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Bacon, Inflation, And "What Gets Measured Gets Managed"

Tyler Durden's picture




 

Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

Via ConvergEx's Nick Colas,
 
Note from Nick: For something that policymakers essentially think is a non-issue, we regularly get more questions about inflation than any other economic topic.  The most common observation is that “Real world” prices are rising far faster than the benign CPI readings used by the Federal Reserve to make decisions about interest rate policy.  Moreover, Treasury prices - essentially the market’s take on future inflation - may not be telling the whole story due to continued risk aversion among some investors.  Today Beth takes on the topic head on, looking at how the CPI gets calculated and why so many Americans are losing faith in this index as a measure of inflation. 
 
I can easily go through Costco’s 4-pound “family pack” of bacon in a week; nowadays it goes on and in everything – cupcakes, ice cream, muffins, scallops… and best of all smothered in brown sugar and baked to candied bacon perfection. 
But fellow bacon lovers beware.  In the past five years the price of bacon has jumped more than 32%, according to the Consumer Price Index (CPI).  This places it at number seven on our list of items that have appreciated the most from 2008 to 2013.  Unleaded regular gasoline tops the list with a 95.56% price increase, followed by fuel oil (+49.04%) and cigarettes (+48.27%).  Energy prices are a bit deceptive, however, as five years ago they were still in the massive slump induced by the global financial crisis.  
 
On the other hand, the price of television dropped more than any other item, falling 65.45% in the past five years, according to the CPI.  Round out the bottom three are personal computers (38.02%) and photographic equipment (-29.72%).  In fact, a majority of the bottom 10 items are technology-related and this is a result of what the CPI calls a “hedonic quality adjustment” (more on this later).  Toys (-24.13%) and dishes (-21.27%) also make an appearance on the list, which is likely a result of the continuing trend of outsourcing to low-cost manufacturing bases such as China.  See the tables following the text for the complete top 10 and bottom 10 lists.
 
Over the same period of time, headline inflation and core inflation (excluding food and energy prices) increased 10.86% and 8.75%, respectively.  However, there is much more to the story that impacts the true cost of living for many Americans, as the average inflation figures are typically don’t reflect how people actually spend their money.  For example, a middle-aged man who is footing the bill for his family’s healthcare expenses and saving for multiple college tuitions likely sees higher cost of living-driven inflation than indicated by the CPI, as healthcare and education expenses are of relatively little importance in the inflation calculation.  Read on below for our three most important and interesting takeaways from out top/bottom 10 analysis, including more on the variability of what people experience in their actual lives versus what the CPI represents.

First, why is bacon so expensive right now?  More interesting than important in the grand scheme of socioeconomic things, the cost of a pound of retail bacon surged to an all-time high of $5.07 last year; meanwhile, the wholesale price of pork bellies, which are cured into bacon, hit a record higher and exceeded $190 for one hundred pounds in 2013.  So what gives?  A mysterious virus – Porcine Epidemic Diarrhea (PED) – began killing mass numbers of piglets in April when it was first discovered in a U.S. herd.  In just one month, pork futures on the Chicago Mercantile Exchange spiked to more than $100 from $78 in March prior to the outbreak of the virus.  And in CPI data, the price of bacon in the supermarket officially increased 32.55% in the last five years.  On the plus side, reports indicate that the virus is subsiding and 2014 should bring with it lower bacon prices – so go ahead, eat up.

 

Second, the CPI greatly distorts the true cost of anything technological.  For example, if you bought a TV this year, chances are you did not spend 65.45% less than on the TV you bought five years ago.  Yes, the average price of a 32-inch flat-panel television hit an all-time low average of $435 in 2012, down from $546 in 2011; however, from Q1 2012 to Q2 2012, the average price paid for a new TV increased, climbing to $1,190 to $1,124.  As technology improves, consumers opt for the more expensive, fancier TVs as opposed to the cheaper, archaic ones.  To account for this, the CPI employs a hedonic quality adjustment in which statisticians reduce the amount of a price increase due to quality by a certain figure.  So if the price of a computer rose by 10%, the CPI statisticians might claim that two-thirds of the price increase was attributable to quality improvements and report inflation as only 3.3%.  In the case of televisions, technological advances have occurred so rapidly that the CPI math has grossly underreported inflation for TV and other tech products as well.

 

And finally, technology aside, the CPI also distorts the true cost of living for many Americans.  For example, inpatient hospital services (#5) and outpatient hospital services (#9) are both on the top 10 list, with respective 5-year price appreciations of 35.82% and 30.71%.  Both are things that people use selectively – if you’re sick then you’re healthcare costs can be exorbitantly higher than for the average person, yet hospital services as a whole only constitute 2.081% of the entire CPI.  Educational books & supplies – #8 on the top 10 list with a 30.85% price increase tell a similar story.  If you’re got three kids in college, you’re expenditures on education and vastly higher than for a single person who done with his or her education.  Educational books & supplies make up 0.195% of the CPI, while the broader education category is just 3.244% of the index.  Most people in college (or parents of college-age children) likely spend more than 3-something percent of their income in education.

