Show differing trajectories, depending on coverage, construction.
Figure 1: CPI (blue), chained CPI adjusted by author using X-13 (tan), CPI for wage and clerical workers (pink), HICP adjusted by author using X-13 (red), PCE deflator (green), all in logs, 2022M01=0. Source: BLS via FRED, BEA, and author’s calculations.
Note that PCE uses prices of goods and services as actually transacted, while CPI measures prices faced by consumers.
Speaking of inflation, remember this?:
“The tendency of money to depreciate has been at times a weighty counterpoise against the cumulative results of compound interest and the inheritance of fortunes. It has been a loosening influence against the rigid distribution of old-won wealth and the separation of ownership from activity. By this means each generation can disinherit in part its predecessors’ heirs;…”
J.M.Keynes, A Tract on Monetary Reform
In other word, inflation is a leveler.
Edward Wolff of NYU provides a demonstration of the rightness of Keynes’ view over the 1983-2019 period:
https://cepr.org/voxeu/columns/why-middle-class-benefits-inflation
After a demonstration of the gains of the median, mean and middle three quartile of households compared to the top 1% as a result of inflation, Wolff observes:
“The middle class make out like bandits from inflation. Why is it apparently so opposed to inflation? Inflation also lowers wealth inequality and boosts real wealth growth, both mean and particularly median.”
I’ll offer a couple of speculations. First, the middle does relatively better from inflation in combined income and wealth, but the benefits are the on the wealth side – there is an effect here similar to saving out of income. It takes knowledge of the sort that Wolff uses (and that Keynes possessed) to figure out that inflation helps in the long run. Second, it’s the long run; humans don’t think like calculating machines when it comes to economic rationality. This is in part because we deal with the risein prices every day, but enjoy the benefits of higher wealth only intermittently, as delayed gratification.
Or, as Wolff puts it, more succinctly:
“The reason is that people tend to feel the income effect of inflation but are not aware of the wealth effect.”
Not certain where I fall on this (the conclusions Wolff draws) but it is thought provoking. And I’m a Keynes fan, so, never eager to argue with his writings.
Macroduck – your speculations are indeed intriguing to me – especially in light of media reports that most people in the U.S. are satisfied with their own situation but oh geez the price of a crappy fast food hamburger is really high https://www.vox.com/politics/2024/1/9/24027094/fast-food-prices-wages-mcdonalds (IMO – shouldn’t we get some value from knowing the person preparing your food is making enough that they can live a little bit better than absolute poverty?) Thanks for posting.
You’re thinking what portion of increased profit margin goes to the person preparing our food when the hourly rate is still probably $8–$12?? And that number I got from a low cost of living state. McDonald’s WANTS you to believe if your burger goes up 50cents the guy flipping the burger gets that 50 cents. McDonald’s also want you to know that Eddy Haskell really is a kindly child.
Moses – I get it – most of these increases are price gouging. Notice how there is barely a mention in the business news that producer prices are continuing to decline but oh geez can’t have any wage increases – the august old white men at the Fed nod sagely and are determined to keep interest rates high https://www.reuters.com/markets/us/us-producer-prices-unexpectedly-fall-december-2024-01-12/
@ James
I mean, honestly I get a little crotchety on this topic, maybe more goes to service line workers than I reckon. But I think the question should always be asked as the prices on food rise while McD’s etc either have unmotivated workers or undermanned work crews during rush hour. Something is wrong there, and it doesn’t spell out a labor market “clearing wage” to me.
https://blogs.cornell.edu/info2040/2015/10/20/market-clearing-wage-and-efficiency-wage/
The 10-K filing as some interesting details on the revenues and costs of running the company owned stores. For every $100 million in revenues, food costs = $35 million, labor costs = $25 million, and all those other operating costs represent $20 million. Yep $20 million in profits for the owners of the property, the owners of the intangible assets, and general profits for running the business.
So let’s say labor costs grow by 20% to $30 million and the business decides it can’t raise prices. Profits drop to $15 million. Poor little capitalists will have to boy less cavier and champagne.
