Inflation / Food vs. Technology

[Lewkowski]

http://tpmlivewire.talkingpointsmemo...ad.php?ref=fpb

New York Federal Reserve President William Dudley on Friday tried to calm people's nerves about rising food prices by reminding them that other products -- like iPads -- are getting cheaper.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said in Queens, Reuters reports. "You have to look at the price of all things."

But better iPads don't put food on the table, audience members reminded him.

"When was the last time, sir, that you went grocery shopping?" one person asked.

And, perhaps most succinctly, another told him, "I can't eat an iPad."

Yahoo's The Lookout points out that food prices have been rising since November 2009, and that consumers should expect to pay 4 percent more for food this year.

************

This brings up an interesting point regarding inflation and living conditions. 4-5 years a Blue Ray player was expensive, now not so much. Have we suffered deflation? 10 years ago a car with all of the safety features/bells whistles today would be MUCH more expensive. Processing speeds on computers and drive space have also gone way down in terms of cost.

Should this be factored in with inflation?

Also the comments were hilarious. The rampant populism makes me laugh.

[Illusions]

This brings up an interesting point regarding inflation and living conditions.

No actually it doesn't, since luxury items shouldn't be factored into living conditions as highly as things like the cost for access to: food, and healthy food at that, an education, safety, cost of being available to work (how much money you need to spend in order to keep your job), and other more relevant things that are necessities to life. If it brings up any interesting points, it would be that there exists a subset of human beings who seem to think that if a person has a blu ray player, they must have it good, or that somehow because you can buy twice the hard drive space now for less than you could in the past, that this is equivalent to something like buying twice the number of nutritious meals for less than you could in the past. It shows a level of disconnect from reality that is both disheartening and enraging.

[Loki]

Illusions, you're falsely assuming that the average person spends most of their money on food. The inflation indexes are based on a typical basket of products. People are just as affected by a fall in the price of electronics (or luxuries as you call them) as they are by higher food prices.

[wiggin]

This is factored into CPI. Essentially, they update every quarter or two with a newer device and adjust for improvements in quality of the device according to a complex weighting scheme. This works for most technology products. For example, see the BLS entry on computers: http://www.bls.gov/cpi/cpifaccomp.htm

Also, while you obviously can't directly eat an iPad, it's a somewhat disingenuous argument to think that quality improvements don't matter. Fundamentally, better technology at the same (or cheaper) price gives us higher economic utility for a lower cost. Maybe this will substitute for other entertainment expenditures, or will allow us to be more productive and thus increase our income. One way or the other, it's saving us money that could be freed up for other expenditures that may be rising - housing, food, whatever.

That being said, I think sometimes the Fed looks too much at core CPI (i.e. excluding food and energy) and not at headline inflation. This is sometimes a good thing - for example I think the ECB looks too much at headline inflation, which can result in a premature tightening of monetary policy in response to volatility in food and energy markets that may not reflect long term trends or the underlying strength of the economy. But sometimes it's a bad thing as well, as when loose monetary policy hurts those on the margins of society when headline inflation increases too much.

Perhaps a better policy would be a growth target, or an unemployment target in conjunction with inflation targeting.

[Nessus]

Illusions, you're falsely assuming that the average person spends most of their money on food. The inflation indexes are based on a typical basket of products. People are just as affected by a fall in the price of electronics (or luxuries as you call them) as they are by higher food prices.

The average person doesn't, but the poorest person?

[Illusions]

Illusions, you're falsely assuming that the average person spends most of their money on food.

I'd hope the average person spends most of their money on the things I listed and implied (I didn't just list food), rather than luxury items. I'd also hope that said items would factor higher in determining standard of living, compared to luxury items.

[wiggin]

The average person doesn't, but the poorest person?

I think part of the problem is that with commodities monetary policy often won't be able to significant move prices. This is because some commodity prices are driven by supply limitations and not demand. That isn't to say there isn't some connection - inventories drop during tight monetary policy, there's an incentive to increase supply rather then leave resources idly by, etc. But sometimes fundamental supply disruptions (from, say, poor harvests due to weather or slower oil production due to revolution) will not be affected by monetary policy in the short term. Thus, since most fluctuations in commodity prices are short term, it seems silly to try to smooth food and energy prices through targeting of headline inflation.

