Hosted By: Wyatt Yates
Inflation Part 2: The Shortcomings in How We Measure It
Inflation in the U.S. is at a 40 year high of 7.5% in January 2022. However, most people's bank accounts are experiencing a much higher number. The reason is, there are some major misses in how the BLS calculates the CPI number that is the gold standard in inflation. In this episode, we discuss the 6 biggest issues with how we calculate inflation that ends up giving us a lower number than what most people are experiencing.
Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money mess you hear from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Mids with your host, wyatt Yates. Welcome to part two of our series on inflation. 00:27 In this part, we're going to talk about some of the shortcomings of how we measure inflation, specifically the CPI that the Bureau of Labor Statistics puts out. In part one, we went over how it's measured and why what you're reading and hearing in the news may be different than what you're experiencing personally in terms of effects of prices of goods and services on you. So I encourage you to go back, listen to part one of inflation to get your baseline before we dive into part two. Here and for today, we're going to talk about the shortcomings. So we've identified six major shortcomings in how inflation is measured by the US government, and that is the CPI, the Consumer Price Index. That's what you're hearing in the news when you hear reference to inflation, which is at a 40-year high right now. Just in January, it was at 7.5% number in terms of inflation, and that is looking at January 2022 compared to January 2021. So in the last 12 months, prices in terms of CPI is up 7.5%, which is the most since February of 1982. So in the early 80s, when we had periods of hyperinflation or high inflation, we're back to those levels Now. When you hear 7.5%, some of you may be thinking well, that sounds low compared to what I'm experiencing when I go to the grocery store, when I fill up my vehicle with gas, or when I get my rent increase in the mail, or when I'm trying to figure out how I'm going to buy a house because housing prices are going so high. And you're probably right in thinking that it really feels like more than 7.5%. And we'll get into why that's the case. 02:24 Because there's several items in how we calculate inflation and that's the Bureau of Labor Statistics. It's a branch of the government, and how they calculate it really pulls down what number they're going to publish in terms of CPI versus probably what you are experiencing as an individual, as a family or as a business. So let's dive into the six things. The first two we kind of covered a little bit in Part 1, but we'll bring them up again here. The first shortcoming in how the government measures it that we covered in Part 1 was that it only looks at urban consumers. They make the argument yes, that makes up 93% of the population, roughly but they do not use any data from rural markets, and it's in a lot of these rural markets where you're experiencing higher levels of inflation right now, because transportation costs have gone through the roof in terms of fuel and other services. 03:25 The second shortcoming in the calculation of inflation is the time lag between the data that is used and how they measure it, so we covered this in Part 1. The CPI is based off a basket of goods and services and it's thousands of surveys consumer surveys that they put together, and these responses that the individuals and families give on what they actually bought is three or four years old before they apply it to the calculation of CPI. So, for example, the 2020-2021 basket of goods and services was based off of 2017-2018 consumer surveys on what they actually bought and what made up their family budget. So there's that time lag. This probably doesn't impact it as much as some of the other things that we'll get into, but it's definitely something to point out. The time lag in changes in consumer spending habits would impact this number differently it could go up or it could make it go down, but it is something worth pointing out. 04:36 The third shortcoming in how we measure it, which this is the biggest one I really also have to do is cover this and you can see why CPI is drastically understated compared to what you're experiencing. And to make my point here, I'm just going to ask you a question. So, for any homeowners out there, if someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, without utilities? Now, 99% of people cannot answer that question correctly. Yet this is the question that the government uses to determine housing costs how much can you rent your home today unfurnished, without utilities? That's what they base their data for housing off of. They don't look at median home prices and what that's increased. They don't look at what rents are actually doing. They base their data for housing costs based off of that question to about 50,000 people. Now, this hasn't always been the case. Up until 1983, they actually factored that in. But in 1983, the Bureau of Labor Statistics made the argument that housing items are not consumption items and therefore should not be in the CPI calculation. They made the argument housing is actually capital goods or investments. These are not consumptions, and the CPI is calculation of consumption. So that's the government's argument against including what's actually going on in the market in their calculation. 