The bottom line is that, while core inflation is a useful estimate for price levels in many instances, Federal Reserve Chairwoman Janet Yellen doesn’t care – at a policy level - about 35% healthcare inflation, 31% education inflation or 96% fuel inflation.  A typical American family of four might care immensely about all three, but in the eyes of the Fed inflation a 5-year core inflation rate of 8.75% is relatively minimal.  This highlights a major issue of using one basket of goods for an entire population – things that people use selectively represent a very small fraction of the CPI, yet are a huge fraction of expenditures for a significant portion of the population.
 
Say you’ve got an aging relative who needs nursing care – an increasingly common challenge for many Americans.  A private room at a nursing home runs about $90,500 per year, so rather than accounting for 0.17% (the CPI weighting for nursing home and adult day care services) of the average household income of $51,016, nursing home services account for 177% of your particular income.  And rather than 10.86% inflation over the past five years – the headline CPI number – your 5-year inflation rate is a whopping 46.0%.  Another example would be a family with two kids enrolled in private colleges, which command an average tuition of $30,094.  College tuition and fees are not 1.81% of you income, as they are in the CPI, but rather 118% of the median household income.  Your resulting 5-year inflation rate is thus 24.3%, or more than twice the headline inflation rate.  Both situations are not at all uncommon and highlight the inefficiencies in applying one uniform inflation gauge to an entire population.
 
There’s an old saying in business circles; ‘What gets measured gets managed”.  The Consumer Price Index may be an efficient way for policymakers to shorthand an answer to the question of inflationary levels.  It is, however, not an accurate method of assessing how consumers feel the effects of higher prices.  This is an important distinction, for inflationary expectations are the true drivers of how both financial markets and consumers alter their behaviors.  Because of the slow-growth global economy of the past five years, both groups have given the Fed a pass on inflation for the moment.  If and when things improve, the psychology behind inflationary expectations may well be different, and more on a hair trigger, than prior recoveries.
 
At least we’ll always have bacon to ease the pain.

 

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Thu, 03/06/2014 - 21:48 | 4519702 y3maxx
y3maxx's picture

...If You want Your Bacon, You can keep Your Bacon...

Thu, 03/06/2014 - 22:34 | 4519828 economics9698
economics9698's picture

Measuring inflation is like measuring a swarm of bees.  At best you get the general direction.  The CPI is used by the Fed as an excuse to print money, in normal money times, gold standard, prices go down when productivity rises faster than population growth.  Historically prices increase and decrease about 50/50.  The Fed and government has so brainwashed everyone that deflation is bad whenever it happens the Fed has its readymade excuse to print.

And that is all the CPI is good for, when it goes negative it’s time to print.  When it’s low, 2%, its time to print.  When its 3% it’s time to print. 

 

Whatever…just hang the MF’r and get it over with.  

Thu, 03/06/2014 - 22:49 | 4519865 Mister Kitty
Mister Kitty's picture

Inflation?  I highly doubt it.  This is a deflationary death spiral.  Yikes.

Thu, 03/06/2014 - 22:53 | 4519877 Pool Shark
Pool Shark's picture

???

 

Thu, 03/06/2014 - 23:14 | 4519937 MontgomeryScott
MontgomeryScott's picture

First by INFLATION (of the money supply) and then DEFLATION (of the value of the currency),...

Quotation: "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Damn, I posted this quote last night, on another discussion board within the Zerohedge. I guess I'll have to 'favorite' the link now.

The proles don't understand the terminology. They think 'deflation' has something to do with so-called 'price decreases' or something. Even the fucking WORLDWIDE FEDS thinks this way, so they try to run a balance between the inflation of the money supply and the value of these dollars (or whatever), not understanding the basic flaws in Kensyan economics (and totally unfamiliar with the true definitions of the words they use at the same time). I think they get 'thrown off track' by the usage of a comma in the statement. It ISN'T A COLON or SEMI-COLON (like they want to think it is). It is a simple PAUSE, to give a deferentiation between two meanings (the MONEY SUPPLY and the VALUE OF THE CURRENCY). It was understood, when this quote was uttered, that the words used referred to these totally different concepts.

DEFLATION of the value of a particular means of exchange by the use of INFLATION of this SAME exchange supply leads to a reduction in purchasing power. Overall, this has been kept artificially in check for several decades (in SOME nations), but with the false logic of 'ever-increasing production', this has proven to be a fallacious course of action.

I don't know (or care) if this relates to the link that you are responding to (as most people STILL do not understand this simple economic FACT).

Thu, 03/06/2014 - 23:12 | 4519931 Soul Glow
Soul Glow's picture

The place around here that makes the best burgers jacked all their burgers up $1 this week.  

Fri, 03/07/2014 - 05:48 | 4520417 prains
prains's picture

but have they watered down their chili so now it looks like soup instead, now that's inflation

Fri, 03/07/2014 - 08:06 | 4520507 zerozulu
zerozulu's picture

Hard to find ant thing below $10 at Costco any more.

