from a Retiree Retired Women Teachers

Reflections and Research from a Retiree: So What Is the cost of Living? Part 2

In our last instalment we reflected on whether official pronouncements about the cost of living jived with our own perceptions as seniors and consumers. Since then inflation news has moved from the back pages to headlines. Even so, does the Consumer Price Index reflect the “reality of the checkout counter?” Here we consider the impacts and causes of inflation and research the methodology in calculating the CPI.

The Prolonged Punch of Inflation

Inflation means that money loses its purchasing power. Money becomes literally worth less. Lulled by the low numbers of recent years we tend to overlook the cumulative effects of price increases. But a centenarian First World War veteran, interviewed a few years ago by the St. Petersburg (Florida) Times had "lived through the invention of airplanes, televisions, interstate highways and cell phones. But the biggest change? 'Money has decreased in value,' he said.” What costs over $100 now could be bought for $3.00 a hundred years ago.

Most of this price increase has happened since the mid-60s. In case, as the old joke goes, you have trouble remembering the 60’s, here's a prompt: in 1965 a new car cost $2650, the average rent was $118 and loaf of bread was 21 cents (US stats). Canada Statistics encourages us to forget past prices by the readjustment of the “base year”, assigned a value of 100, against which it measures increases. The base year is currently 2002; the next reference point will be 2012.

What’s in the Basket and When?

Back in the 70’s, the Free Press published a monthly update for the grocery portion of the CPI, showing the fluctuations in the price of a pound of pork chops, etc. Now, with such a plethora of dietary choices and shopping venues, can any sampling be typical? Can it be manipulated?

The CPI basket of goods and services is also adjusted from time to time to reflect changes in consumers’ habits, lifestyle and technology. The CPI numbers used in TRAF’s recent COLA calculations were based on the 2007 version of the CPI basket, which was derived from a 2005 household survey. Adjusting for changes in consumer patterns cannot be easy. At one time, for example, the average telephone cost was a landline rental. How does one now determine a typical user’s cell phone costs? Last month Stats Canada updated its shopping basket. Photo developing was out while dried lentils and smart phones were added to the 760 items in the basket. There still remains the significant problem of time-lag in adjusting for changes. The US Bureau of Statistics recently admitted to Business Week that its method of canvassing consumers is increasingly “out of touch” in the age of computers and cellphones. An economist who tracks over five million items sold on the internet concludes that inflation is “much higher” than officially reported.

Some prices bounce up and down. Stats Canada acknowledges that “transitory fluctuations” and “temporary movements” led to the invention of what is called core cPi. Core CPI excludes “volatile components” in the CPI basket; presently fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest and intercity transportation. Prior to May 2001, the Bank of Canada calculated core CPI by simply excluding all food and energy. This led to the saying that inflation was no problem – except, of course, if you had to eat, drive a car or heat your home.

The Americans initiated this kind of adjustment to their CPI in the mid 70’s, a time of galloping inflation. After oil prices quadrupled in 1973, energy costs were removed from the Consumer Price Index. The rationale for this was the Yom Kippur War, a temporary outburst. As food prices lurched upward these too were removed from the CPI calculation. The disappearance of anchovies off the coast of Peru was cited as the cause of temporary food inflation. (I am not making this up.) In time too, according to one source, the “Federal Bureau of Statistics discarded used cars, children's toys, jewelry and housing…costs consumers battled in their daily struggle with rising prices.” Allan Greenspan is sometimes credited with initiating “reforms” to the US CPI in the early ‘80s as a way of reducing the government’s tally for Social Security.

donna Goodman, Pension committee member

“Lies, Damn Lies and Statistics” …???

Besides eliminating items or adjusting for weather and seasonal variations how do statisticians achieve the supposed sleights of hand that make the CPI reflect less than the prices we pay?

• Substitution - when steak, for example, becomes too expensive people are assumed to consume more hamburger. Hence the cost of beef purchases is virtually unchanged.

• Geometric weighting - if the price of something goes up then it is made to account for less of the CPI relative to other things. When the price comes down, it counts for more.

• Hedonics or quality adjustment - this is when there is deemed to be no price increase on new car models, etc. because of added ‘standard equipment’ i.e. more bells and whistles.