I'd hope the average person spends most of their money on the things I listed and implied (I didn't just list food), rather than luxury items. I'd also hope that said items would factor higher in determining standard of living, compared to luxury items.

Uhm, it does. CPI is weighted by how much the average person spends on X.

[Loki]

The average person doesn't, but the poorest person?

The poorest is affected more by the price of food, but they're also affected more by rent, and in many parts of the country, any prices related to housing are plummeting.

Only ~12% of people's income is spent on food: http://www.ers.usda.gov/AmberWaves/S...ntofIncome.htm Even if we double that for really poor people, they still have 76% of income that's spent on other products.

I'd hope the average person spends most of their money on the things I listed and implied (I didn't just list food), rather than luxury items. I'd also hope that said items would factor higher in determining standard of living, compared to luxury items.

Well you hope wrong. Most money is not spent on food and healthcare. Even poor people buy plenty of gadgets. I really don't see your problem with the measure; it looks at what people actually buy, not what they should be buying according to you.

[Illusions]

Uhm, it does. CPI is weighted by how much the average person spends on X.

I'm aware of this, but I thought we were discussing Lewk and the subject of the article's hypothetical world were luxury goods factored in more. Just look at Lewk's comment about blu ray players to get the gist of what I'm arguing against.

[Loki]

I'm aware of this, but I thought we were discussing Lewk and the subject of the article's hypothetical world were luxury goods factored in more. Just look at Lewk's comment about blu ray players to get the gist of what I'm arguing against.

24 million blu ray players were sold in 2010. That's one for every 12 people.

[wiggin]

I'm aware of this, but I thought we were discussing Lewk and the subject of the article's hypothetical world were luxury goods factored in more. Just look at Lewk's comment about blu ray players to get the gist of what I'm arguing against.

Dude, they're not factored in more, it's just that the change in quality/price of a blu-ray player is factored into the price of blu-ray players. If 10% of our expenditure is on gadgets that increase in price by 1% but increase in quality by 2%, we say the price of those gadgets is lower. We're not really weighting them more in the CPI; they're just weighted on the basis of how much people spend on them.

[Illusions]

24 million blu ray players were sold in 2010. That's one for every 12 people.

What does this stat have to do with anything? Owning a blu ray player does not directly correlate with already possessing a good standard of living due to having access to say food, a good job, etc.

[Loki]

What does this stat have to do with anything? Owning a blu ray player does not directly correlate with already possessing a good standard of living due to having access to say food, a good job, etc.

It says that there's nothing unreasonable about claiming that a fall in the price of blu rays reduces inflation.

[Illusions]

It says that there's nothing unreasonable about claiming that a fall in the price of blu rays reduces inflation.

Thats great, I'm arguing living conditions.

Dude, they're not factored in more, it's just that the change in quality/price of a blu-ray player is factored into the price of blu-ray players. If 10% of our expenditure is on gadgets that increase in price by 1% but increase in quality by 2%, we say the price of those gadgets is lower. We're not really weighting them more in the CPI; they're just weighted on the basis of how much people spend on them.

I think you're having the same problem Loki is having. I really don't give a damn about how this is viewed, economics-wise, but how Lewk is going to argue that because we have access to blu ray players instead of DVDs or that our computers are faster, that it must mean that livings conditions are better.

[wiggin]

Then again, I think a valid question is why this isn't extended to everything. To my knowledge, they don't have a similar scheme for housing. So, even if, say, the average size of the US home has increased, that doesn't mean that we attach a deflator term to housing costs in the CPI. Do we?

[Loki]

Then again, I think a valid question is why this isn't extended to everything. To my knowledge, they don't have a similar scheme for housing. So, even if, say, the average size of the US home has increased, that doesn't mean that we attach a deflator term to housing costs in the CPI. Do we?

Rent is in the CPI: http://www.bls.gov/cpi/cpifact6.htm

Thats great, I'm arguing living conditions.