Thu, 03/06/2014 - 23:57 | 4520051 teslaberry
teslaberry's picture

why are people constantly after years still arguing about inflation and deflation as if they cannot both happen simultaneously . it's like arguing about great taste or more filling for bud lite. 

our fiscal and monetary policty are devastating and extracting the social health of the country to run the empire. that's ok ...for now. right? when does it become a problem? when the nsa and cia cannot keep a lid on political extremism in the 50 states that aren't new york and washington dc?

 

remember---agitation always starts at the fringes. you'll know that agitation when you see it, and you will see it when the news can no longer ignore it. 

Fri, 03/07/2014 - 11:13 | 4521143 tarsubil
tarsubil's picture

Price inflation is baloney.

Technological progress that naturally happens in an anywhere close to healthy society leads to lowered prices and more real wealth. Inflation is a growth in the money supply.

Rising prices means that inflation of the money supply is surpassing the current natural "deflation" that comes from tech progress.

Bottom line is printing money is the equivalent of theft and when people are induced into using the printed money through the use of force (Federal taxes punishable with arrest and jail and MIC supported petrodollar), it is robbery.

They print because they are greedy robbers and has nothing to do with "inflation vs deflation" cover story BS debate.

Thu, 03/06/2014 - 22:48 | 4519862 Big Corked Boots
Big Corked Boots's picture

I just naturally assumed there was a link between bacon and Obamacare... y'know, it isn't good for you, so they just raise the price. Kind of like the cigarette business model, without the expensive lawsuits.

Fri, 03/07/2014 - 15:10 | 4521447 fedupwhiteguy
fedupwhiteguy's picture

guess what? unadulterated pork (non-gmo organic fed, no hormones, antibiotics, nor saline injections) is a healthier addition to your diet than modern day wheat!!!

Fri, 03/07/2014 - 03:21 | 4520282 A Nanny Moose
A Nanny Moose's picture

As long as you don't eat it. 0'bamacare will have a fee for that based on some completely unscientific definition of unhealthy diet.

Fri, 03/07/2014 - 10:53 | 4521040 Jumbotron
Jumbotron's picture

Bacon and Beer key to immortality !

http://www.theregister.co.uk/2014/02/28/beer_bacon_study/

Thu, 03/06/2014 - 21:52 | 4519709 Rakshas
Rakshas's picture

Is this the GM bacon???

 

Kind of developing a hankerin' for fat assed politician on a spit......... hey it ain't no bacon but it's a good meal

Thu, 03/06/2014 - 22:30 | 4519823 Bad Attitude
Bad Attitude's picture

Mmmm. Long pork.

On the other hand, given that polticians are full of shit, wouldn't a fat assed politician taste like shit?

Forward (over the cliff)!

 

Thu, 03/06/2014 - 22:51 | 4519871 Beam Me Up Scotty
Beam Me Up Scotty's picture

Start with Chris Christie.  He'll yield alot of bacon.  Or Shit.   I'm sure he would taste like shit, since hes full of shit.

Thu, 03/06/2014 - 23:56 | 4520048 MontgomeryScott
MontgomeryScott's picture

Lissen to me, laddie.

If Chris Christie was a dog, he'd be a television star. Perhaps not, though, beacuse the dog isn't quite fat enough:

http://www.youtube.com/watch?v=CErapf79rqM

The fool's body is akin to a warp engine without the Dilithium control mechanism (invented by Zephram Cocharine). Because he's a sociopathic prick, he eats too much, and his body has done as commanded (he got really fat, out of control, and he has a shit on deck larger than a shuttlecraft, right now!). His corpse is like a massive black hole, taking up and consuming everything in sight, and will eventually swallow light itself if allowed to do so.

Fortunately, laddie, universal constrictions will stop this eventuality by a built-in 'self-destruct' mechanism. He will be declared dead by 'heart attack', or other things which Doctor McCoy still doesn't understand, but the engineers KNOW what's happening in the timeline (despite our predelictions to strong drink).

http://www.bing.com/images/search?q=Montgomery+Scott+Pictures&id=E3A555F...

Don't wear the red shirt, laddie.

Fri, 03/07/2014 - 03:57 | 4520327 steveo77
steveo77's picture

But take the red pill.........

Fri, 03/07/2014 - 04:01 | 4520334 Rock On Roger
Rock On Roger's picture

I know a steveo, could be 77.

Know a FBV 12-33?

Thu, 03/06/2014 - 21:53 | 4519711 LetThemEatRand
LetThemEatRand's picture

People will work harder to afford bacon.  That's the endgame.

Thu, 03/06/2014 - 22:39 | 4519840 johnQpublic
johnQpublic's picture

you'll work harder with a gun in your back for a bowl of rice a day

Thu, 03/06/2014 - 23:05 | 4519909 jackstraw001
jackstraw001's picture

Nice, not many Jello Biafra references on ZH.

