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Yeah, this kind of comparison really drives it home. The inflation figures, while not cooked in some grand conspiracy sense, really completely fail to capture the real price increases experienced by real people.
The limitation of CPI is that it is designed for one specific thing, but we end up using it for others. If you want to measure the value of a commodity over time, like a bushel of wheat or a barrel of oil, CPI is OK for that. A bushel of wheat or a barrel of oil now are pretty similar to ones in 1970. But most goods we purchase are not so directly comparable. The CPI calculation tries to compare like goods to like goods, and it applies adjustment factors to the price of goods that aren't constant through time. For example, the TV you can get in 2024 is far, far better than one you could get in 1970. In CPI terms, this means that the real cost of TVs has plummeted by orders of magnitude.
But it goes beyond electronics. Think of homes. People will wring their hands and decry Americans as greedy by citing the size of new homes today vs in 1970, as they have significantly increased. But it's not a matter of greed; you simply cannot buy a new 1200 ft^2 modest home in post places in the country today. They don't make them anymore. Zoning has so restricted housing construction that all new housing has to be luxury housing. Yes, if you actually could find a duplicate of some c. 1970 1200 ft^2 home built new today, it would likely be quite affordable. But in terms of both size and construction details, it's not legal to build homes like that anymore. But this won't show up in the inflation figure. They'll compare the 1200 ft^2 entry-level home in 1970 to whatever rare example of that they can find that is built today of someone building one of those in unzoned farmland in rural North Dakota, and conclude that house prices haven't risen so much. In reality, no one can actually find those homes near job centers.
Or consider college. The college experience of 2024 is vastly different from that of 1970. The MBA class wormed their way into university administration and kicked all the actual academics out of admin. The MBA class see the kids as "customers" rather than pupils or students. And all the colleges and universities, even the state ones, went into MBA customer-seeking overdrive. Colleges have been luxurified. Big fancy dorms, extravagant student unions and study spaces, decadent gym facilities, etc. College at a state school in 1970 was 4 people crowded in a tiny dorm room, where your 'gym' was the campus running track. CPI looks at what it would cost to run a 1970s-style university in 2024, and concludes that college hasn't gone up in price as much as it has. This is one reason community colleges have remained so relatively affordable. By their nature, they deal mostly with commuter students who wouldn't want to use your stupid fancy gym even if you built one.
And the same thing for vehicles. Automakers have chased higher and higher rates of return by making bigger and heavier vehicles. Yes, if you could find a car made today that was an exact duplicate of a 1970s vehicle, it wouldn't have inflated as much. And that's what CPI shows. But it doesn't capture the actual buying options Americans have at their fingertips.
Ultimately, here is what you are doing when you use an inflation calculator and put in 10,000 in 1970 and calculate to today. You are fundamentally saying, "consider the kinds of goods and services average people bought in 1970. If I bought that exact same basket of goods, literal exact duplicates, what would they cost today?"
And for economists, that kind of analysis is useful. If you want to calculate interest rates and GDP growth, CPI works great for that. But for real people in the real world, they cannot simply live like it's still 1970. The affordable options they had then simply no longer exist in the market. Sometimes things have changed for good reasons like product safety, but more often it is simply because the MBA class has turned everything into a luxury good to maximize return on investment. Everything has become a luxury good aimed at the top 20% of earners. And our policy tools for dealing with inflation have been utterly unprepared for this.
That sounds interesting but are you sure it’s correct? My understanding is that CPI traces a bundle of goods that is typical at the time. This means that current CPI contains a current TV while 1970 CPI contains a 1970 tv. CPI inflation is the relative price change of these typical bundles.
My understanding (but again correct me if I am wrong) is that the type of technology adjustment you discuss affect GDP, but not CPI.
What I'm getting at is hedonic adjustment in economic terms. The BLS specifically tries to factor out the effect of increased quality of goods. They don't just look at what's typical at any given time, they specifically and explicitly want CPI to show the underlying change of goods in relation to the money supply. If overnight, the quality of all goods doubled but the price also doubled, the CPI rate for that change would be 0%. CPI says that you're now effectively buying twice as much stuff for twice as much money, so no real inflation has occurred.
This is the primary cause of the disconnect people experience between the figures they see on the news. Kamala tried to run on, "real wages have never been higher!" She was comparing wages measured in CPI inflation. People then looked at their actual lived experience, the actual price of actual goods and services they purchase, and concluded she was lying. Yes, if you're just talking commodities, an hour of work today buy more of basic commodities than at any time before. For ascetic monks who wander the Earth and never buy anything other than bulk rice and beans, there's never been a better time than now. But for people just trying to live a life of some basic dignity and comfort, they find that the only options available in category after category are things that would have been considered luxury versions of products generations past.