Realtime Inequality paints an entirely different picture.
https://www.realtimeinequality.org/
From January 1976 through March 2023, real wealth grew as follows:
Top 1% – 548.8%
Top 10% – 342.9%
Middle 40% – 253.8%
While the Middle 40% did well, wealth of the top 1% grew twice as fast…exacerbating inequality.
If you are trying to tell us that inflation is the sole driver of relative real wealth changes, then you are even dumber than I gave you credit for. And since I put your IQ is in the single digits, maybe I have to entertain the possibility that the dumbest troll God ever created has a negative IQ.
As impressive as the middle class’ wealth growth may sound, it’s important to keep in mind that the “According to the Fed data, the median net worth for Americans in their late 60s and early 70s is $266,400. The average (or mean) net worth for this age bracket is $1,217,700, but since averages tend to skew higher due to high net-worth households, the median is a much more representational amount.
While $266,400 may seem like a lot of money at first, people in their 60s usually start tapping into their net worth to cover living expenses in retirement. When planning for your non-working years, it’s important to understand how net worth works and how it relates to living on a fixed income.”
https://www.cnbc.com/select/average-net-worth-of-americans-ages-65-to-74/
What most people don’t realize is that a nursing home can easily cost $100,000 or more per year. The average Social Security benefit for retirees is about $24000 per year, which is the equivalent of $12/hour for working people. I’ll leave it to commenters to figure out how long the average retiree can last before outliving his money.
Inflation only exacerbates the problem, since it’s foolhardy for people with median net worth at retirement to put much of their money into high risk assets…and low risk assets like Vanguard’s Total Bond Market Fund (VBTLX) have a 10 year yield of less than 2% per year, well below the average inflation rate of 2.8% over the past 10 years.
Johnny, you dimwit. You utter numbscull. Can you not understand even Wolff’s very clear presentation?
Nothing you have written or linked to contradicts what Wolff wrote. You’ve linked to a site that shows levels. It shows that rich people are richer than people who aren’t rich. Everyone but you already knew that. What you haven’t shown, despite your claim tothe contrary, is that the RELATIVE performance of the 1% has been better than that of the middle, nor that INFLATIONARY effects have been better for the rich than the rest.
Then in perfect Johnny style, you’ve lectured us about medians, when Wolff has demonstrated that “Inflation also lowers wealth inequality and boosts real wealth growth, both mean and particularly median.” No need for a lecture from the class dunce – the data are in, and inflation improved the performance of the median household vs the top 1% in the period Wolff consdered.
What the hell is wrong with you?
Realtime inequality also shows that the top 10%’s share of real wealth growth increased 5% while the next 40%’s share decreased by almost 5%.
It’s also interesting that Wolff fails to note that the 10 year Treasury rate dropped from about 11% in 1983 to less than 2% by 2019…no wealth effect there! The Fed funds rate showed a similar drop. Meanwhile inflation in 1983 was only 3.5%.
But according to Wolff the rise in wealth was not attributable to Fed’s actions and was all due to inflation!
Johnny, who wants us to feel bad, has refused to address Wolff directly. Wolff is completely transparent about his data, his calculations, his results. Johnny doesn’t say Wolff is wrong by pointing to error in Wolff’s work – he can’t.
Instead, Johnny leads us away from Wolff’s work. Johnny ignored Wolff’s discussion of relative performance untilI called him on it. Johnny has used someone else’s aggregated data to argue against Wolff’s disaggregation.
Johnny changes data end-points, wrongly implies that Wolff has ignored changes in the median, wrongly implies that Wolff has ignored Treasury debt performance.
And that’s not all. There’s this:
“But according to Wolff the rise in wealth was not attributable to Fed’s actions and was all due to inflation.”
That’s not what Wolff said, anywhere, at all. Not even close. Johnny is simply lying, again. Johnny drags in Social Security benefits, nursing home costs and the kitchen sink, none of which addresses Wolff. And then Johnny simply claim that “Inflation only exacerbates the problem” when that’s the point in dispute.