Fri, 03/07/2014 - 00:10 | 4520074 HisNameIsRP
Fri, 03/07/2014 - 08:14 | 4520516 johnQpublic
johnQpublic's picture

http://www.youtube.com/watch?v=u-6JjQShoyg

jello with ministry

united snakes of america....outstanding

I pledge defiance to the flag of the United Snakes of Captivity

And to the Republic for which it stands, I dip it in kerosene, and stick it up the ass of  you know who1 and light it

One nation, under God--or else

One nation, under psychopath Pentagon gangsters, whose idea of democracy is concentration camps for the people who go and use the drugs that the government supplies themselves

One nation, under Wall Street:

If the cops and the President are all criminals, I might as well be one too, ha ha! 2

One Nation of tabloid robots who actually believe what they see on tv, but when ask about it say “I don’t care.”

One nation, drowning in its own garbage

Indivisible from the from the fall of Rome

With liberty and justice for all who can afford it

Thu, 03/06/2014 - 21:55 | 4519717 Pig Circus
Pig Circus's picture

"But fellow bacon lovers beware.  In the past five years the price of bacon has jumped more than 32%, according to the Consumer Price Index (CPI).  This places it at number"

Bullshit. I've been buying bacon from my same little butcher shop for 20 years. 5 years ago it was $3.49 a pound and had been that price for years. It's now $5.99. My butcher has been doing a better job keeping prices down then all the big local chain grocery stores.

My buddy just paid $9.99 a pound at Whole Foods last week. He said the last time he bought bacon there a few months ago it was $7.49.

Thu, 03/06/2014 - 22:40 | 4519846 johnQpublic
johnQpublic's picture

6.99 at safeway...so i bought ham at 4.00  pound

 

explain that

Fri, 03/07/2014 - 10:01 | 4520842 Lux Fiat
Lux Fiat's picture

That's referred to as "chained CPI".  It's what the federal gov't wants to move to as a measure of inflation.  http://en.wikipedia.org/wiki/United_States_Chained_Consumer_Price_Index

Welcome to the current incarnation of financial repression.

Thu, 03/06/2014 - 23:37 | 4519997 Solarman
Solarman's picture

Bacon is 3.99 at albertson last week, and averaged 4.99 for the year.

Fri, 03/07/2014 - 10:19 | 4520923 Montgomery Burns
Montgomery Burns's picture

For a 12oz package, not a lb.

Fri, 03/07/2014 - 11:39 | 4521245 Woodhippie
Woodhippie's picture

Exactly Monty ... make sure we all are talking about the same weight package.  Like most products now, the packaging is staying the same but the amount in the package is decreasing. 

Thu, 03/06/2014 - 22:46 | 4519856 johnQpublic
johnQpublic's picture

 Whatchamachicken

lol

thanks for the link

Thu, 03/06/2014 - 22:04 | 4519745 fonzannoon
fonzannoon's picture

We are seeing inflation in some things and deflation in others while the middle class avalanches down and barfs up everything they have to try make it another day. This is barflation. 

Thu, 03/06/2014 - 22:36 | 4519831 Ham-bone
Ham-bone's picture

It's all quite simple...just breeze through how this is managed...

Frequently Asked Questions about Hedonic Quality Adjustment in the CPI
  1. Why does the CPI adjust prices for changes in quality?
  2. What is hedonic quality adjustment?
  3. What items in the CPI are hedonically adjusted?
  4. How does the hedonic method estimate the value of quality change?
  5. Can you explain how the CPI uses the hedonic regression model to estimate and apply a quality adjustment?
  6. Would you walk through another example at a more detailed level?

 

  1. Why does the CPI adjust prices for changes in quality?

    The CPI measures the average change in price over time of consumption goods and services by following the prices of a representative sample of consumption items in the retail establishments that sell them. A fundamental problem for the goods and services in the CPI sample is that their characteristics, not just their prices, change over time as the retailers introduce new versions of items and discontinue the older versions. In many categories of items, this is the primary time when price change occurs. The new version of the item may provide additional benefits or, in some cases, reduced benefits. This change in benefit is quality change.

    To measure price change accurately, the CPI must be able to distinguish the portion of price change due to this quality change. The traditional CPI solution to this problem is to temporarily remove an item from the sample when its quality has changed. While this method is sometimes acceptable, it biases the CPI if new version price changes are systematically different from the price changes of the unchanged goods.

  2. What is hedonic quality adjustment?

    Hedonic quality adjustment is one of the techniques the CPI uses to account for changing product quality within some CPI item samples. Hedonic quality adjustment refers to a method of adjusting prices whenever the characteristics of the products included in the CPI change due to innovation or the introduction of completely new products.

    The use of the word “hedonic” to describe this technique stems from the word’s Greek origin meaning “of or related to pleasure.” Economists approximate pleasure to the idea of utility – a measure of relative satisfaction from consumption of goods. In price index methodology, hedonic quality adjustment has come to mean the practice of decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes.

    The CPI obtains the value estimates used to adjust prices through the statistical technique known as regression analysis. Hedonic regression models are estimated to determine the value of the utility derived from each of the characteristics that jointly constitute an item.