06:26 Now, this follows the narrative that we hear all the time that a home is an investment, and it's just plain wrong. Your home is not an investment. It is a consumption item. All it does is cost you money until the day you sell it or the day you die and that equity can be passed on to your heirs. Your home is a consumption and when you look at it as an investment, you're going to make a lot of mistakes in your personal finances and you're not factoring in what a home really is. It just consumes, it just takes your cash flow, it just takes your money and that's all it does. You can build equity for your heirs. It can be a great estate planning tool in terms of that, but in terms of you personally, it just takes money and to think of it not as a consumption item whether it be you personally or the government doesn't factor in the true impact on your wallet and what you're experiencing in terms of Pricing in the market and what you're able to now spend your money on. 07:29 Home prices go up. It's hard. You're taking more of your money to get into that same home. Rents go up. You're taking more of your money to go into that home and provide a service in terms of Shelter over your head, a roof over your head. So, by the government completely ignoring this fact, you have a cost of living measure, which is the CPI inflation, that doesn't actually factor in the cost of living in your own home. It doesn't factor in your real estate taxes, it doesn't factor in your mortgage payment, it doesn't factor in your homeowners insurance. All as it does is go off of a question to 50,000 people that don't have a clue about market pricing saying what could you rent your home for today? 99% people can't answer that question correctly and it's obvious in the data. So Right now, in that seven and a half percent figure you hear in January, it's only factoring in 3.8% increase in housing costs in. In median, home prices have gone up anywhere from 15 to 20% in the last year. So it costs you 15 to 20% More to get into a home now and your housing costs go up 15 to 20% more Then a year ago. But the government says it's only up 3.8% and that 3.8% is a 14 year high. According to the government, in terms of what housing costs in the measure of Inflation have gone up. It's a 14 year high. Yet most real estate markets have gone up in terms of rents on multifamily and in terms of median prices on single family homes have far exceeded this 3.8% for the last decade. 09:18 You can look at the case Schiller report. You can look at the largest landlords and data companies in the industry, whether it be the Yardee or Corlogic Zillow. All these companies have Millions and millions of data points to calculate what rents are increasing, what home prices are increasing, and they all come in double digit figures and the government is saying it's only 3.8% increase based off of a survey of 50,000 people. And this survey goes into a quarter of the calculation of that seven and a half percent. So One quarter of the calculation for CPI is based off of this survey. If you just look at the actual data from the companies that have millions of data points from actual results, in fact with that in you're double-digit inflation right there You're over 10% and that's why when you hear that 7.5%, you're like seems low from what I'm experiencing, because we drastically mess up how we are accounting for housing costs. 10:34 Now the fourth shortcoming of this measurement is that the Bureau of Labor Statistics really operates under a veil of secrecy, with numerous changes to how they're calculating CPI, and they rationalize this because the changes they're making are to make it better, which some of them definitely are. But as far as this veil of secrecy, they don't provide the raw data into how they're calculating prices, and their rationale is that they don't want this raw data available to the public so companies can compare prices. If companies had access to other companies' pricing, then that would not be a good thing. Evidently they haven't looked at the dang internet lately, because any company can get their competitors' pricing by just doing a simple search on the internet. This is an outdated rationale for why they won't publish the raw data on how they're calculating it. It's just absurd. 11:40 The fifth shortcoming is that the CPI measurement doesn't even meet the government's own definition of inflation. So the definition of inflation that it gave at the beginning of this episode was the rate at which the value of currency is falling and consequently the general level of prices for goods and services is rising. Now that's a definition from the Bureau of Labor and Statistics, yet what they're measuring doesn't even meet that definition of what inflation is. The CPI is actually looking at consumer spending patterns that change as prices change. It's not looking at the continuous rising of prices or falling value of money. It's factoring in consumer spending patterns. So they're not even meeting their definition of inflation. 