Why is Johnny so desperate for us to think inflation is worse than it is for the majority of households? Johnny’s constant theme is “U.S. BAD!. (Russia GOOD!!!) This is an election year. Back in the 2022 mid-term election year, Johnny rooted for recession. He used the same dishonest debating tricks then to argue for recession that he’s using now to argue that wage growth is weak and that inflation is bad, bad, bad! Johnny often blames Democrats for the “failure” of pity to help the non-rich, never mentioning Republicans, in the same way he blames the U.S. for the war in Ukraine, rather than Russia. (U.S. BAD!!!)
That’s Johnny.
“Johnny drags in Social Security benefits”
Never mind they are indexed to CPI. Jonny boy also seems to think financing these benefits with a payroll tax is financing them with a progressive tax. Yea – he is THAT STUPID.
“…failure of policy to help…”
Clumsy thumbs.
WTF? That was even more unresponsive than the serial garbage from Princeton Stupid Steve.
Hey Jonny boy – we get you were robbed in that 2023 troll of the year award but pay attention. Stupid Steve has opened an enormous lead in the 2024 campaign. So please try harder as we are all cheering for you!
“But according to Wolff the rise in wealth was not attributable to Fed’s actions and was all due to inflation!”
I read what Wolff wrote and Macroduck is spot on. He did not say anything remotely close to what you suggested he wrote.
Then again – I’m trying to figure what the eff your stupid sentence even means. What FED actions are you suggesting and how does this exactly works – the FED letting inflation either go up or go down? Come on Jonny boy – we get you have zero understanding of basic macroeconomics. We get you flunked pre-K writing skills. But DAMN!
“What the hell is wrong with you?”
It’s not obvious by now?
Vanguard’s Total Bond Market Fund (VBTLX) have a 10 year yield of less than 2% per year, well below the average inflation rate of 2.8% over the past 10 years.
Gee Jonny boy – you found one asset over the last ten years that had a negative real return? Good little boy. Let’s try 10-year index Government securities:
Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed (DFII10)
https://fred.stlouisfed.org/series/DGS10/
A positive real return for most of the period.
But let’s get back to Vanguard. Over the last year, its return = 5.7%. I would say this is a positive real return but then I’m not the mentally retarded inflationm forecaster you are.
https://economics.td.com/us-cpi-pce
This link is an excellent discussion of the diferences between the two indices. I put comment under an earlier blog after JohnH started his usual Know Nothing babbling.
Wow! pgl just learned that different inflation indices have different trajectories, depending on coverage, construction!!! I mean, who knew?!? Apparently not pgl.
But pgl still claims that he doesn’t understand how the statistical discrepancies among the indices can be used to support different political agendas. To make matters worse the discrepancy between PCE and CPI has become anything but trivial.
Here’s how to argue like pgl:
1) Select a statistic, like inflation.
2) Shop for the deflator that best shows what you want to prove.
3) Calculate the result.
4) Declare that the politician or anyone using a different deflator and getting a different result is incredibly stupid or living on a different planet.
This is not idle speculation…I’ve seen it done here. BTW I prefer to just go with official statistics, and in the absence of real, inflation-adjusted data, to use the deflator used by similar time series.
“But pgl still claims that he doesn’t understand how the statistical discrepancies among the indices can be used to support different political agendas.”
You did not know the real reason these series show different rates and apparently you still don’t. NO – Jonny boy suggested PCE was put out by the Biden crime family whereas CPI comes from the always honest Trump’s Truth Social.
BTW Jonny boy – had you read the real discussion (which of course is something a moron like you never does) you might have noticed that PCE is driven by the fall in the relative cost of health care. Given you are in bed with Big Pharma it figures a corrupt liar like you would hate that.
“Here’s how to argue like pgl:
1) Select a statistic, like inflation.
2) Shop for the deflator that best shows what you want to prove.
3) Calculate the result.
4) Declare that the politician or anyone using a different deflator and getting a different result is incredibly stupid or living on a different planet.”
(1), (2), and (4) describes JohnH perfectly not me or any of the other adults here. But yea – no one will ever accuse little Jonny boy of (3) as even adding 2 plus 2 is beyond his pathetic intellect.
