[Sys1]

link Some economists pretend that a 90$ barrel won't hurt the economy...while a 55$ barrel triggers inflation.

[Armageddon]

a top economist said 'real' inflation has been running at around 15 % for a few years now. The government uses guages to show low inflation so they dont have to pay out as much money for benefits. With rising energy prises , we havent seen anything yet. Its going to get ugly very quickly. im scared to see what things will cost at $ 100.00 per barrel oil. $4.00 gas, $5.00 gallon milk, $3.00 loaf of bread, etc. Can you say major economic depression ?

[Sgs-Cruz]

You're going to see about 10 posts in a moment complaining about hedonic indexes and how they're used to disguise the inflation rates.

Do yourself a favour and read some real information on hedonics, and don't listen to the people who assume that every bureaucrat is out to get us. (Hedonics do cause the inflation rate to be reported as less than it would be, but it's not as bad as many here think.)

[jaws]

Jim Puplava wrote a great article on the rigging of CPI. It all really boils down to this:

$this->bbcode_second_pass_quote('', ' ')In the early 90’s the government realized it had a problem with rising entitlement costs for Social Security, Medicare, and government pensions. These entitlement payments were indexed by the inflation rate each year. With inflation on the rise it meant these costs were rising faster, thus making government deficits much worse. In order to bring the government deficits under control, it would be necessary to bring rising entitlement costs down.

One way to lower entitlements would be to bring the inflation rates down, which would translate into lower Cost of Living Adjustments (COLA). The way to do this was to bring down the rate of inflation. However, this was not done by natural means, but artificially through statistical manipulation. The supply of money and credit began to go parabolic in the 1990s as shown in the graph of M3. The rise in money and credit would mean higher inflation rates. Higher inflation rates would mean higher COLA adjustments, which would lead to bigger deficits.

The solution was to change the way inflation is measured. Media reports began to surface on how CPI was overstated. The real inflation rate was actually much lower according to government and Federal Reserve officials. The Senate Finance Committee appointed the Boskin Commission to study the problem and find a solution. The Boskin Commission published its final report ”Toward a More Accurate Measure of the Cost of Living,“ and submitted its findings to the Senate on December 4, 1996. The Boskin report recommended downward adjustments in the CPI of 1.1%. The CPI, which is used as the basis for COLAs to Social Security and government pensions, if lowered as recommended by the commission, would reduce future entitlement payments as well as impact other government programs. The CBO estimated that by overstating CPI by 1.1% it added $691 billion to the national debt by 2006. By then the annual deficit would rise anywhere from $148 billion to $200 billion annually by overstating the inflation rate. In effect the government was overpaying because the actual inflation rate was much lower.

The Boskin Commission recommended several changes to the CPI index which included:

* develop and publish two indexes
* abandon the fixed-weight formula for CPI goods
* change the weight of items in the index from arithmetic weighting to geometric weighting
* introduce substitutions in the index
* seasonal adjustments to account for price increases that occur on a seasonal basis, which would smooth out the fluctuations
* Reduce prices by quality improvements

The result of their implemented suggestions is the mish mash we have today, which bears no resemblance to reality. The Commissions recommendations had widespread support in the Clinton Administration, a Republican Congress and from financial luminaries such as Alan Greenspan, who was expanding the money supply at a very rapid rate as shown in the graph above.

[MagnoliaFan]

On October 21, 2004, the Ministry of Plentry told us that $55 oil was nothing to worry about because the "inflation adjusted" all time high was $66 in 1980: Link broken

Now the figure has been re-adjusted to $94: Link broken

Note to moderator: These images were already posted in the "Current Events" section, but they're too good to pass up and I want as many people as possible to see these.

[RonMN]

Interesting! I remember hearing "around $80" just a few months ago.

looks like we must have had some pretty rampant inflation in the last month or so

[FoxV]

Hey not to worry, the real inflation rate has been almost 3X higher than the official inflation rate.

So using the official inflation rate to adjust the price means that they're actually far shorter that what it really should be. The real inflation adjusted price should be around $112.

now doesn't that make you feel better about it all

[MagnoliaFan]

$this->bbcode_second_pass_quote('FoxV', 'H')ey not to worry, the real inflation rate has been almost 3X higher than the official inflation rate.

So using the official inflation rate to adjust the price means that they're actually far shorter that what it really should be. The real inflation adjusted price should be around $112.

now doesn't that make you feel better about it all

[Such]

inflation is a bunk calculation anyway... because they ignore energy and food in the calculation. If you think about it, those are the only two things that actually matter!