  3. What items in the CPI are hedonically adjusted?

    The CPI uses hedonic quality adjustments in item categories that tend to experience a high degree of quality change either due to seasonal changes, as in apparel items, or because of innovative improvements and technological changes, as in consumer appliances and electronics.

    See table for a complete list of items for which the CPI uses hedonic based quality adjustments to account for quality change.

  4. How does the hedonic method estimate the value of quality change?

    CPI data collectors obtain the price and a full description of each item in the CPI sample. In those item categories where the CPI uses the hedonic method, BLS economists use a statistical technique called regression modeling to estimate a value for each characteristic; these values sum to the price of the item. For instance, in the men’s shirts hedonic model, sleeve length is an estimated characteristic. The estimate for long sleeves is interpreted as the portion of the shirt’s price that can be attributed to the presence of long sleeves.

    Hedonic models are estimated about every two years to capture new innovations in the marketplace, or to reflect changes to the value estimates of existing characteristics.

  5. Can you explain how the CPI uses the hedonic regression model to estimate and apply a quality adjustment?

    To illustrate the mechanics of a hedonic quality adjustment, it helps to begin with the generalized form of the hedonic regression equation:

    (1)

    Where the dependent variable, lnP, is the natural log of price, ß are the coefficients estimates of the independent variables (Xk), and e is the error term. The coefficients are a measure of the percentage change in price associated with a unit change in the characteristic. If the item being modeled is men’s shirts, the independent variables might be sleeve length and fiber composition; a simplified version of a hedonic model for men’s shirts might be:

    (2)

    Here all shirts are either short sleeve or long sleeve and either cotton/poly or 100% cotton. After doing the statistical processing BLS might estimate that ß1 = 0.15 and ß2 = 0.25. This indicates that a long sleeve shirt is 15 percent more valuable than a short sleeve one and that a 100% cotton shirt is 25 percent more valuable than a cotton/poly blend shirt.

    If the BLS data collector is forced to replace a short-sleeve cotton/poly shirt in the CPI sample with a long sleeve 100% cotton shirt, the CPI would attribute 40 percent of their price difference to increased shirt value (15 percent for sleeve length and 25 percent for fiber). The CPI would treat the remaining 60 percent of the price difference as pure change.

     

    If the price of the original shirt had been $20 and that of the replacement shirt $30, rather than using a $10 increase in price for that sample observation, the CPI would use a $6 increase, attributing the other $4 of the price difference to difference in the quality of the two shirts.

     

  6. Would you walk through another example at a more detailed level?

    Here is an example of a hedonic regression model for televisions.

    Televisions

    Characteristic
    Category Characteristic
    Name Coefficients P>T Statistics   Intercept 3.4455 30.49 Display Type Projection -0.25586 -2.60   CRT Base -   DLP 0.58356 8.58   LCD Projection 0.38566 5.43   LCD Direct View 0.73075 12.49   Plasma 0.72483 9.81   Screen Size 1 0.08348 11.24   Screen Size 2 -0.00049 -5.19 Features Picture-In-Picture 0.08430 2.39   Universal Remote 0.16261 4.42   High Def (HDTV) 0.34280 5.53   Extd Def (EDTV) 0.12228 1.82   3D Comb Filter 0.07122 1.47   Flat Screen 0.18461 3.91   S-Video Input 0.13772 2.08   VCR Built-In 0.18958 1.96   DVD Built-In 0.38247 5.33  

    From this model, we can see that LCD direct view and plasma televisions have prices that are about 70% greater than CRT televisions, all other characteristics being equal.

    When an item is replaced and it is possible to apply the hedonic model, the CPI estimates what the price of the new version of item would have been if it had been in the CPI sample in the previous period. To obtain that estimate, the previous period price of the old version (which was observed) is adjusted using the value of the change in characteristics between the two versions.

    Here’s an example of an item replacement:

    Characteristics Item A Item B Price $250.00 $1,250.00 Features 27 Inch 42 Inch   CRT Plasma   EDTV HDTV   S-Video Input S-Video Input   Universal Remote Universal Remote

    Item A is a television that is no longer available and it has been replaced by a new television, Item B. The characteristics in bold differ between the two TVs. There is a large degree of quality change and there is a very large (400%) difference in the prices of these TVs. Rather than use the 400 percent increase in price between Item A and Item B, the quality adjusted rate of price change is measured by the ratio of the price of Item B in the current period ($1,250.00) over an estimated price of Item B in the previous period – Item B’.

    To derive the estimated price of Item B’, we use the following equation:

    (3) Where PB,t+s-1 is the quality adjusted price, PA,t+s-1 is the price of Item A in the previous period, and is the constant e, the inverse of the natural logarithm, exponentiated by the difference of the summations of the ßs for the set of characteristics that differ between items A and B. The exponentiation step is done to transform the coefficients from the semi log form to a linear form before adjusting the price.

     

    For our television example, equation (3) looks like this:

    (4)

    When this quality adjustment is applied, the ratio of price change looks like this:

    Characteristics Item A Item B Price $1,345.02 $1,250.00 Features 42 Inch 42 Inch   Plasma Plasma   HDTV HDTV   S-Video Input S-Video Input   Universal Remote Universal Remote

    The resulting price change is -7.1 percent after the quality adjustment is applied.