Given the well established fact that Jonny boy is incapable of reading links past the headline as a public service for my mentally retarded stalker, I have been noting some of the key passages from informed discussions such as this one:
‘Healthcare related expenditures are the predominant source of divergence between PCE and CPI originating from this category, largely due to the inclusion of third-party expenditures in PCE. The BEA does not publish party-specific expenditure data, but we can tell by the difference in weights that PCE expenditures are far larger. The CPI weight for healthcare services is currently 7% (based on 2019-2020 data) while the PCE index weight for healthcare services for the same time period was more than twice that amount (16.8%).’
Jonny boy is on some pathetic tirade that the recent lower rise in PCE relative to CPI is due to some Hunter Biden led socialist plot but this informed discussion let’s us know that this difference reflects the recent decline in the relative cost of health care.
Now more affordable health care is a good thing in my view but then I’m not working for Big Pharma while we know Jonny boy has become their chief spokesperson.
“BTW I prefer to just go with official statistics”
Are you this effing stupid? PCE comes from BEA. CPI comes from BLS. Both are official statistics – as opposed to the dimwitted dishonest garbage you pedal.
Now if you want to tell us BEA is run by Hunter Biden while BLS is run by Lawrence Kudlow, our host should invite people from both agencies to come here and tell us all what an ignorant utter jerk you really are. Then again – everyone here knows you are the most ignorant jerk ever created.
“To make matters worse the discrepancy between PCE and CPI has become anything but trivial.”
I have suggested in the past that Jonny boy is a gutless coward. He is now accusing the BEA of manipulating PCE for purposes of supporting the Biden crime family. Now if he is serious about this (absurd) claim he should take action.
Hey Jonny boy – Congressman James Comer might appreciate a letter noting your supposedly serious concerns. In fact he might invite you to his committee to share your “expertise” on this issue. So come on Jonny boy – have a spine and write that letter. It is after all your patriotic duty. MAGA!
“Wow! pgl just learned that different inflation indices have different trajectories, depending on coverage, construction!!! I mean, who knew?!? Apparently not pgl.”
Jonny boy cuts and pastes the host’s blog post. Real genius this one is. Especially since I was the one who pointed this out to Jonny boy. Yea – Jonny boy throws a temper tantrum while the other kiddies just snicker at him as they realize little Jonny boy has no clue that trajectories, coverage, or construction even means. Sort of reminds me of when Jonny boy thought a McConnell filibuster meant he invaded Costa Rica! m
If you ever wondered where trolls like Bruce Hall get their stupid ideas on economics, take a listen to Art Laffer on Faux Business:
https://www.msn.com/en-us/money/markets/biden-touts-cooling-inflation-but-prices-are-up-sharply-from-2021/ar-AA1mRB6g?ocid=msedgdhp&pc=U531&cvid=9097fd9d3c9b441aa873f0b06535baed&ei=19
Biden says current inflation is less than it was in late 2021/22 which is correct but Laffer says Biden is totally wrong as the price level is 20% higher than it was 3 years ago? People are 20% worse off even though real GDP has risen. WTF? Laffer also babbled a lot of BS about employment that must have been written by his buddy Kudlow. I would continue but listening to this clown may be putting my sanity in jeopady.
Follow up on the Laffer lies on Faux Business:
GDP deflator has risen by 15.51% since 2020Q4 not 20%. Over the same period nominal GDP rose by 25.36%.
Anyone seeing these facts cannot say real income has declined with a straight face. Then again Laffer wears his ugly glasses to cover up what his lying little face is really doing. And of course the morons who get their economic news from Faux Business are too stupid to check the facts or know what they mean.