[kambei]

Maybe the top one is the average yearly price. The bottom one the average monthly price. It is the sustained high prices that matter, such as over a year.

What is the one year moving average price now? Can't be too far off.

[nero]

And another graph:

Price history analysis




I think the different data sources for the price of crude is an important factor. The nominal prices of the two graphs are quite different. Another factor is that the first one looks like it has been smoothed out. It is probably the yearly average price which would tend to reduce the 1980 peak, which afterall was fairly brief.

[UncoveringTruths]

whoops!

[MagnoliaFan]

$this->bbcode_second_pass_quote('kambei', 'M')aybe the top one is the average yearly price. The bottom one the average monthly price. It is the sustained high prices that matter, such as over a year.

What is the one year moving average price now? Can't be too far off.

[kambei]

$this->bbcode_second_pass_quote('MagnoliaFan', '')$this->bbcode_second_pass_quote('kambei', 'M')aybe the top one is the average yearly price. The bottom one the average monthly price. It is the sustained high prices that matter, such as over a year.

What is the one year moving average price now? Can't be too far off.

[NEOPO]

ok so is it $66 or $112?

Are we paying the most we have ever paid, are we somewhere in the middle or is oil still the best bargain around?

[FoxV]

I just tried a comparison using average income which I think is more realistic (data from here)

so with income at $7,787 in 1980 and $22,851 in 2001, that gives a scale factor of 2.93.

so that spike of $39/brl in 1980 would be $114 today (hmm, maybe I'm on to something)

ultimately the spike is one thing but if you just eyeball the average price during between 80 and 86 it looks to be around $60/brl on the $94.28 graph and $50/brl on the $66.20.

no matter what graph you use, it spells trouble

[seldom_seen]

$this->bbcode_second_pass_quote('MagnoliaFan', 'O')n October 21, 2004, the Ministry of Plentry told us that $55 oil was nothing to worry about because the "inflation adjusted" all time high was $66 in 1980

[aahala]

Whatever government agency puts out the CPI, also has a number of
other inflation indices. You get different results depending upon the
deflator used.

The CPI is to measure the changes in the cost of living. That's not
exactly what is wanted to "deflate" a commodity from one time to
another. What's needed is an index that measures changes in the
value of money.

[jdumars]

In the arsenal of "facts" used to counter the arguments of peak oil, one of the most pervasive is "inflation-adjusted" oil figures that say in essence "it's not so bad now... in 1970 oil was the equivalent of X$ per barrel!" And, there are several such time periods that inevitably get pulled out for comparison, proving beyond a shadow of doubt that we weathered those storms and we can weather this one, right?

My assertion is that there is almost no meaningful way to "inflation-adjust" the dollar due to a variety of factors:
- the CPI and other leading indicators of inflation are highly-subjective and non-reflective of the actual cost of living
- localized impacts of energy costs are much higher now due to a higher, decentralized population that relies on non-proximity for financial well-being... that is to say, most people can't afford to live right in the city, so they live in the suburb which has a requisite energy demand that was not as prevalent in the past
- Inflation figures, just like unemployment and welfare data are often subject to political manipulation based on the desired outcome of the administration at that time. Yes, unemployment figures are lower! (partly because so many people have been unemployed for so long, they use up all of their unemployment compensation and fall off the rolls) I consider such indexes, figures and such highly suspect
- The composition of the economy has radically shifted away from manufacturing to service, which means a much higher percentage of workers now earn less. I know this point could be considered cyclic, since how do we really know workers earn less if the underlying data is potentially faulty? -- but this is really common sense.

There are undoubtedly more arguments both in support of and patently against this sentiment, but I will stand firmly by my core belief which is things now are headed in a much more severe financial direction than anything we've faced in the inflation-adjusted past. We are only seeing the tip of the iceberg that seems destined to hit the starboard keel in about 3 months.

[aahala]

If you want to compare the monetary value of a commodity in two time
periods, you want a deflator that adjusts for the value of money. The
CPI is not that. The value of money and the cost of living are different
things.

If you want to judge the impact upon something, like the cost of living,
then you need to use an index that measures the impact. The CPI may
or may not judge that properly.

If properly applied, the differences in the value of oil then and now one
see's in different news reports, can be because a different deflator has
been used. Different indexes give different results.