As we all know, the CPI is a crock. The government manipulates the formula used for determining the CPI as it sees fit, usually with the intent of making the CPI appear to be lower than it otherwise might be.
This evening, the discussion about inflation was taking place on another forum. I got to wondering what a decent way might be to figure out the actual rate at which the cost of living is changing.
It occurred to me that the standard of living might not be a bad way of looking at the cost of living. After all, we've been hearing recently that the standard of living is on the decline today. In my own experience, it seems that the standard of living has stayed about the same throughout my life, and extending only that my childhood. Why not just chart household income, going back as far as I can find numbers, and using that as a means of approximating the rate of inflation. After all if a family in 1980 could get by with a certain amount of money, and today takes twice as much money to achieve the same standard of living, we could reasonably conclude that inflation had caused 100% price increases in 32 years.
Some of you might quickly debunk my reasoning. But I find it interesting, so I went and looked for data. Without too much effort, I found these household income statistics, from 1967 to 2010.
$5,952
$6,464
$7,057
$7,396
$7,671
$8,226
$8,945
$9,600
$10,218
$10,962
$11,743
$13,121
$14,605
$16,017
$17,375
$18,422
$18,859
$20,295
$21,405
$22,588
$23,685
$24,879
$26,550
$27,601
$27,937
$28,547
$29,244
$30,321
$32,191
$33,593
$35,086
$36,932
$38,714
$39,926
$40,148
$40,347
$41,185
$42,167
$44,082
$45,817
$47,752
$47,832
$47,361
$47,022
Charted, they look like this:
What does this tell us? Well, in 1967 a household got by with $5,952. In 2010, households get by with $47,022. 43 years. A 7.9-fold increase in what was needed to "get by."
That's an 18.3 percent increase annually, right? (790% divided by 43 years.) No, not really, because of the time value of money.
What I want to know is what interest rate would turn 1 into 7.9 in 43 years. It would be something far, far smaller than 18%.
fv = -pv * (1 + rate)^nper
18 percent would give us...
1,233 = 1 * (1+.1
^43
A 123,300% return! As I said, 18% is too high.
But a 2% rate of income increase would turn a $1 income into just $2.34. That's not high enough.
The correct value is 4.9%. That's the rate at which incomes have risen. ON AVERAGE.
If the cost of living has been standard over that period, then it is our true AVERAGE rate of inflation from 1967 to 2010.
I think that's higher than our government has been saying, but it's not THAT bad. Or is it?
In 1967, hardly any women worked.
Today, MANY do. For married households, this skews the income up big-time. If every household is a dual household, and today they both spouses work while in 1967 none of them did, it would mean that today's worker can only bring home HALF of a household standard of living with his income.
That's a seriously flawed assumption of course, but it's an interesting one. If it were true, it would make the rate at which the cost of living is rising MUCH greater. It would mean that $1 in 1967 would come to $15.80 43 years later.
7 percent annually, on average.
The true value would be a little less. In 1967, there were a few two-earner households, but the women tended to earn a lot less than the men. In 2010, there are still a few single-earner households, and women have caught up with men.
So the TRUE average annual rate of inflation, based on what has happened to household incomes, and the increased number of earners, and an assumption that the standard of living has stayed about the same over that period, should be ABOUT six percent.
That's what the CPI *SHOULD* be, if it were honest and calculated this way.
So say I.
Of course, that's the 43 year average, and it's a lot worse than that these days.
Gold is $1,581/oz today. When it hits $2,000, it will be up 26.5%. Let's see how long that takes. - De 3/11/2013 - ANSWER: 7 Years, 5 Months
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