America, circa 2024:
https://www.dailykos.com/stories/2024/1/11/2216465/-Cartoon-Hostage-situation?pm_campaign=front_page&pm_source=comics&pm_medium=web
Trump loses even when he is the plaintiff:
https://www.msn.com/en-us/news/politics/donald-trump-ordered-to-pay-the-new-york-times-and-its-reporters-nearly-400000-in-legal-fees/ar-AA1mTiHa
Former President Donald Trump was ordered Friday to pay nearly $400,000 in legal fees to The New York Times and three investigative reporters after he sued them unsuccessfully over a Pulitzer Prize-winning 2018 story about his family’s wealth and tax practices. The newspaper and reporters Susanne Craig, David Barstow and Russell Buettner were dismissed from the lawsuit in May. Trump’s claim against his estranged niece, Mary Trump, that she breached a prior settlement agreement by giving tax records to the reporters is still pending. New York Judge Robert Reed said that given the “complexity of the issues” in the case and other factors, it was reasonable that Donald Trump be forced to pay lawyers for the Times and the reporters a total of $392,638 in legal fees. “Today’s decision shows that the state’s newly amended anti-SLAPP statute can be a powerful force for protecting press freedom,” Times spokesperson Danielle Rhoads Ha said, referring to a New York law that bars baseless lawsuits designed to silence critics. Such lawsuits are known as SLAPPs or strategic lawsuits against public participation.
SLAPP? Like that? Be honest – you want to slap that ugly orange face over and over.
It is great that NY has passed a law providing an effective counter measure against the Orange abominations favorite tool for intimidating anybody speaking the truth about him. Just SLAPP that clown when he tries to silence the press. But it should have triple punitive damages – to be more effective.
Remember VW’s little “Dieselgate” problem, which led to a fine of $4.3 billion, recall of hundreds of thousands of vehicles for retrofit of pollution control equipment and the indictment of six VW execs?
Turns out, VW isn’t the only Johnny in the vehicle sector. Cummins has been fined $1.67 billion for essentially the same crime:
https://www.thedrive.com/news/cummins-fined-1-67-billion-for-diesel-defeat-devices-in-630000-ram-pickups
Fewer vehicles, smaller fine, but Cummins is a smaller firm than VW; this has gotta smart.
David Ulman, Assistant Director of EPA’s enforcement department sounds like he’s eager to do it again.
@ Macroduck
This isn’t going to effect my orange VW van die-cast toy is it?? I have it on a shelf in the kitchen, it makes me think of my Dad, who had an orange VW van in the late ’70s. I love that thing and am thinking of getting the red one or maybe the yellow one with hippie graffiti on it. $7 and about 9 times the size of your typical Hot Wheels car. What do you think, should I risk the recall?? I could use my hand to make it glide in the air and go “Vroom!!! Vroom!!!! in pretend German engine sounds while I’m drinking instead of putting inebriated comments up on Menzie’s blog. What do you think??
People think my social/emotional maturity is stunted. I don’t get it. My “Vroom!!! Vroom!!!!” German engine sounds are very realistic.
3 earthquakes in my state today, one over a 4.0 Now, mind you, all of our Republican governors in this “oil & gas state” say these events, which have a decent chance of causing serious property damage over a wide area, has anything to do with fracking. Nothing at all……..
https://www.msn.com/en-us/news/us/multiple-earthquakes-hit-central-oklahoma-what-to-know/ar-AA1mV7ZY
News account of your earthquakes. Hope you are OK.
Doing well. Genuinely appreciate the concern. But it’s disconcerting when you hear mild cracking sounds in the walls during the “events”.
Taiwan election results are in. Time to get to inow the winner:
https://www.washingtonpost.com/world/2024/01/13/taiwan-president-lai-ching-te/
“Taiwan has elected as its president Lai Ching-te (currently vice president), once a scrappy advocate for Taiwanese independence, now a key proponent of the Democratic Progressive Party’s efforts to maintain peace with Beijing while repelling its aggression.
“During the closely-fought race, Lai promised to work closely with the United States to build up Taiwan’s defenses at a time when trust between Beijing, Taipei and Washington has frayed and when escalating Chinese military harassment is threatening to tumble into outright conflict”
The first paragraph is a bit self-contradictory, but you get the idea.
