# Predicting inflation



## Davis (Nov 11, 2014)

A retirement plan should incorporate assumptions about inflation for spending, and as applicable, government benefits, tax brackets, and some pensions. Today's financial profile in the National Post assumes 3% inflation going forward. Based on average CPI inflation of 1.82% over the past 20 years, I assume 2%.

What assumption do you use and why?


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## GoldStone (Mar 6, 2011)

Davis said:


> A retirement plan should incorporate assumptions about inflation for spending, and as applicable, government benefits, tax brackets, and some pensions.


Why?

I don't make any assumptions about inflation in my planning. I use real (today's) dollars and real rates of return.

Real dollars / Real returns are so much easier to work with than Nominal dollars / Nominal returns.


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## Just a Guy (Mar 27, 2012)

Besides, real costs for things are a lot higher than the "official" inflation rate. The government may claim prices aren't going up much, but my pocket book says otherwise.


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## gibor365 (Apr 1, 2011)

Just a Guy said:


> Besides, real costs for things are a lot higher than the "official" inflation rate. The government may claim prices aren't going up much, but my pocket book says otherwise.


True! Also every family has their own inflation number.... We spend majority of money on food, travel and recreation.... practically don't spend on Jewellery, watches, furniture, TVs , very little on clothing etc


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## cainvest (May 1, 2013)

Davis said:


> AToday's financial profile in the National Post assumes 3% inflation going forward.


You can always add a 2 or 3% inflation number into your calculations. It'll just make you save more and it *might* be more accurate down the road.


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## Rysto (Nov 22, 2010)

Just a Guy said:


> Besides, real costs for things are a lot higher than the "official" inflation rate. The government may claim prices aren't going up much, but my pocket book says otherwise.


This is tired nonsense. Have you ever actually ran the numbers? I doubt that you have.


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## Davis (Nov 11, 2014)

+1. I don't think anyone is going to be convinced that you can generalize the personal experience of one family to refute Statistics Canada. "There are no French-speaking people on my street, so I don't believe government statistics that say that a quarter of Canadians speak French." 

The point that costs will rise differently for different people is valid, but it is pretty challenging to determine your own personal inflation rate, so the rate for consumer prices in general would seem to be the best proxy.


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## OnlyMyOpinion (Sep 1, 2013)

We can run different assumptions, but currently comfortable with a 3% real rate of return (5-2?).


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## dogcom (May 23, 2009)

Just a guy is right I think inflation is much much higher then we are told by the government. Everything we need does seem to cost more and try hiring a professional and see what that costs today and materials. Of course stuff we don't need like TV's and such keep dropping in price. I don't know the numbers but I do know everything costs more and fees are also getting added on all the time as well.


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## Just a Guy (Mar 27, 2012)

Rysto said:


> This is tired nonsense. Have you ever actually ran the numbers? I doubt that you have.


Actually, I do run the numbers. My grocery bill has increased significantly, the price of gas has increased significantly, the price of my utilities has increased, the price to buy a house has increased significantly. Not only that, but many food items have decreased in size as well as increasing in cost. Try to buy a 2L pail of ice cream...no one sells that size anymore. Chocolate bars are smaller and more expensive. Cereal, bread, soup, juice (now 900ml instead of 1L). At 2% inflation juice should be the same price as 5 years ago, but it's more expensive as well as smaller.

True, some cars are cheaper, but a truck is much more expensive (not that I buy these often). The price of a flat panel TV has decreased, but still costs more than the last tube TV I bought (-again, not something I routinely buy). I'm sure you can find a way to skew the numbers with statistics, but reality is the basics of life have gone up more than 2% a year.


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## Davis (Nov 11, 2014)

That would be your reality, and I don't dispute that. I don't but 2L pails of ice cream or juice, so my reality is different. And there is no evidence that your experience is the same as that of the average Canadian. You would seem to be the unlucky oddball.