Fri, 03/07/2014 - 00:12 | 4520079 MontgomeryScott
MontgomeryScott's picture

When I decided to wait and bought the NEW MODEL YEAR car and paid only $2,200 dollars MORE, I was satisfied by the fact that the manufacturer had added a chrome grille and re-designed the cup-holder so that it would accomodate the new 44 oz. 'Big Gulp' cups, and also put another 'powerport' within handy reach, so that I can charge my cell-phone.

I KNOW that all these improvements were worth, um, nothing (as the 'powerport' melted, the chrome seems to have an issue adhering to the grille, and the cup-holder's retracting lock broke after two weeks, and the dealer stated that I had abused it, so it was not covered under warranty), but, well, overall, my 'customer experience' is, overall, 'good'.

SHIT. Excuse me, I have to pull over. There seems to be some smoke coming out under the hood...

NO, REALLY, did you see the NEW PAINT they have this year?

HEDONICS: Ther gift that you think keeps on giving (but covers up all the shortcuts they take)

I leaned my arm on the hood the other day, and it dented. I took my wonderful car back to the dealership, and they said, "WE don't CARE if you SAY you simply leaned on it. OBVIOUSLY, something ELSE did this. SEE? (They proceeded to show me how I couldn't have done this by leaning on my new car, and, in the process, added two more dents)...

Fri, 03/07/2014 - 03:26 | 4520286 A Nanny Moose
A Nanny Moose's picture

Could you keep your posts to a synopsis, in your own words, preferably 250 or less. You lost me at #1

Fri, 03/07/2014 - 05:31 | 4520404 Wile-E-Coyote
Wile-E-Coyote's picture

Point 6 This is where it falls down, what if the person wanted a CRT TV, now they have all but disappeared from the shelves, he is therefore forced to buy the more expensive flat screen. That is real inflation.

By the way how many people use all the features that come with their TV, or any other electronic device. If you don't use the feature then it has zero value.

I noticed the guy in this article didn't mention substitution or geometric mean, a couple of methods used to drive inflation down.

Thu, 03/06/2014 - 22:04 | 4519747 Dr. Engali
Dr. Engali's picture

Is this the bitcoin thread? It seems bitcoin's "founder" denies involvement in the NSA ... Er I mean crypto currency and fled from reporters.

http://mobile.reuters.com/article/idUSBREA252D820140307?irpc=932

Thu, 03/06/2014 - 22:26 | 4519806 Buttertooth
Buttertooth's picture

So, he invented bitcoin for....a free lunch?  

Fri, 03/07/2014 - 00:21 | 4520100 MontgomeryScott
MontgomeryScott's picture

WORSHIP ME.

I AM SATOSHI.

Hale-Bopp was a simple miscalculation.

I have some Kool-Aid. Don't worry. It will taste good.

I AM JIM JONES.

What is that guy's name, again, on the message boards?

His name was... (something)fone...

PSYCHOFONE, or what? I forget now.

Thu, 03/06/2014 - 22:05 | 4519748 mliu_01
mliu_01's picture

Baconomy is more real than Economy in USA.

Fri, 03/07/2014 - 00:33 | 4520127 MontgomeryScott
MontgomeryScott's picture

The baconometric indicators are generally looking fatter than last year's. As people in general become ever larger, the demand for bacon is increasing, leading to a pent-up demand for swill and cow-shit (which seems to enlargen the basic porkonometric production units).

A recent survey of Convenience stores nationwide indicates that the clerks are gaining weight (or are generally obese) as the customers, while exuding more repulsive body odors, seem to be receptive to larger purchases of 'breakfast foods':a large portion made up of the basic baconometric sub-concentrates.

 

Between Chevron and Walmart, I feel like I am fast-becoming a MINORITY (as I am healthy and of the correct weight, and aware of the current events).

BACONOMY!

Fri, 03/07/2014 - 03:28 | 4520288 A Nanny Moose
A Nanny Moose's picture

Bad metaphor. Fat is not as fattening as is sugar.

Thu, 03/06/2014 - 22:10 | 4519762 LMAOLORI
LMAOLORI's picture

 

 

Bacon's getting pretty expensive for some people as is beef.

Beef: It’s What’s No Longer Affordable for Dinner

 

Guess the Fed will soon want us to substitute meats with generic dog food

 

Thu, 03/06/2014 - 22:35 | 4519829 Ceylon tea
Ceylon tea's picture

Welcome to china where 1kg of meat is around $70

Fri, 03/07/2014 - 00:57 | 4520156 laomei
laomei's picture

1kg of non-supermarket, fresh halal beef can be had for 50 (frozen slices), 54 (non-loin) or 60 (loin) RMB.  Non-halal, slice off about 2 RMB per kg.  This is Beijing prices, so it's cheaper elsewhere, or more expensive if it's higher quality (but not by much).

