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Comment by pjscott | Hacker News Reader

It doesn't track cost of living? The way it's calculated is all about cost of living!

In the US, the official inflation numbers are based on a "basket of goods" meant to be representative of a typical person's spending. Housing currently makes up about a third of the basket, while luxury items are a fairly small percentage. Here's a pretty well-written summary, albeit with numbers from 2022:

https://www.pewresearch.org/short-reads/2022/01/24/as-inflat...

Changes in housing prices have a large effect on the BLS's inflation figures. Downward changes in the price of luxury goods have a small (and bounded) effect. Even if all luxury goods became free, the reduction in inflation wouldn't be all that much.

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CPI is an aggregate measure which munges a bunch of things together under a single statistic.

In fact, the cost of necessities has overall risen faster than the cost of discretionary goods. This has been generally true since the mid-1990s; prior to that, inflation differences were much smaller across income groups despite lower income groups spending more of their income on necessities. In some periods like the post-COVID housing and energy price shocks, the differential effect of real inflation on basic necessities has been even greater.

Even "small" effects compound over time. For example, when someone in a low bracket loses 10% purchasing power after many years, the net economic stress they experience is much greater than for someone at a high bracket. Differential inflation of necessities vs discretionary goods magnifies this.

Housing is actually ~44% in 2024, but the subcategory of 'Shelter' is ~35% for CPI-U. 'Shelter' is further broken down into rent and owner's equivalent of rent. 'Owners' equivalent rent of residences' is ~26% for CPI-U and ~21% for CPI-W, 'Rent of primary residence' is around 7% and 10% respectively.

Depending on how one live their lifestyle, the 'inflation' calculation can greatly vary in relevance.

Source: https://www.bls.gov/cpi/tables/relative-importance/home.htm

Nope. CPI is an excellent differential indicator -- "how much did a typical person's cost of living rise this year" -- but it's a terrible integral indicator if you compound it because it's blind to the difference between forced and voluntary substitution. If essentials inflate faster than wages, money_in=money_out drives a reduction in nonessentials -- forced substitution -- and the CPI basket adjustments launder the forced substitution into voluntary substitution.

Well, "launder" is a strong word that the hardworking bureaucrats at BLS do not deserve, but the people who use CPI as a deflater so that they can wave around graphs "proving" that things have never been better absolutely deserve it, so I'll keep it in.

Bonus meme: the American Dream was not to Owner Imputed Rent a house.

Yes, it also takes into account rising quality. For an example, in 2010 I rented a rat hole apartment for $x from a fisherman who had inherited the building. He never did maintenance (he was out to sea most of the year) and he never raised rent.

A large company bought the building after I moved out. Ten years later, the same apartment with a fresh coat of paint and new countertops was back on the market for a rent of about three times $x.

The CPI can say that apartment, since it was refurbished, increased in quality and so it wasn't really a price increase of the same good from $x to $3x. This offers a "degree of freedom" to adjust the CPI itself (since quality is inherently subjective), and may be a big part of why CPI does not reflect the lived experience.

I didn't care one bit about paint or countertops when I rented that apartment and I assume broke young adults today don't either. At the time I wanted the cheapest place to live in the area and this was it. It still is one of the cheapest places, but you need three times as much money to rent it.

It’s also been toyed with and twisted since about 1983. The actual standard of living for Americans has generally been falling since then.

Which changes to CPI since 1983 do you most object to?

How are you measuring the "actual standard of living?”

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