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## gibor365 (Apr 1, 2011)

Davis said:


> The point that costs will rise differently for different people is valid, but it is pretty challenging to determine your own personal inflation rate, so the rate for consumer prices in general would seem to be the best proxy.


"rate for consumer prices in general " - it's like to tell that average patients' temperature in a hospital is 36.6 
You should know how much you spend on dirrerent items.... For last 10 years we spent on average 25-35K per year on travel, 10K on recreation, less tahn $50 on furniture, jewellery, TV's .... so we don't really care if jewellery will increase even 1000%, but we care that ice time constantly increases by big % and so on ....
btw, didn't take Mississauga transit for about 7-8 years, this week my car was in repaint, so took the bus and was surprised that one ride cost $3.50! as far as I remember 7-8 years ago it was like $2. 
I really doubt that real inflation is around 2%


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## tenoclock (Jan 23, 2015)

With increases in technology and efficiency in production, shouldn't things be getting CHEAPER? No? Why is that? Because the government is devaluing the currency at every turn possible. The inflation figures only measure the increase in prices from last year (and who knows whether we can even trust such figures). They do not account for the part where goods were supposed to get cheaper but the shelf prices say otherwise. That cannot even be accounted for by national GDP growth figures in a highly globalized world.


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## gibor365 (Apr 1, 2011)

CAD$ in last 5 years fell 30% comparing to USD$and 40% comparing to Chinese Yuan. Canada importing practically everything....so how inflation can be 2%?!


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## lonewolf (Jun 12, 2012)

It is like there is more then one economy/market that caters to different wealth brackets i.e., clothes can be purchased cheaper @ value village then Costco, Costco is cheaper then Wall mart, Wall Mart is cheaper then Beverly hills with a lot of different prices in between. It is the same with new cars they can be purchased from just under 10,000 dollars to cars costing 100s of thousands of dollars. Cars are lasting longer then they used to so even a used car would be like buying a new car years ago. Which would help absorb the increase in cost of the newer better car. The price of education is all over the map from getting education online or through books from libraries to spending thousands of dollars going to Ivory tower schools. There is a market for people that want to spend a lot of money on gas such as using helicopters & lear jets, then lower on the scale would be hummers, large cars, medium cars, economy cars, electric bikes with all kinds of things in between. A person could make 100s of millions of dollars if they do not know how to streach those dollars they can end up broke. I don't see inflation much of a problem as of late if you know how to be in the right market/economy for example if your making 11 dollars an hour you do not want to shop in Beverly Hills.


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## RBull (Jan 20, 2013)

Back to the original question-

We use 2.5% for our retirement planning for the next 39 years planned remaining, but don't claim to predict future inflation in any way, or know if official posted inflation is/will reflect our actual spending. However other than tracking actual expenses it may be the best we have. 
Bank of Canada states inflation for 1974-2014 (40 years) inflation is 4.01%. If we shorten this to 1984-2014 (30 years) it is 2.47%. If we continue to shorten the time frame inflation decreases. Over a 100 year period it is 3.09%. 

http://www.bankofcanada.ca/rates/related/inflation-calculator/

I do not know what true inflation is but know that we spend less overall on non discretionary than 5 years ago. We track our monthly/annual expenses. Much of this is simply reduced consumption and creative and pro active ways to reduce costs, although there is little more fat to trim. We do this to save obviously but to redirect into discretionary such as travel. Some things we have influence on but the most concerning are things we don't such as property taxes, electricity rates, income taxes....Some of the things that seem to exceed official rates of inflation and take a good bite of our fixed expenses.

Our retirement investment income/withdrawals are based on year end capital vs plan, so also factors in our actual previous spending. So far this dynamic approach is working but we're early in the retirement game.


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## mrPPincer (Nov 21, 2011)

Davis said:


> A retirement plan should incorporate assumptions about inflation for spending, and as applicable, government benefits, tax brackets, and some pensions. Today's financial profile in the National Post assumes 3% inflation going forward. *Based on average CPI inflation of 1.82% over the past 20 years*, I assume 2%.
> 
> What assumption do you use and why?