Works out to

$3.70/lb sliced

$4.00/lb non-loin

$4.45/lb loin

 

Lamb tends to be around $4.45/lb as well, or $4/lb for sliced.  Supermarkets... you're only buying there if you're an idiot.  Anything "on sale" to a point where it competes with the markets is such low quality crap that it'll spoil rapidly... markets rely on reputation of individual sellers.  Supermarkets have higher overhead and no one is actually responsible for anything apart from showing profit.

Thu, 03/06/2014 - 23:15 | 4519943 KickIce
KickIce's picture

I don't think this is going away anytime soon either.  Texas has had to cull cattle due to drought going on two years now and parts of both Nebraska and Kansas have also suffered due to drought.  Now add California to the mix unless something drastic happens to eleviate their dry conditions.  Short term this might help to stabilize prices but in the long term results in more expensive beef.  As a side not, dairy farmers have also been affected because of higher grain prices while milk prices remained stable.  Milk prices have since adjusted some but not without sacrifice to some herds.

Thu, 03/06/2014 - 23:42 | 4520011 LMAOLORI
Fri, 03/07/2014 - 01:14 | 4520176 MontgomeryScott
MontgomeryScott's picture

REALLY?

I thought California farmers didn't have any water.

Between the EPA fish restrictions, the 'drought', and 'fracking', I was under the impression that California no longer HAS any 'farmers'. WELL, they DON'T (except for Monsanto, I suppose).

HMMM. 'FARMERS' use 'WATER' to grow 'HAY' for 'CHINA'.

TRANSLATION:

Illegal Mexican Aliens, working for Monsanto-run lands in the San Juaquin Valley, are pumping vast amounts of contaminated hydraulic fracturing wastewater, to replenish water tables, which; due to geoengineering moves to reduce the immediate effects of the known radioactive fallout from the Fukushina Dai-Ichi meltdowns; are sorely needed as California becomes the first victim of the pre-planned collapse of the United States. California, if taken seperately in economic migjht, once ranked as number seven, as far as economic output (if considered as a separate nation), as recently as 2003.

LORI, WELCOME to MY nightmare:

http://www.youtube.com/watch?v=iQE0pfBAYQ8

Girls really like salads, Lori.

 

 

 

Fri, 03/07/2014 - 03:32 | 4520297 A Nanny Moose
A Nanny Moose's picture

The "illegals" are getting out of the migrant farm worker, work. They are moving on to growing pot in the Sierras. Contaminated water is not as much of a problem as no water. Plants can generally deal with contaminated water. They cannot do shit, with no water.

Fri, 03/07/2014 - 03:36 | 4520301 Fedaykinx
Fedaykinx's picture

golf courses use moar water than fracking ever thought about.

Fri, 03/07/2014 - 09:59 | 4520833 LMAOLORI
LMAOLORI's picture

 

 

I hear you Montgomery  I am glad I can grow some vegetables and have a deep well. 

 

Lori 

Thu, 03/06/2014 - 22:49 | 4519773 Cacete de Ouro
Cacete de Ouro's picture

.

Thu, 03/06/2014 - 22:15 | 4519779 Dr. Engali
Dr. Engali's picture

"Thus we must use caution when using one figure to make policy decisions for an entire nation"

For God's sake Nick. Policy makers want the artificially low numbers. SSI is already broke. Do you think they want to be passing out an 8.75% annual raise?

Thu, 03/06/2014 - 23:46 | 4520018 HisNameIsRP
HisNameIsRP's picture

"My fellow Americans, we have decided to give everyone a 0.8% cost of living wage raise according to CPI, to help you through these troubled times. You will all be just fine if you do not spend your money on:  School, Healthcare, Gas, Heating oil, Beef, TVs, Computers, Cigarettes, and Bacon.  You may buy toys and dishes.  That is all and your welcome"

Your friend The Gubment

Thu, 03/06/2014 - 22:49 | 4519805 Cacete de Ouro
Cacete de Ouro's picture

.

Thu, 03/06/2014 - 22:52 | 4519873 Coldfire
Coldfire's picture

[W]e must use caution when using one figure to make policy decisions for an entire nation... . 

What do you mean "we" Kemosabe? To hell with the idea of making any policy decisions "for an entire nation". 

What is this fascist stank doing on my lovely fringe lowbrow financial blog?

Thu, 03/06/2014 - 23:07 | 4519914 Its_the_economy...
Its_the_economy_stupid's picture

Bacon at the Acme usually $5/lb. Last week, 2lbs/$4.  I loaded up.

Thu, 03/06/2014 - 23:15 | 4519941 LMAOLORI
LMAOLORI's picture

 

 

That was smart I do that whenever I see a good buy and freeze it T-Bones $6.99/lb and $7.49 for Porterhouses at our little local Super Valu's this week.  I'll be picking up quite a few of them. The prices are going to keep going up and if you freeze them correctly they last a long time.

Thu, 03/06/2014 - 23:12 | 4519932 NoWayJose
NoWayJose's picture

The biggest problem, of course, is that you don't buy a new giant screen TV every year - but you buy bacon, gasoline, apartment rents, etc much more often. The percentages are also way out of whack with what an average family spends their money on.