Even though Menzie makes some great posts and crunches out some graphs and difficult computations for us mere mortals, He’s kind enough to let us go off on our own tangents sometimes (I didn’t say tantrums, I said tangents). But I like to drop off some interesting data points here sometimes. One of America’s great financial papers said that there’s a lot of vacant office space in America right now. They were quoting Moody’s Analytics who said in major U.S. cities 19.6% of office space was not being leased. I thought that was an interesting number. That’s 1/5th of all the major city office space. 1/5th. I wonder if they brought the asking price on those leases down if that space would be used?? I also wonder if that 19.6% office space was used instead to house the homeless who would be worse off?? 19.6% of unused office space is “efficient”?? Are those “free market efficiencies”?? I bet I could find some central planners who could do a better job. Not all of them, but let ME choose the central planner with some actual delegation/implementation power and I bet I could beat free markets’ “efficient” 1/5th unused office space. Wanna bet me??
The CPI–PCEPI Inflation Differential: Causes and Prospects
Wesley Janson, Randal Verbrugge, and Carola Conces Binder
This Cleveland FED piece was written four years ago but it is a lot better than the usual stupidity from JohnH:
https://www.clevelandfed.org/publications/economic-commentary/2020/ec-202006-cpi-pcepi-inflation-differential
The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation target, they need to translate these CPI inflation forecasts into corresponding implied PCEPI forecasts. Since 1978, CPI inflation has averaged 0.3 percentage points above PCEPI inflation, but this differential has varied significantly over time. In this Commentary, we explain why, investigate a key historical episode, and provide an updated estimate of the likely differential going forward.
https://www.bea.gov/data/personal-consumption-expenditures-price-index
Table 2.8.7. Percent Change From Preceding Period in Prices for Personal Consumption Expenditures by Major Type of Product, Monthly
I’m letting the adults here know how to review the Prices for Personal Consumption Expenditures by Major Type of Product series provided by the excellent and non-partisan professionals at BEA. You can see how modest the price increases for health care services has been.
I know JohnH is too lazy and too stupid to check on this data and besides he is too busy telling his MAGA friends that BEA has a bunch of partisan hacks working for Team Biden. Yea – Jonny boy is one disgusting POS.
Taiwan’s new president Lai Ching-te issues defiant message to China after historic election win
https://news.yahoo.com/taiwan-president-lai-ching-te-184055493.html
Taiwan has voted for Lai Ching-te to become president, securing a historic third consecutive term for the pro-sovereignty ruling Democratic Progressive Party (DPP) in a result that has angered China. During his victory speech, Lai – also known as William Lai – said the election result showed Taiwan will “continue to walk side by side with democracies around the world,” and emphasised that the election highlighted the Taiwanese people’s desire to safeguard their democratic way of life.
“We are telling the international community that between democracy and authoritarianism, we will stand on the side of democracy,” Lai, who had served as vice-president to Tsai Ing-wen since 2020 said.
A key item that I noted in an earlier discussion:
“The CPI is designed to measure inflation in out-of-pocket spending by urban households, and thus its basket is representative of the goods and services that are purchased by urban consumers. In contrast, the PCEPI is designed to measure growth in the cost of the entirety of personal consumption expenditures in the national income and product accounts (NIPA). Thus, its scope is broader. In addition to the growth of prices related to out-of-pocket spending, the PCEPI must also account for growth in prices or costs of all goods and services purchased by entities such as governments, firms, or nonprofit institutions on behalf of the household sector. For instance, total spending on medical care includes both direct purchases of medical goods and services by consumers, as well as the spending on medical goods and services on behalf of households by Medicare or employer-provided health insurance companies.”
CPI places a smaller weight on the cost of medical care than does PCEPI which was noted in the more recent discussion I provided. Something tells me JohnH failed to read about this important difference and even if this lying moron did – I doubt little Jonny boy has the mental capacity to grasp its importance. So let me make this simple – a major reason why PCEPI rose by less than the rise in CPI is that it placed a higher weight on the cost of medical care, which has recently been lowered in real terms.
Now this is a not partisan hit job by some alleged Biden crime family as the always disgusting Jonny boy suggests. No – it is more a recognition that we had a movement towards a reduction in the relative cost of medical care. I would say this is an important positive development. But yea a MAGA hat wearing moron like JohnH would see this as the influence of the deep state.