1.82% seemed low to me (even though we've been in an extended period of low inflation), so I took the official Statistics Canada Total CPI for Canada (not Core CPI which excludes volatiles like food & fuel) from 1995-2014, and averaged them resulting in a 20 year Total CPI inflation of 1.915%.*
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46a-eng.htm

I do not count on inflation remaining at 2% however, take a look at the prior 20 years for example, from 1975-1994.
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46b-eng.htm
The average Total CPI over this 20 year period is 6.145% !!

I'm not sure how long these links will last, these gov't sites keep changing what they want us to see.

Several years ago I used an at-the-time current gov't site which had a tool showed CPI for any time period from 1914 to then which included the average for that time period.
The average CPI for the full time period since they started keeping the records was over 3% at the time, something a little over 3.1% actually if I remember correctly.

Since then 3% is the number I use. 
Every september I give myself a 3% raise in what I charge. I figure sometimes the actual CPI is higher and sometimes lower, but 3% is fair, and my employers never question it.

Here's another link I found that shows a table from 1914 to 2014.
http://inflationcalculator.ca/historical-rates-canada/

Years of double-digit are not uncommon in the past and no doubt they will happen again, the question is when imho.
One might even think that with all the massive amounts of stimulus governments have been doing lately, that an upswing in inflation should not come as a surprise.

---

*edit: RBull's BoC calculater is faster than the way I did it 
It gives similar numbers but not exactly the same because it goes to the most recent month, so from june (0%) to june currently instead of using the january to december (inclusive) monthly CPI stats.

Using the calculater from june 1995 to june 2015 it's 1.88%
The 20 years from june 1994 to june 2014 is 1.96%


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## Davis (Nov 11, 2014)

Thanks RBull and MrPPincer. I think that the last twenty years is the most appropriate period to examine. There was a sea change in monetary policy in the 1980s - Maggie Thatcher's "monetarism in the lab", Alan Greenspan in the U.S., and similar policies in Canada. The Bank of Canada now aims for price stability instead of using expansionist monetary policy to stimulate the economy. Since the latter was shown to cause inflation instead of long-term expansion, I cannot see us going back there. Also, the Bank has set an official target range of 1-3%, and has been sticking within that range for two decades.

As far as all of the "the government is lying to us" rhetoric here, I despair of CMF when I see the discussion so focussed on this silliness - people who have formed this conspiracy theory without a lick of evidence beyond a few anecdotal examples. CMF used to be a better source of financial information, but it seems that it's becoming more of a forum for people who wear tin foil hats.


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## mrPPincer (Nov 21, 2011)

Did I imply the government is lying to us??
If so, my apologies, I'm not a tin-foil-mad-hatter lol

My comment was meant to say that I could not find the same tool that I had used several years ago, not that the gov't was giving false numbers.

The tool I used was pretty much the same as the one that RBull linked, but it was different.
It included graphs and a lot more info and had some more flexibility if I recall correctly.

My life experience includes gov't work (armed forces) and I'm quite aware of the multitude of make-work projects they love to do, and imho this is just another example.
I may have a slight prejudice, not arguing that, but conspiracy theory is a bit of a leap imo. In any case I won't take offence


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## My Own Advisor (Sep 24, 2012)

Davis said:


> A retirement plan should incorporate assumptions about inflation for spending, and as applicable, government benefits, tax brackets, and some pensions. Today's financial profile in the National Post assumes 3% inflation going forward. Based on average CPI inflation of 1.82% over the past 20 years, I assume 2%.
> 
> What assumption do you use and why?


I use 3% for the high side. This way, I err on the side of caution. Hard to predict the future.


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## Just a Guy (Mar 27, 2012)

I too never meant to imply the government is technically lying to us. I, however, do know that with statistics you can prove anything you want by selectively picking your sample (try reading how the government has changed the "basket of goods" they use to calculate the inflation rate over the years) However, when the price of beef (or groceries in general) has skyrocket, the price of housing has doubled, gas prices remain high despite oil crashing, and the dollar has dropped, I don't see how people can really believe in 2% inflation when basic needs have obviously gone up so much. I've got spending records going back decades (since I'm self employed I keep such things) and I see a fairly steady increase in spending. 