Thu, 03/06/2014 - 23:32 | 4519983 Colonel Klink
Colonel Klink's picture

The price of brainwashing (TeeVee) has dropped.  It should make one wonder.  Fucking sheeple!

Thu, 03/06/2014 - 23:51 | 4520036 ebworthen
ebworthen's picture

Pretty sure I patented the Bacon Inflation Index here on ZeroHedge a couple years ago but...

Fri, 03/07/2014 - 00:03 | 4520063 Hulk
Hulk's picture

swine !!!

Fri, 03/07/2014 - 00:24 | 4520108 lasvegaspersona
lasvegaspersona's picture

With interest rates controlled with derivatives who knows what any data point means?

T

The S&P is up 100 points in the past 30 days. I expect a rout any moment but I have been expecting that for 4 years.

They may even be able to keep gold low until the end.

If the S&P were measured as part of the CPI we would have the worst inflation on record.

Most here are not fooled but most here like me are amazed. We are amazed that everything we thought we knew could be so wrong for so long. I believe I will be amazed for the rest of my life if things don't change.

I expect however that amazement will soon change to 'I told you so'. When that day comes I intend to shut up and hide because it will get ugly fast from that point on. When we reach point 'Argentina' (I like that name) it will be game over for the fed.

Fri, 03/07/2014 - 10:56 | 4521052 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

'Argentina' (I like that name)"

Because L'argent is french for money?

Fri, 03/07/2014 - 00:26 | 4520111 Atomizer
Atomizer's picture

The bacon bowl will contain Mr. Janet Yellen’s next market bubble pin hole.

/sarc

Fri, 03/07/2014 - 01:05 | 4520164 analyzer_66
analyzer_66's picture

How can one take a short position on bacon? Pork bellies seem too diverse.

Fri, 03/07/2014 - 09:25 | 4520649 El Hosel
El Hosel's picture

Stop buying eggs, tell all your friends and Neighbors to follow the trend on twitter.

Fri, 03/07/2014 - 09:22 | 4520467 hooligan2009
hooligan2009's picture

the article highlights the political nature of the Fed. the CPI is a measure that is targeted by one Government agency to apply to central planning as with a politburo in a communist regime. the Fed even has five year plans that are symptomatic of such "one size fits all" approach to politics.

the Fed regulates interest rates for cash and bonds (and arguably currency and equities) as evidence of yet another political decision.

politics is all about the reallocation of resources by a central government. the size of the government makes it communist (which finds the lowest common denominator of poverty and moves the country towards it) and fascist (which finds the same thing) - the people at the top of either these two systems have the same characteristics - lots of money and power. 

socialism or neo-conism assumes that the money and power gathered by those in charge is invisible to those being exploited.

It is visible.

central planning via a central blank is all about politics since it transfers wealth and resources from one sector (main street) to another (wall street) on the grounds that main street is too stupid to look after its own resources and needs them removed to smart people on wall street. this is politics - of course although you don't have any say at all in who or who isn't a Fed governor (as you would for a State governor) people (you) do elect the people who appoint the Chair of the Fed via a nomination and confirmation policy.

so ask yourself this: why do successive presidents appoint people who make political decisions that affect more people than their own now extremely low (discretionary spending of just 5% of taxes) power? where is the real political power now that the Fed has been allowed this monetary experiment? I suggest that the Fed has exceeded any power that it should be entrusted with by resembling a communist politburo - and we all know how well those work in impoverishing the entire nation that is ruled by them.

Fri, 03/07/2014 - 08:47 | 4520553 22winmag
22winmag's picture

"Shut up bitch go fix me a turkey pot pie!"

 

Was 20 to 25 cents when the movie was made... now at 80 cents.

Fri, 03/07/2014 - 09:23 | 4520644 El Hosel
El Hosel's picture

Even The Federallies fabled version of "Low Inflation" is about to go out the window... Grains $Natgas Oil Metals all looking up.... for weeks now.

 

Interesting to see what TPTB "throw up" for a Goldiloks Number on Jobs this morning. There is no just right anymore, they wore it out.

Fri, 03/07/2014 - 09:38 | 4520704 DriveByLurker
DriveByLurker's picture

Little did the Zerohedge readers know that they were witnessing the birth of a new discipline - "Baconometrics".   Mmmmmm...baconometrics.

Fri, 03/07/2014 - 10:02 | 4520846 Steve in Greensboro
Steve in Greensboro's picture

"...we must use caution when using one figure to make policy decisions for an entire nation..."

How about "we must use caution when making policy decisions for an entire nation"? 

Or better yet, "devolve power from the Federal government (including the Federal Reserve) to individuals and their private organizations, so some government employee cannot make decisions for an entire nation"?

Fri, 03/07/2014 - 11:42 | 4521254 fedupwhiteguy
fedupwhiteguy's picture

ConvergEx's Nick Colas = perfect name for his trade . colas = cost of living allowance(s)

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