Market Watch

[check]

I would be careful about concluding that the CPI is a fair measure of actual inflation. For one thing, it takes increases in property rental into account, but does not include increases in the cost, maintenance, property tax or insurance cost of homes. Some people pay more than 50% of their monthly income just to cover their home mortgage which means that the CPI does not even pretend to measure what is the biggest monthly expense for many households.

The CPI in Canada includes mortgage costs. Are you sure that isn’t the case in the US?

 

[rScotty]

The CPI in Canada includes mortgage costs. Are you sure that isn’t the case in the US?

Interesting.... The CPI in the USA doesn't change with short term changes in mortgage costs. I didn't know that Canada's did. But the US method doesn't ignore homeowner costs. Instead of tracking changes in mortagage, the US CPI uses a formula derived from the average rental cost across the country, and applies that to owner-owned houses.

The idea being to estimate what homeowners would would pay if they were renting instead of paying a mortgage. Like all estimates, it isn't perfect when things change rapidly. For the past couple of years the effect of that estimate has been to artificially increase the annual inflation number.

 

[2manyrocks]

The CPI in Canada includes mortgage costs. Are you sure that isn’t the case in the US?

"Spending to purchase and improve houses and other housing units is treated as investment and not consumption in the CPI. Interest costs (such as mortgage interest), property taxes, real estate fees, most maintenance, and all improvement costs are part of the cost of the capital good and are also not treated as consumption items. These non-consumption costs of owned housing are out of scope for the CPI under the cost-of-living framework that guides the index." Measuring Price Change in the CPI: Rent and Rental Equivalence : U.S. Bureau of Labor Statistics

The statistical issue with using a small sampling is an increase in the size of the margin of error. They apparently only sample about 50,000 rental units out of 143,876,655 housing units in the US. Another issue with estimating housing costs based on rental rates is they are two different markets, for one thing. Another thing is it's basically a guess because they aren't working with actual housing costs numbers, but imputing (guessing) housing costs based on their rental survey.

1/32" inaccuracy in a 2 foot level over 2 feet will be pretty far off if you tried to determine level with it two miles away.

 

[Torvy]

Any economist worth the name will tell you that the CPI is a weak measure of inflation. It is better than not having a measure, but excludes too many things.
Here is a neutral source that explains it quite well.

What Are Some Limitations of the CPI?

Despite being followed so relentlessly, the consumer price index (CPI) has its limitations and is an imperfect measure of inflation and the cost of living.

www.investopedia.com

 

[ultrarunner]

Interesting.... The CPI in the USA doesn't change with short term changes in mortgage costs. I didn't know that Canada's did. But the US method doesn't ignore homeowner costs. Instead of tracking changes in mortagage, the US CPI uses a formula derived from the average rental cost across the country, and applies that to owner-owned houses.

The idea being to estimate what homeowners would would pay if they were renting instead of paying a mortgage. Like all estimates, it isn't perfect when things change rapidly. For the past couple of years the effect of that estimate has been to artificially increase the annual inflation number.

I’m guess spreading rent control and pandemic years of no rent increases tamp down the USA CPI

 

[Torvy]

Another problem with inflation discussion is that it is complicated and the average person can be manipulated into drawing incorrect conclusions.

1) inflation is cumulative. It doesn't go down unless there is deflation. When people say it is down, they only mean the rate of increase is lower.

2) the biggest factor in inflation is money supply. This is driven primarily by 2 things, monetary policy (fed rates, et al) and fiscal policy (government spending, et al).

So, if the government floods the economy with money it rapidly drives up inflation and unless they continue that level of infusion, the rate of inflation will slow, but the damage is already done. Think of it like stomping on your accelerator on an icy road, spinning your car out of control. Taking your foot off the accelerator does not solve the out of control spin. More acceleration or slamming on the brakes just makes it worse.

 

[check]

Interesting.... The CPI in the USA doesn't change with short term changes in mortgage costs. I didn't know that Canada's did. But the US method doesn't ignore homeowner costs. Instead of tracking changes in mortagage, the US CPI uses a formula derived from the average rental cost across the country, and applies that to owner-owned houses.

The idea being to estimate what homeowners would would pay if they were renting instead of paying a mortgage. Like all estimates, it isn't perfect when things change rapidly. For the past couple of years the effect of that estimate has been to artificially increase the annual inflation number.

Very interesting. I would like to see the formula for that estimation. Here in Canada, the variable interest rate went up from a low of about 1.45% A couple of years ago to 6.2% now. Meanwhile, In Toronto at the same time the rental rates must’ve gone up at least 50%. Then, of course, there’s the “affordability“ issue, which includes principal and interest on a mortgage. So I have always compared the cost of renting to the cost of mortgage, principal and interest, given a particular loan to value ratio. Always kept that ratio as high as possible on property that I was hoping to see a capital gain, but now that the interest rates are so high, I am reducing that loan to value ratio to his close to zero as possible.

Very relevant to a big decision I have to make today, which I am in favor of doing so far. Someone has made an attractive offer on our big 23 acre waterfront property, which will allow me to get rid of all of my mortgages, and have a good whack of leftover money to invest. Question is, invest in a house in town, or turn it over to my sister-in-law, who is a broker in a big investment firm.