If I'm so out to lunch, why is there all these threads about the "price of beef", "housing prices", "dollar at 70 cents", etc.


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## cainvest (May 1, 2013)

Just a Guy said:


> If I'm so out to lunch, why is there all these threads about the "price of beef", "housing prices", "dollar at 70 cents", etc.


Why ... because people generally just like to complain. 

If we look at 2% over 10 year price increase here is what we get, 

then and now

3.36 4.09 Lean Ground Beef (lb)
1.00 1.22 Gas
1.70 2.07 Bread

Doesn't appear that far off to me but I don't have the actual bills to back it up either.

For retirement planning I don't think using a 3% increase / yr is a bad idea.


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## steve41 (Apr 18, 2009)

Question....

is the inflation rate the year to year rate change in the cost of living or the slope of the cost of living curve as measured over time?

If the former, then it takes on an exponential aspect, if the latter, it is a straight line. Over a long stretch of time, this makes a major difference.


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## mrPPincer (Nov 21, 2011)

In year to year it's the percent change on a basket of goods from the previous year.
I don't think they change what's in the basket.. or by much if they do.
No hidden exponentials thrown in to the best of my knowledge (and can't see why they would).


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## steve41 (Apr 18, 2009)

If the inflation mechanism is defined as a constant 2% (say) year over year change to the CPI, then it is exponential.


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## cainvest (May 1, 2013)

steve41 said:


> If the inflation mechanism is defined as a constant 2% (say) year over year change to the CPI, then it is exponential.


I believe that's how it is and if so, the effects are indeed compounding.


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## mrPPincer (Nov 21, 2011)

Sure, CPI is, year over year, without doubt compounding, and I suppose you could say compounding acts exponentially, but that goes without saying, it's a given, naturally..


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## mrPPincer (Nov 21, 2011)

^Hopefully our own unique strategies each, will at least out-compound the CPI compounding


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## steve41 (Apr 18, 2009)

However, when you look at the CPI from 1965 to the present, it sure doesn't look to be compounding.... it is a straight line increase.


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## tenoclock (Jan 23, 2015)

I remember gas prices 10 years ago were somewhere around 55-65 cents a litre with almost the same CADUSD and after the oil crash, almost the same cost per barrel. Now prices are double. i do realize there are new taxes imposed on gasoline, but that does not account for 100% increase in price over 10 years. 

If you look at the CPI basket, transportation costs 20% and shelter costs 27%. These costs can be easily demonstrated to increase by at least 50% in the last 10 years along, yet this does not exactly show up in govt stats. Not sure what type of numbers they are using, but as said before, statistics can be used to make any point.


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## mrPPincer (Nov 21, 2011)

steve41 said:


> However, when you look at the CPI from 1965 to the present, it sure doesn't look to be compounding.... it is a straight line increase.


CPI inflation rate has overall been on the decrease in the long run over that time period, (late 70s & early 80s had a lot of double digits and rates have been pretty low since the early 90s), which would account for the pretty much straight line.

If one was to assume this to continue, what would be expected would be a continuing decline in rates by ever decreasing increments towards near-zero.

I consider this a highly unlikely scenario (not short-term, I mean long-term), but I don't profess to be any kind of expert, your guess is as good as mine.


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## RBull (Jan 20, 2013)

Davis said:


> Thanks RBull and MrPPincer. I think that the last twenty years is the most appropriate period to examine. There was a sea change in monetary policy in the 1980s - Maggie Thatcher's "monetarism in the lab", Alan Greenspan in the U.S., and similar policies in Canada. The Bank of Canada now aims for price stability instead of using expansionist monetary policy to stimulate the economy. Since the latter was shown to cause inflation instead of long-term expansion, I cannot see us going back there. Also, the Bank has set an official target range of 1-3%, and has been sticking within that range for two decades.
> 
> As far as all of the "the government is lying to us" rhetoric here, I despair of CMF when I see the discussion so focussed on this silliness - people who have formed this conspiracy theory without a lick of evidence beyond a few anecdotal examples. CMF used to be a better source of financial information, but it seems that it's becoming more of a forum for people who wear tin foil hats.