It would take an advanced degree in statistics to master inflation calculations. The purpose here is just to inform you that a debate exists. We consequently ask: is the Canadian CPI, be it the all-items, sometimes called the headline variety, or the core calculation, accurate? The Bank of Canada admits that: “Because of the difficulties of measuring price changes due to changes in quality of products as well as other variables, the CPI may contain a certain measurement bias that prevents it from getting a completely accurate picture of inflation.” It hastens to add that we are getting a deal: “Recent studies of this bias suggest that the CPI may overstate inflation by about half a percentage point.”

Angry American economic commentators are not so sanguine. They use words like “corruption”, “malicious manipulation”, and “Orwellian” to describe the acrobatics by which rising prices, and the accompanying depravations, are understated. Recently, Canadian James Wanstall, CFO of Blumont Capitol, told Business News Network: “CPI is a lie propagated by government to rob us of our wealth by devaluing our money.”

In 2010 the influential US core inflation rate rose only 0.8%, the smallest increase since recordkeeping began in 1958. According to economist John Williams, however, the annual CPI increases would be much higher if calculated by the original method, based on a fixed basket goods, quantities and qualities unchanged: up to 10% if the methodology of the early 1970’s were used, and around 4% by the methodology of the 1990’s. (The mainstream media has been cautious in endorsing his ShadowStats Alternative CPI, which is not without its detractors and debunkers.)

Do all of the calculations and convolutions matter? You bet. The CPI is central to labour contract negotiations. Canadian governments use the CPI to adjust old-age security, CPP and tax deductions. Our TRAF pensions cost of living adjustment (cola), until 2017, is capped at no more than two thirds of the CPI – if the plan is able to afford that. In 2009, this yielded an increase of 0.80% and, in 2010, 0.98%. The Bank of Canada uses the core CPI as a guide to policy decisions about the money supply and interest rates. And, because low core CPI rates relate to low investment interest rates, pension plans like TRAF are unlikely to be able to afford more generous payouts.

Inflation - Then and Now

Nowadays we assume that inflation is an irrefutable fact of life. Not so back in the days of gold and silver currency. Society then took changes in the value of money very seriously. Unscrupulous folk who debased the currency, melted it down, mixing in lower-cost metals, or who clipped the currency, shaving off bits of precious metal, faced horrendous executions - except, of course, if it were the government debasing the currency to better enable it to pay its debts. This notion brings us back to the present time. As a means of trying to jumpstart a failing economy the American government employed ‘quantitative easing’ (QE), sometimes described as letting the money printing presses run wild. When money is worth less, massive government debt is easier to pay back. Will this phenomenal increase in the money supply cause the lid to be blown off the inflationary kettle?

Fears on the Horizon

Fuelled by emerging market demand, weather calamities, and the trillions flooded into the market by monetary stimulus, prices have recently skyrocketed for commodities such as cotton, copper, coffee and wheat. These increases are now being passed on to consumers in what has been describes as “death by a thousand cuts.”

What is to happen to the value of our money? Experts disagree. Some predict hyperinflation, urging us to take to the hills with our guns, gold and bottled water before blood is spilled on the streets. A few forecast the opposite - deflation – falling prices, especially in real estate, and, consequently, a contracting economy as has happened in Japan. Canada’s fate might be stagflation, little movement in employment, interest rates and wages - unions have little power in a global market place - but rising prices on fuel and food. Canadians supposedly spend, on average, only 10% of after-tax income on food (I must be more hungry than ‘average’), and some commentators glibly assume that price bumps will pass unnoticed. But, in the words of researcher Evan Fraser, “for those at the lower end of the income distribution, so called subtle hikes will feel like a wallop.”

Impacts of Inflation

The fact is that inflation does not hurt everyone equally. Those who fly first class often have someone else picking up the tab, indirectly subsidized by us, the consumers and taxpayers. The unemployed or underemployed, on the other hand, relate to the misery index, the total of the CPI and the unemployment rate. Those with modest wage gains and without perks feel the pinch. Those with fixed incomes, with little or no increases in their pensions, surely experience more pain.

Last November the Globe and Mail reported a “25% spike in the number of seniors in poverty” and that “economists say women make up as much as 80% of the increase in seniors’ poverty.” A large portion of retired teachers are women, who often made lower salaries, because of family responsibilities and fewer opportunities for educational and administrative advancement.

One financial advisor and author advises that: “there are so many distortions to the CPI that one is better off to assume the consumer price index is rising 5% to 10% a year and to adjust one’s life (and investments) accordingly.” For those on fixed incomes, this means not saving more but sacrificing more.