Comment by mgolawala | Hacker News Reader

Comment by mgolawala | Hacker News Reader

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Unfortunately, for the last few years I have noticed more and more people no longer take government inflation data very seriously. Here are two (I am sure there are more) reasons why:

Housing, Health and Education.. these very basic needs have consistently outstripped official inflation numbers. Specifically on the US coasts. Correct me if I am wrong, but I believe the cost of housing is completely left out of that inflation number. Which in my opinion is kind of silly.

The formula for the index used considers substitutions. So for example, let's say Wool gets expensive, they expect you to substitute it for acrylic. If beef gets expensive, they expect you to substitute it for chicken or turkey, and so on. This isn't the reality people _feel_. For example, I for one, would realize I am no longer able to afford wool socks, and have to make do with acrylic socks. In essence, feeling poorer than I did before.

That's not really how substitutions work. Substitutions work by replacing what people used to buy with what people buy now.

Now your criticism remains valid, to a slightly lesser extent, because if everyone gets poorer and trades wool for acrylic socks, they get replaced in the basket. Not to artificially depress inflation, but to reflect what everyone (now poorer) actually buys.

The issue is, obviously you need substitutions. The finance example is going to be horses, so let's go with that. Nobody buys or rents horses anymore. They are exclusively the domain of recreation. So having them in the index would be lunacy.

One measure people use is the "big mac inflation index", a PPP index. That one would tell you that inflation between 2010 to 2020 is about 76%, or indeed 5.8% per year average.

But that's how the FED chairman Powell (and all those before) will dress it up these days.

CPI and inflation metrics generally do account for housing costs [1], but the problem is inflation in housing is not evenly distributed. If you live in a coastal city or tech hub, your housing costs have likely risen much faster than the national average. I've found it difficult to get realistic measures of city-level inflation data without trying to construct my own index from various data sources.

[1] https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

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