And a related big question is, are houses in Toronto going to continue to go up?

 

[edgarrian]

Well, that's my mistake then.
I meant my reply to be to the more general general conversation of cost of living increases, not just one household's personal spending.
I know how that can happen. A few years ago we had a flood. Rebuilding caused our next few years' expenses to be 10 times what our annual expenses had been before. Almost wiped us out.
We did save the Kubota, though.
rScotty

I think most people feel the effects of inflation and you are living in an area that apparently has not. Our energy has gone up. I know our grocers have seen more than 8%. Restaurants have gone up more than 8%. Our insurance has stayed the same but when we purchase a replacement car for my wife. It will be interesting to see if there is much increase. That will most likely be in 2 to 3 years. Obviously fuel prices reached a record high as they did with *****. We are finally seeing break in fuel prices but its also freight and overall things are in fact slowing down. Freight is extremely down. You should research that a bit. Also OPEC cut oil production to boost prices and they have not really worked all that great. The next question will be what will opec do next year? My guess is they will start easing production cuts to allow "market" to determine prices. Another words they will increase production. I maybe wrong but with venezuela getting ready to come back on the scene and america producing 13 million barrels. They do not like that like.

Nobody knows when a recession will hit just like the mortgage crisis. Jobs were readily available wages seemed ok. Everything was humming along and then the bottom fell out. There are people saying the next bubble is about to pop. I do know one thing. The white house seems to try to convince people that its not as bad as it seems. Yet people have seen there bills go up. Spending habits have changed in most households. You seem to thing otherwise. I think thats why so many are perplexed by your opinion.

 

[rScotty]

Very interesting. I would like to see the formula for that estimation. Here in Canada, the variable interest rate went up from a low of about 1.45% A couple of years ago to 6.2% now. Meanwhile, In Toronto at the same time the rental rates must’ve gone up at least 50%. Then, of course, there’s the “affordability“ issue, which includes principal and interest on a mortgage. So I have always compared the cost of renting to the cost of mortgage, principal and interest, given a particular loan to value ratio. Always kept that ratio as high as possible on property that I was hoping to see a capital gain, but now that the interest rates are so high, I am reducing that loan to value ratio to his close to zero as possible.

Very relevant to a big decision I have to make today, which I am in favor of doing so far. Someone has made an attractive offer on our big 23 acre waterfront property, which will allow me to get rid of all of my mortgages, and have a good whack of leftover money to invest. Question is, invest in a house in town, or turn it over to my sister-in-law, who is a broker in a big investment firm.

And a related big question is, are houses in Toronto going to continue to go up?

Most people would love to have those decisions to make.

All the US CPI methods and formulas are public domain info. Just do a search on CPI/Overview or CPI/methods. My personal opinion is sort of like Torvy's if I understand him right. CPI is OK for rough comparisons to keep popular newscasters honest, but the CPI economic conclusions are less so. It startles me when I start agreeing with Torvy. Better check my meds.

Have fun with your decisions. In spite of the extra work involved, I lean toward keeping existing mortgages and real assets. If I had that decision to make, I would not trade either one for paper-backed brokerage investments. The person who made you the offer apparently agrees.

 

[jyoutz]

I think most people feel the effects of inflation and you are living in an area that apparently has not. Our energy has gone up. I know our grocers have seen more than 8%. Restaurants have gone up more than 8%. Our insurance has stayed the same but when we purchase a replacement car for my wife. It will be interesting to see if there is much increase. That will most likely be in 2 to 3 years. Obviously fuel prices reached a record high as they did with *****. We are finally seeing break in fuel prices but its also freight and overall things are in fact slowing down. Freight is extremely down. You should research that a bit. Also OPEC cut oil production to boost prices and they have not really worked all that great. The next question will be what will opec do next year? My guess is they will start easing production cuts to allow "market" to determine prices. Another words they will increase production. I maybe wrong but with venezuela getting ready to come back on the scene and america producing 13 million barrels. They do not like that like.

Nobody knows when a recession will hit just like the mortgage crisis. Jobs were readily available wages seemed ok. Everything was humming along and then the bottom fell out. There are people saying the next bubble is about to pop. I do know one thing. The white house seems to try to convince people that its not as bad as it seems. Yet people have seen there bills go up. Spending habits have changed in most households. You seem to thing otherwise. I think thats why so many are perplexed by your opinion.

I know you are replying to Scotty, but once again I have to say that your observations in the Midwest about business and freight slowdowns don’t match what we are experiencing in much of the west. I still see more trucks on the interstates than previously and the freight train traffic on the BNSF transcontinental route is also heavier than I have seen in a decade. Who knows what will happen with fuel prices, but they have been declining for the past month, and $2.50 regular gas is easy to find. Yes, prices are up for most everything, but spending is also up, so people are navigating the new prices, maybe from increased wages. It was reported that this year’s online and box store Black Friday and cyber Monday sales set new record highs. And last winter’s high natural gas prices have come down considerably.