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Started by TimNew - June 11, 2021, 5:09 p.m.

Just a quick note.   Y'all probably know this..  But in case you don't.

There are two measures of inflation.    Well,  more really,  but these are the most relevant.

The most popular, accepted  by the general public is the Consumer Price Index (CPI).    This is a measurement of a "basket of goods" .  You can find the list, or I could provide,  but it's not relevant to the discussion.

The other is  Personal Consumption Expenditures (PCE).  This one takes into account that people adjust their purchases based on prices.    If steak gets too expensive,  they buy more chicken,  etc.

The obvious difference is that one sets consumption per dollar (CPI).  The other sets behavior per dollar (PCE).  Subtle,  but very significant.

The point of this explanation is that the FED defines inflation based on PCE.  

I suspect the big players know this, which is why equities did not tank following this weeks 5.0 annual CPI.

Re: CPI vs PCE
By metmike - June 11, 2021, 10:55 p.m.
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Thanks TIm for the special insight that many of us, including me do not know that much about. 

Please keep helping us to learn more.

Re: CPI vs PCE
By 7475 - June 12, 2021, 8:52 a.m.
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Thanks Tim, Now I have a couple questions if you'll humor me.

 CPI is the price of a basket of items -the items for the most part are the same items month to month. A change in cost of those items reflect the inflation status month to month.

Now PCE. Are you saying that this is based on a basket of items items that are actually purchased by consumers? The cost of this basket then would reflect what consumers are actually spending for, lets say, food-altho that food might be chicken instead of steak or rubber soled dress shoes rather than leather soled shoes.

 Now, if one was disciplined and remained on budget then their expenses would remain constant and indicate no inflation- disregarding, of course, the difference in items purchased.

 Is this any where near an accurate statement/assumption?



By TimNew - June 12, 2021, 11:34 a.m.
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It's pretty close,  on the money as far as the measures are concerned.

But even if you modify your "basket",   the price of chicken will still go up. (for example).   No matter how careful you are,  there will be a point where you can't cut costs any further. 

In my experience,  people will adjust spending based on things like cost,  but few are extremely dilligent.

Re: CPI vs PCE
By bear - June 12, 2021, 5:59 p.m.
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forgive my skepticism... but i hear the example about steak every decade.  in the 80's they said that steak did not really go up because i switched to hamburger.

in the 90's they said steak did not really go up much because i switched to hamburger.  in the 2000's they said that steak did not really go up much... because i switched to hamburger.  etc. etc.  how many times do i switch to hamburger? 

it looks to me like a way of trying to claim that there is less inflation, rather than admitting there is more inflation.  they are in denial.   

are people really consuming LESS steak today than what they did in the 80's, or 90's , ???

other than the fact that there may be more vegetarians today... if the average meat eater is consuming the same amount of steak per capita per year... then i would consider the "switching products" argument to be distraction from the truth about inflation.  

so, guys,... tell me why i am wrong. 

Re: CPI vs PCE
By 7475 - June 12, 2021, 10:10 p.m.
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bear and Tim

 I think we all know what's going on here.

Thanks for your responses


Re: CPI vs PCE
By wglassfo - June 13, 2021, 9:47 a.m.
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Actually I don't know what is going on here

But I have always suspected the method of calculating inflation is rather a bogus exercise

You can switch from steak to hamburg but the entire carcass is consumed

Steak is ground into hamburg, perhaps as extra lean or some thing

You don't throw the part [steak] away if nobody buys it

You sell it for less [hamburg] making the whole inflation calculation a bit bogus

Do you know what Jello is made of or rather the gellaton part

Inflation won't move much because of my consumption of jello  [hooves. ligaments, split skins, bones]