And here I was thinking that living conditions are affected by things people buy. Again, if something is weighed 2% in the CPI, that means the average person spends 2% of their income on that product (or basket of products).

[wiggin]

Obviously rent is in CPI. IIRC housing was like 40% of the weighting in the CPI. But do we run hedonic regressions on housing data to compensate for quality? I don't know. (edit: yes they do. I just looked it up; They've been adding deflator terms to housing based on quality since 1968. Good for them!)

There's also an issue we haven't really addressed here, namely substitution. Following what consumers actually buy may change CPI ratings quite a bit if they're trading down for cheaper alternatives. I know the BLS tries to compensate for this at times, but it's still a big problem when dealing with CPI targeting. CPI might be artificially lower if people are substituting for cheaper items that aren't appropriately accounted for. Sure, it looks at actual spending, but it might amount to effective inflation when it comes to quality of life issues.

[Illusions]

And here I was thinking that living conditions are affected by things people buy.

And here I was arguing that being able to buy a better iPad should not be considered as much of a living condition improvement, as being able to buy better food.

[Loki]

And here I was arguing that being able to buy a better iPad should not be considered as much of a living condition improvement, as being able to buy better food.

Based on what criteria? Your moral judgment?

There's also an issue we haven't really addressed here, namely substitution. Following what consumers actually buy may change CPI ratings quite a bit if they're trading down for cheaper alternatives. I know the BLS tries to compensate for this at times, but it's still a big problem when dealing with CPI targeting. CPI might be artificially lower if people are substituting for cheaper items that aren't appropriately accounted for. Sure, it looks at actual spending, but it might amount to effective inflation when it comes to quality of life issues.

If new goods enter the basket, they can always check whether the price of those goods (or quality) has changed in the last year.

[agamemnus]

And don't forget air quality in quality of living.

Haven't been able to open the window all winter because people are polluting it with their cheap detergent and burning rubber (dirty chimneys?). Been coughing for months now...

This problem has been going on for 2 years. Got a city inspector to take a look, but they don't work after 5 or so -- that's when the problem is there almost always, and if they come by and don't smell anything they'll never come back. I live on the outskirts: this has been going on for decades in the center of the city...

Versus having poor air, having a cheap IPad doesn't balance quality of living

[Nessus]

Based on what criteria? Your moral judgment?

I don't suppose you'd be willing to detail your criteria for good living conditions.

[Loki]

I don't suppose you'd be willing to detail your criteria for good living conditions.

It's based on what people actually buy...I think it's slightly more objective to say someone's living conditions improved if the cost of the things they usually buy goes down (or quality goes up) than to come up with arbitrary categories of products people "should" buy and suggest that higher prices of other products shouldn't really be relevant.

[Ominous Gamer]

Trying to count technology into deflation/inflation talks is retarded. Technology has always trended downwards as the manufacturing techniques improved, the wafer turn over lowered and as new technology was introduced. The fact that I'm not paying several thousand dollars for a 4GB harddrive that needs its own room and cooling system has very little to do with inflation and deflation.

And its Blu-Ray, Lewk, you dumbass.

The 24 million Blu-Ray players was also a projection, I've found no numbers that suggest that projection was reached or passed. Not that I want to get into what a gamer considers a necessity, but the fact that the Sony PS3 counts for 20+ million of those sales, and used to be the best server farm hardware you could buy, its a pretty poor fucking example to use.

[Loki]

Really? So the fact that most people own computers and the computers today are far superior to the ones from 5 years ago doesn't improve people's standard of living?

[Flixy]

I'm sure that even you can see the difference (especially the poor) between not being able to buy an ipad, or food or healthcare, etc. Some things are more essential than others and it is silly to deny that. Not saying that the prices of all products aren't relevant, but the CPI deals with an average person, and it it's definitely also relevant to look at the price index of 'essentials'.

[Loki]

I'm sure that even you can see the difference (especially the poor) between not being able to buy an ipad, or food or healthcare, etc. Some things are more essential than others and it is silly to deny that. Not saying that the prices of all products aren't relevant, but the CPI deals with an average person, and it it's definitely also relevant to look at the price index of 'essentials'.