You're welcome. I agree that more current monetary policy aims for 2% and trying to stay within 1-3%. 100 year history shows just over 3%. That's why I've settled on something in between at 2.5%. Perhaps a bit more conservative but I prefer that.

Many people on here seem to believe real inflation is much higher than CPI. I'm not so sure.


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## RBull (Jan 20, 2013)

tenoclock said:


> I remember gas prices 10 years ago were somewhere around 55-65 cents a litre with almost the same CADUSD and after the oil crash, almost the same cost per barrel. Now prices are double. i do realize there are new taxes imposed on gasoline, but that does not account for 100% increase in price over 10 years.
> 
> If you look at the CPI basket, transportation costs 20% and shelter costs 27%. These costs can be easily demonstrated to increase by at least 50% in the last 10 years along, yet this does not exactly show up in govt stats. Not sure what type of numbers they are using, but as said before, statistics can be used to make any point.


Your memory may not be serving you as well as you think. 10 years ago Canadian gas price ranged .85 to 1.00 depending on location. 20 years ago gas was closer to the range you recall as 10 years ago. Where I am gas is now 16% higher than 10 years ago. 4 months ago it was actually lower. 

http://www.statcan.gc.ca/pub/11-402-x/2010000/chap/ener/tbl/tbl03-eng.htm

This example is possibly one of the reasons people think CPI is not accurate.


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## cainvest (May 1, 2013)

steve41 said:


> However, when you look at the CPI from 1965 to the present, it sure doesn't look to be compounding.... it is a straight line increase.


Just compare using the BoC CPI calculator, add up the individual yearly values (say 5 years worth on $1000) vs the same 5 years as a single range calculation. If the two values are the same it would show "simple interest" and if the single range is higher that would reveal a "compounding" effect.


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## steve41 (Apr 18, 2009)

5 years is kinda light. I prefer to look at it over a 30-40 year time scale. Then, the difference between linear and compounding is quite stark. check out....https://en.wikipedia.org/wiki/Consumer_price_index


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## Davis (Nov 11, 2014)

There definitely seemed to be a strong current of "the government is lying to us" thought here:
*" real costs for things are a lot higher than the "official" inflation rate. The government may claim prices aren't going up much, but my pocket book says otherwise. "
*"I think inflation is much much higher then we are told by the government."
*"I'm sure you can find a way to skew the numbers with statistics, but reality is the basics of life have gone up more than 2% a year."
*"The inflation figures only measure the increase in prices from last year (and who knows whether we can even trust such figures)."
*"these gov't sites keep changing what they want us to see."
*"I, however, do know that with statistics you can prove anything you want by selectively picking your sample "

I think the last comment is the most telling. It is being used to dismiss the inflation statistics published by Statistics Canada, which is widely recognized as operating at arm's length from the government. Their professional tracking of prices of a large basket of consumer goods is being dismissed in favour of personal recollections of the prices of a few selected goods.

This comment is also choice: "These costs can be easily demonstrated to increase by at least 50% in the last 10 years along, yet this does not exactly show up in govt stats." Yeah, if StatsCan CPI figures were wrong, it would be easy for someone like the Fraser Institute, or Canadian Centre for Policy Alternatives, or a bright young university economist looking to make a name for herself or himself. But no-one has, because StatsCan numbers are unbiased, despite the doubters here, who don't provide hard evidence despite how easy it would be.

Look, I am appalled that Harper is spending millions of taxpayers dollars every year to convince us that his policies are good and he should be re-elected, but there is no evidence anywhere that StatsCan is being used by the government to mislead Canadians on inflation or anything else they measure. It just is baseless conspiracy talk.

