Understanding the Measurement of Inflation | The Behind-the-Scenes Details of CPI, PCE, OER and More

With the rise of inflation in the past few years, many investors have been paying attention to metrics that they largely ignored for decades. Measures like the CPI and PCE have now become front page news when they are released each month. But despite quoting them all the time, many investors don't understand what goes into them and how they are calculated. In this episode, we try to correct that. We take a deep dive into the metrics that are used to measure inflation and the details behind them. We cover the CPI, PCE and the behind-the-scenes metrics like owner's equivalent rent that go into their calculation. We also look at more real time metrics like Truflation and look at what it all means from both an investing and financial planning perspective.
#inflation #cpi #macro
00:00 - Intro
02:45 - Inflation's return to the investing radar
05:54 - Inflation is personal
09:05 - The composition of the CPI basket
12:55 - The inflation rate of the individual CPI components
16:29 - The different ways to calculate the rate of inflation
20:30 - How shelter inflation and owner's equivalent rent are calculated
26:43 - CPI inflation vs. home prices over time
31:26 - The differences between CPI and PCE
34:15 - Housing drives the long-term difference between CPI and PCE
34:37 - The Cleveland Fed Nowcast, Truflation and real time inflation measures
40:13 - Should inflation impact a long-term investment strategy?
48:14 - Thinking about inflation directionally rather than exactly
52:10 - The relationship between inflation and the performance of value stocks
55:25 - How inflation impacts the financial planning process
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[@bluesky2145]

I think they're also needs to be a new term defined that tells the offset from previous prices. Let's say a hamburger was $10 and inflation was 20% for the last year so now the hamburger is $12. Well now for this year let's say inflation is zero so they come out and they say hey inflation is zero everything's great but they never reference the new high cost of the hamburger which is now $12 or 20% higher. We're going through that right now where all the prices have gone up many of them 20% and when they start talking about how inflation is low there's no reference to all the new highs that are not going down. There needs to be a term that can reference how current prices are compared to one, 5, 10 years ago

[@MichaeldeSousaCruz]

29:35 The Fed has only 1 tool, the Fed Funds Rate, which it controls itself by raising their own hand, not the Invisible Hand. If the Fed wants 2% inflation, then it can, by a raise of hands, set its Fed funds rate policy at 2%, since the Fed Funds Rate is the inflation rate. Congress has given the Fed the power to do this. It’s the Fed’s function along with clearing payments between member banks.

[@MichaeldeSousaCruz]

Oh good. You guys know MMT (somewhat through Cullen, just go to Mosler for the real explanations). So you know, because of MMT, that the Fed Funds Rate is the Inflation rate, you know this, right?

[@bluesky2145]

Even though the CPI shows 45% for housing and the average person might only spend 30% for their housing I think when you get all the billionaires a millionaires adding all their cash purchased real estate it becomes a much larger piece of the economy and so a larger piece of the CPI.

[@MichaeldeSousaCruz]

Inflation is a continuous increase in the price level. That’s what the Fed Funds Rate does. The Fed Funds Rate is the inflation rate.

[@MichaeldeSousaCruz]

45:15 “Populism is take money from corporations and give it to people”… huh?? That’s not how it works. That’s not populism, thats mythonomics. U.S. Dollars come from the U.S. Government, the only source. The rest of what people call “money” is leveraging of the U.S. Dollar.

[@MichaeldeSousaCruz]

CPI is abstract terms, not real terms.