I already addressed this. Even a poor person is unlikely to spend more than a quarter of their income on food.

[Ominous Gamer]

Really? So the fact that most people own computers and the computers today are far superior to the ones from 5 years ago doesn't improve people's standard of living?

I think its altered their way of living. I'm not sure about their standard of living (especially at the lower levels), and I doubt you're able to identify all the expenses and savings a family spends and makes involving a computer. I spent 3 grand on my first computer. Sure, buying that exact same computer now would only cost a few hundred at most, but if I wanted a computer now that rank in the same performance bracket as my original, I might be lucky to swing 3 grand.

You're also ignoring the current life cycle of machines. We're reaching a plateau in technology performance. The Core2Duo, Xbox 360, Wii, and PS3 are all pushing 5 years old or more. Very little has changed in terms of actual performance, aside from "more more more"! The longer a tech stays mainstream, the cheaper it gets because the easier it is to make thanks to trial and error in the manufacturing process, which works at a much different pace then inflation/deflation for most other expenses.

[Loki]

Erm, so you're basically basing your standard of living not on absolute comparisons (i.e. what you can do now versus what you could have done 5 years ago), but rather on relative ones (what you can do relative to other people)? Sure, using the latter criterion, the standard of living hasn't gone up. In fact, it never goes up using that criterion. I think most people would agree it's an absurd criterion, however. Did the change from horse carriages to cars not increase the standard of living, even though relative to other people, most people didn't see their situation improve?

[Ominous Gamer]

What the fuck are you on? I didn't make a single comparison between current needs/abilities
In fact, I made a very specific example about what I was able to do then compared to what I would be able to do now.

Or are you confused that consumer technology from 5 years ago (your time frame) is not "far superior" (your words) to current consumer technology?


The entire concept of the life expectancy vs expense of technology is based on what you could with it then compared to what you could do with it now.

[wiggin]

Trying to count technology into deflation/inflation talks is retarded. Technology has always trended downwards as the manufacturing techniques improved, the wafer turn over lowered and as new technology was introduced. The fact that I'm not paying several thousand dollars for a 4GB harddrive that needs its own room and cooling system has very little to do with inflation and deflation.

They don't just use hedonics for computers but for most goods. Home prices have gone up in the last few decades, but the average home has gotten larger, had more bathrooms/etc. This means that the same amount of money might buy more house than it used to. Thus, even if we're spending more money on housing it doesn't necessarily factor into inflation since we're actually getting a better product.

Same goes for cars, computers, and a whole host of other goods. It makes sense not just from a strict mathematics perspective either. It's not just that better technology makes the same thing cheaper; it also means that we can do more with the same amount of money. This 'doing more' translates into economic utility - I wrote on the last page about how this has tangible effects on household expenses.

I'm sure that even you can see the difference (especially the poor) between not being able to buy an ipad, or food or healthcare, etc. Some things are more essential than others and it is silly to deny that. Not saying that the prices of all products aren't relevant, but the CPI deals with an average person, and it it's definitely also relevant to look at the price index of 'essentials'.

Fair enough, it's possible to construct an 'essentials price index' if you so wanted to see how the very poor are handling price changes, though it would probably be very volatile since it would be heavily weighted with energy and food. But is this relevant from a macroeconomic perspective in a modern economy? Probably not; basing monetary policy on this would be foolish in the extreme.

I guess the question I have for all of you is what should we care about? I think measures of inflation are only relevant in terms of setting monetary policy. Monetary policy is our main weapon to control inflation, and it's clear that current measures of core CPI are pretty good, not too volatile, measures of inflation for the Fed to use.

Obviously we could come up with an artificial index that might roughly measure price inflation for the lowest, say, 10% of Americans. It probably would be a lot more volatile but might be a decent measure of how much pain the less advantaged of society are dealing with. But I'm not sure how it should change policy. We already have various programs for that segment of society - welfare, food stamps, housing subsidies, etc. Outside of having automatic stabilizers that kick in to increase benefits in times of high 'essentials price inflation' I'm not sure what you'd suggest we use it for.