On the question of the CPI, StatsCan measures price changes on a basket of consumer goods (actually of baskets, over a variety, since they publish a number of different price indexes for different purposes as someone mentioned above) from year to year. Once every ten years, the basket is updated to drop things like VHS recorders and add things like smart phones. The basket is weighted to reflect what typical families spend on housing, food, transportation, consumer goods, etc. Obviously families have different spending patterns. If the economy is causing prices of the causing the prices of things your family buys to rise faster than the average, then you should consider whether the economy is persecuting you -- producers, importers, distributors and retailers all plotting to make your life worse. (I am kidding here. Please don't take that seriously.) I think there is a psychological reason behind this. Economists and decision theorists talk of "loss aversion" - people's tendency to strongly prefer avoiding losses to acquiring gains. If you offer someone $100, or a 50% chance of winning $200, most people will go with the sure thing. I think people are more likely to remember prices that have gone up than those that have gone down, and that results in the false impression that inflation is higher than the CPI tells us. 

The effect is cumulative -- 2% inflation per year in each of ten years would produce 21.9% total inflation, not 20% It is an index, so it is reset every so often. Let's say the basket of goods cost $100 in 2005. With 2% inflation, it would cost $102 in 2006, and 2% on top of $102 would mean those same goods would cost $104.04 in 2006. By 2014, they would cost $121.90, not $120.


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## steve41 (Apr 18, 2009)

You mean buggy whips aren't included in the basket? Who knew?


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## cainvest (May 1, 2013)

Davis said:


> The effect is cumulative -- 2% inflation per year in each of ten years would produce 21.9% total inflation, not 20% It is an index, so it is reset every so often. Let's say the basket of goods cost $100 in 2005. With 2% inflation, it would cost $102 in 2006, and 2% on top of $102 would mean those same goods would cost $104.04 in 2006. By 2014, they would cost $121.90, not $120.


Yup.

I think the CPI value is useful one. Unless one is willing to spend the time on calculating their own basket (with proper methods) CPI is the way to go.


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## mrPPincer (Nov 21, 2011)

Davis.. did you read my response to your accusation?
In case you missed it. Here is the link, post #19
http://canadianmoneyforum.com/showt...ting-inflation?p=758882&viewfull=1#post758882

You are still saying that I claim that statistics canada is lying to us..
When I definitely clarified that that was not what I was saying..
Are you a politician by any chance?


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## mrPPincer (Nov 21, 2011)

Buried in there was this 


> If the economy is causing prices of the causing the prices of things your family buys to rise faster than the average, then you should consider whether the economy is persecuting you -- producers, importers, distributors and retailers all plotting to make your life worse. (I am kidding here. Please don't take that seriously.)


Confusing, possibly highly intelligent as well as amusing, but still not sure exactly, I love it lol, good one


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## Just a Guy (Mar 27, 2012)

Davis said:


> This comment is also choice: "These costs can be easily demonstrated to increase by at least 50% in the last 10 years along, yet this does not exactly show up in govt stats." Yeah, if StatsCan CPI figures were wrong, it would be easy for someone like the Fraser Institute, or Canadian Centre for Policy Alternatives, or a bright young university economist looking to make a name for herself or himself. But no-one has, because StatsCan numbers are unbiased, despite the doubters here, who don't provide hard evidence despite how easy it would be.


Davis, once again you caught me...

I'm sure if my tinfoil cap weren't so tight respected newspapers like the Globe and Mail (http://www.theglobeandmail.com/repo...detached-from-the-real-world/article20288296/) would be publishing articles (http://www.theglobeandmail.com/repo...low-inflation-in-their-bills/article16676812/) about this instead of the National Enquirer. I'm sure places like the Financial Post would also have run articles to expose the fact that the government drops items from the basket to keep it's numbers inline (http://business.financialpost.com/n...ime-for-a-reality-check-at-the-bank-of-canada).

