as a metric to set interest rates. Rents stayed but mortgage payments did not as mortgage payments would become smaller if the RBA cut rates in response to rising inflation. Clearly that would be a nonsense when it would have made up such a big part of household expenditure. House construction stayed too, but land did not, for the reasons Peter explained four pages ago.

The test of our CPI measure is how well has it enabled the RBA to manage the economy through responding to inflation with interest rates. How many years without a recession now?

I don't think there is much more to discuss is there?

Collecting desperation.
Ex-Bp Golly April 2 2015. "I see with a slight overshoot -70% [fall in Sydney house prices] as being well within possibility"
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Count du Monet
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Mallard
29 Dec 2013, 06:53 PM
The basket of goods included in the CPI is recalibrated every five years or so by the Household Expenditure survey. Talk of pocket calculators in the seventies is just forum bollocks talk.

The CPI was changed in 1998 to reflect its changing use as a metric to set interest rates. Rents stayed but mortgage payments did not as mortgage payments would become smaller if the RBA cut rates in response to rising inflation. Clearly that would be a nonsense when it would have made up such a big part of household expenditure. House construction stayed too, but land did not, for the reasons Peter explained four pages ago.

The test of our CPI measure is how well has it enabled the RBA to manage the economy through responding to inflation with interest rates. How many years without a recession now?

I don't think there is much more to discuss is there?

Quote:
 
The basket of goods included in the CPI


The CPI is not measure of general inflation. It is a measure of slave rations. How much does it cost society to keep its slaves and keep them from rebelling.

The share of the GDP that goes to the slaves has shrunk from 66% to 46%, a quite substancile amount.

Quote:
 
Talk of pocket calculators in the seventies is just forum bollocks talk.


No it isn't, the fact is the CPI makes and inadequate account of productivity improvements.

Is the fall in the price of a pocket calculator over 40 years a product of deflation or improvement in product? Can you answer that?

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The test of our CPI measure is how well has it enabled the RBA to manage the economy through responding to inflation with interest rates. How many years without a recession now?


More a case of blind luck?
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Pig Iron
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Bogan scum

Count du Monet
29 Dec 2013, 07:53 PM
More a case of blind luck?
lucky 22 times in a row? not possible.

I am the love child of Tony Abbott and Pauline Hanson
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HardTruths
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Count du Monet
29 Dec 2013, 07:53 PM
More a case of blind luck?
More a case of stupid luck, and the largest commodity boom in a hundred years.

The problem with booms is that you end up with a lot of idiots at the helm of large institutions, public and private. When the boom comes to an end, the same people very quickly run their organisations into the ground.
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Foxy
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Zero is coming...

Dr Hank
29 Dec 2013, 10:08 AM
What are peoples views on official inflation being 2-3% at the moment, and has been for a while

versus the unofficial inflation rate of i suspect 4-5%?? gas, electricity prob more

why was land taken from the cost of calculating cpi in 1998?? obviously to hide inflation but why???

cheers all
Dr. Hank,
Simple i think we all know that a house in Mount Lawley 20 years ago cost say $200,000 today that is closer to $2,000,000.
Cigarettes and alcohol well i don't have to tell you where that has gone, basically for some leaves off a plant and some fancy water.
Fuel for your car the list goes on.
So those things are taken out of the basket.
Your left with very little in the basket.
Keep the people in the dark and feed them bullshit.
On commercial leases generally there is a rent increase clause that is c.p.i. plus 1 or 2%.
Peter
:pop:
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Mallard
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Yes it is difficult to work out whether prices are changing or if the quality of products is changing. I know the ABS were wrestling with changes in the quality of clothing as the trend for disposable fashion emerged over the last ten years.

But so what?

Even if inflation was underestimated by 2 per cent a year using the ABS methodology, as long as it is consistently underestimated then it still works as an indicator of changes in prices.

Count de Monet, I don't know why you and the others are determined to paint this as a conspiracy. Often in business you have to make do with approximate or analogue measures to make decisions. It doesn't mean that there are higher forces out to get you.
Collecting desperation.
Ex-Bp Golly April 2 2015. "I see with a slight overshoot -70% [fall in Sydney house prices] as being well within possibility"
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Foxy
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Zero is coming...

Mallard
30 Dec 2013, 06:36 AM
Yes it is difficult to work out whether prices are changing or if the quality of products is changing. I know the ABS were wrestling with changes in the quality of clothing as the trend for disposable fashion emerged over the last ten years.

But so what?

Even if inflation was underestimated by 2 per cent a year using the ABS methodology, as long as it is consistently underestimated then it still works as an indicator of changes in prices.

Count de Monet, I don't know why you and the others are determined to paint this as a conspiracy. Often in business you have to make do with approximate or analogue measures to make decisions. It doesn't mean that there are higher forces out to get you.
iNFLATION IS IN THE SYSTEM
Peter
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