The ultimate cause of a lot of this is corporate consolidation. The entire economy is owned by a handful of major investment funds, and most goods have only a handful of suppliers. And the consultant/MBA class at the top all copy each others' homework. They ultimately have very few ideas. In a free economy, some companies in a sector could try to offer discount goods, like many industrialists have done in the past. But it's currently fashionable in the oligarch class to pursue a strategy of maximum profit per minimum unit, rather than trying to make modest profits per unit and make big profits through huge sales. And since the same small club of people effectively controls every publicly traded company, they all end up following the same strategies. All of them are following the strategy of "turn my market into a luxury good, as that has a superior profit margin per unit sold." What we're seeing is a direct result of the cult maximizing shareholder rate of return. If you want to maximize profit while absolutely minimizing capital investment, then you have to pursue a luxury brand strategy.
Yep, this is such a huge impact on the apparent inflation rate. It is an absolutely valid thing to measure, but I love your point about how the market has essentially shifted to only selling luxury products. You either get to pay luxury prices or do without.
Other challenges with CPI are substitution and owner's equivalent rent.
With substitution, economists look at changing purchase patterns and adjust the basket of goods included in the calculation. For example, if you used to spend $20 per week on steak, but now you spend $20 per week on chicken, the economists say your preference changed and there was no inflation. In some cases, this might be true, but in others it could be that the price of meat went up significantly and you switched to something cheaper because you can't afford the higher prices. If you're talking about the fact that nobody is buying 8-tracks anymore, then substitution is certainly valid, but that's not always the case.
In the case of housing, up until the early 1980s, CPI included home prices in the calculation. Then they switched to an estimate of what you would pay in rent for your house rather than the price of the house. This flattens out the CPI movement when home prices go up and down. Is it valid? Maybe? Probably to the economists at least, but not to anyone who wants to buy a home. On the flip side, if you already own a home, home price inflation is kind of irrelevant in the short to medium term because your cost doesn't necessarily change (other than insurance and taxes).
Today I learned. Thanks.
More than 50% of classes in universities are now taught by poorly paid adjuncts with no benefits who can have their classes cut up to the day before classes start. It's insane what the MBAs have done to higher education.
Another limitation of CPI is that it does not account for the devaluation of a currency due to the increase in circulating currency supply which is something the price of gold does perfectly. We can also put the rise in the price of gold next to a chart showing the increase in us circulating currency and they are very close to each other.
The price of gold was constant, only fluctuating 80% from $19 to $35 in the first 172 years of the us dollar’s history. Then nixon ended the gold standard in 1972 and within 8 years the price of gold increased 2000% from $35 to just under $800 one year later the us printed its first one trillion in circulating currency now we print 1 trillion every 3-4 months and the price of gold has increased 7500% since nixon withdrew from the bretton woods agreement. In 1956 minimum wage of $1/hr equaled 60 ounces of gold annually ($160,000 today) in 1968 it was $1.60 which is $250,000 in todays money. Gold has alwaus been considered an inflation proof asset, it has retained its value for all of history. An ounce of gold will always be able to purchase a fine set of garments, liek a really nice 3 piexe suit with undergarments, a button shirt and tie and leather shoes, a months rent in a 2 bedroom in a nice part of town or between 300-400 loaves of good bread from a bakery.
But cue in the “economics experts” telling me the price of gold has nothing to do with the value of currency
It's an interesting thought:
Today's economy forces obesity in the quantity and quality in the products bought, even when people don't actually care about that.
It reminds me of car companies saying "people want grossly oversized cars" even though a lot of people would prefer smaller, compact cars. But these aren't even sold. In the big seller houses, it's one oversized SUV after another.
Exactly. You know what I would love to buy? I do lot of woodworking, so I would like to have a pickup truck. But I don't want one of the giant clown car pickups. I want a pickup truck with a generous bed size and modest cabin, the type they made back in the 70s and 80s. That size of small compact pickup. Ideally, I would like something like that, but electric. Just a simple small spartan pickup with a stupid reliable electric drive train, the kind my grandfather used to drive around the farm.
I really do not care about cars. Right now our only vehicle is 2006 Toyota Corolla. And we're well enough off that we could go buy a luxury car in cash if we wanted to. Neither me or my partner really give a damn about cars. We just want something that will get us from point A to point B. In fact, we barely ever drive. I'm a PhD student and take my e-bike or the bus to campus, while my partner works remotely from home. We really, really do not give a damn about cars. We do not want some giant luxury vehicle. If we had to buy something new today, we would probably just buy something similar to a Corolla, though something with a bed would again be nice. But just looking at car prices gives us a heart attack.