I'm sure there would be places like the American Institute for Economic Research who would come out with new models (http://viableopposition.blogspot.ca/2012/04/everyday-price-index-superior.html), or other Economists screaming that it was true (http://www.shadowstats.com).

Heck, even the Bank of Canada would probably never admit that "There are several reasons why changes in the CPI may not provide an accurate measure of actual changes in the cost of living." (http://www.bankofcanada.ca/wp-content/uploads/2010/11/measurement_bias_canadian_cpi.pdf).

But, alas, you caught me and called me out. Had I only spent say 10 seconds typing into Google, I could have spared myself the embarrassment of obviously unfounded statements based on my real world experience. Imagine what could have been had I spent maybe a full minute on research.


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## mrPPincer (Nov 21, 2011)

how'd that happen?
Now Davis wears tinfoil hat.

Is this the 'one who holds the hat speaks' thread ?
niice..


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## Davis (Nov 11, 2014)

MrPPincer, I was avoiding accusing any one person of saying that the government is lying to us. Some editors walked much closer to that line, or even across it than you did. I should have clarified in my last response that I understand your explanation about information on websites changing. 

Just a Guy, yes, you should have spent that minute doing actual research, because then you would have seen that the links you provided do not support the claim that CPI under-represents actual inflation. In fact, some of them contradict it. Ten seconds on Google is not enough time to form an opinion, or to support an ill-conceived notion. 

The first Globe article is a column by a guy who acknowledges that it is hard to argue with 950,000 price checks on 600 goods and services, but after citing a few random examples (parking, health insurance premiums) concludes by whining "Besides, it _feels _like there’s more inflation. Isn’t perception sometimes as important as reality?"

The second Globe article says “And the accuracy debate goes both ways. Several studies in the past decade have found Statscan over-estimates – not under-estimates – consumer price inflation.”

The Financial Post article is about how inflation in June 2014 was running faster than had been forecast by economists, and notes that the Bank of Canada monitors different price indexes that StatsCan prepares. It does not say that the government strips out items “to keep numbers in line”, it says that StatsCan removes more volatile items (i.e., that go up and down more than others) from its “core” inflation rate. It publishes the rate with those items in too. Removing these volatile items does not lead to more stable representation of inflation over the long-term – it does not lead to under-representation of inflation.

The analysis by the American Institute for Economic Research was for US CPI. It may be applicable to Canadian CPI, or it may not be. As the blog you linked notes, the analysis has not been done for Canada. I’m sure you would not assume that the conclusions for the US would be the same for Canada since we have different economies, and different statistical agencies.

Shadowstats is written by a guy who has an undergraduate degree in economics, Class of ’71. Not really peer-reviewed academic-calibre research is it? Of course, on the internet, you can find people who will say just about anything. And his analysis is about American CPI, not Canadian.

Finally, the Bank of Canada provides the standard caveats about CPI, and concludes (if you took another ten seconds to read down the page), that Canadian CPI overestimates actual inflation 0.5% per year – it doesn’t underestimate it, as you are claiming. It also notes that US CPI overestimates actual inflation by 1.0% per year. 

Above all, a scientific, statistical approach to measure inflation beats the stuffing out of basing your impression on a few things items whose prices you remember, or may mis-remember.

If your personal inflation rate is in fact higher than that for the average Canadian family, I’m sorry for you. You really should undertake a proper documentation of this over a period of years and present your findings to StatsCan. I am sure they would find it very useful.

But you may also find that it your loss aversion is causing you to remember the prices that go up more than the ones that go down. That would be an understandable and not unexpected outcome.


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## OnlyMyOpinion (Sep 1, 2013)

Interesting BoC paper, hadn't realized the CPI bias might make it a slightly overstated number. A small typo in your summary (sb overestimates - not underestimates):


Davis said:


> ... Finally, the Bank of Canada provides the standard caveats about CPI, and concludes ... that Canadian CPI overestimates actual inflation 0.5% per year...


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## Davis (Nov 11, 2014)

Thanks! Fixed.


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