12:37 Now the last shortcoming and this one's right up there with number three on the big miss we have on how we're determining housing costs to consumers this one, that housing one, or probably the top two Misses we really have on our CPI and really what's affecting consumers and what's affecting the population in terms of inflation. And this last one is there is absolutely no consideration for money supply in the calculation of CPI. So in our own definition of inflation we say the continuous falling value of money, yet we're not even looking at the money supply when we factor in inflation. Now, maybe in normal times the supply of money wouldn't really matter, but what we had in the last 25 months in terms of money supply is insane. We've had a 41% increase in the M2 money supply in the last 25 months. Basically Almost 30% of every dollar ever created in the history of the United States has been created in the last 25 months. 13:53 And to think that this doesn't have any impact on inflation is just crazy. There's more dollars chasing the goods than before by a 41% increase and to think that won't affect pricing is the government putting their blinders on thinking they can fool us? Because money supply will impact Inflation. The more dollars you have chasing the same level of goods and services is going to drive prices up, and we've had a 41% increase in money supply in just 25 months. Now this increase is from the drastic measures that the government did during the COVID Shutdown. So it started with Trump with his stimulus bill, and then he did another one Right before the end of his presidency, and then Biden jumped in and did a stimulus bill and then you had all the stimulus from the Fed in the markets with their bond buying adding liquidity to the market. All of this drastically increased the money supply and that's gonna impact pricing. Because you have more dollars chasing the same level of goods and services, prices will go up. 15:07 Now those are kind of the six biggest shortcomings of how we measure CPI, which is what we Look at when we're saying inflation. It's what's gonna get published in the newspaper is the CPI number. That's what they're talking about when they're talking about inflation. Now the CPI is the most universally looked at number. It's the best we've come up with to date and it does have shortcomings. Like any data point Like where does it fall short in trying to capture what it's trying to capture? And when you hear the number seven and a half percent increase a 40 year high and you look at your wallet and like what you're spending when you're going to the grocery store or when you're trying to fill up your vehicle or when you're trying to find housing, you definitely right now feel like it's way more than seven and a half percent. And it's mostly because of the big miss we have on housing prices and the fact that we don't factor in money supply. So housing prices are up 15, 20%, whether that be buying a single family home or even rents. I know several people that have gotten 15% rent increases notices in the mail in the last few months. And money supply is up 41% in the last little over two years, last 25 months. Money supplies up 41% and these factor in to really actually make the true inflation number. What most people are experiencing to be over 10%. 16:43 Now why would the government want a lower number? I mean it's pretty obvious why. There's 80 million people in America that are tied to this inflation number, this CPI. Their income is tied to it, whether it be social security beneficiaries, food stamp recipients, military and federal civil service, retirees, survivors, children on school lunch programs. These are all tied to the CPI number. So there's a big incentive for the government to keep this number lower. When you have 80 million people whose financial lives are tied to this number, you wanna keep it lower. If it fits up 10%, you just increase government spending and what you have to come up with drastically. So there is an incentive by the government to keep this number lower than maybe what the majority of people are facing. 17:37 So what can you do about it? What can you do in periods of higher inflation? What should you do financially, personally and with your business, and should you be worried about high inflation over the long term? Well, you're gonna have to listen to part three. We will dive into that. In part three We'll talk about whether you should be worried in the long term on inflation and what you can do now, during periods of higher inflation, what you should be doing with your personal finances or your business. So listen to part three on that. No matter what happens or circumstances there are, there's always a way to navigate through it in a way to come out on top with your personal finances or with your business. So and we will cover that in part three I hope you enjoyed this episode. 18:22 If you haven't listened to part one on how inflation is calculated and really the nuts and bolts of how we do CPI, go back. Listen to that, re-listen to this episode, because we really miss the mark on housing costs and what it costs for people to keep a roof over their head when we calculate this. And that is definitely the biggest miss on this and why people feel like they're experiencing a lot higher than 7.5% inflation, because cost to rent, cost to own a home, have gone through the roof over the last decade and we're saying they're only going up 3% 4% a year in terms of inflation numbers. So hope you enjoyed this episode. Let me know If you have any questions. Feel free, go to our website at regenfinancialcom and reach out to me and we will see you in part three when we look at how we can deal with this high inflation and what to do going forward. Thanks for listening. 19:25 Want to achieve financial independence? 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