Inflation is a big topic that's received a lot of attention right now (for good reason). Warren Buffett recently said that he's seeing "substantial" inflation, which is a break from the Fed and what they report. Likewise, I have many friends from different countries in Europe which have also said that they're seeing much higher inflation than what's being reported. Even where I live, I have yet to hear a single person talking about how the price of items are lower than a year or two before now. In the video, How To Measure Inflation and Why we look at some data principles in measuring your own inflation rate and why.
Some questions and important discussion points that are answered in the video:
- Why should we ignore official inflation reports from government entities or central banks?
- What's one incentive that every government or economist has to misreport inflation?
- Why is it better to approach a problem from the view of incentives over data? What does this mean when we consider inflation and the "official" people reporting it?
- What is asset price inflation? Why is this being overlooked and how does this impact inflation measurements?
- What is shrinkflation? What is one technique that we would use to uncover shrinkflation?
- What is a big problem with seasonal goods regarding inflation and how could we handle that problem in our inflation calculations?
- The author of the video mentions the inflation rate that he's calculated over the last 15 years. What is it? Why is it important to know this?
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One problem with inflation is that the official measures tend to leave out important items and weigh items inappropriately. Case in point: you're a frugal person who rarely buys a new cell phone (like once every 5-7 years), yet this weigh high in inflation measures and they have gotten cheaper if you consider features. The trouble is this doesn't impact you much because you seldom buy one. The same with TVs: some people do buy a TV often, but if you seldom do, falling prices of TVs doesn't impact you much. Meanwhile, rising food or energy prices (which some inflation measures exclude) impact you significantly. A big reason why you should consider tracking your own inflation is to discover what prices tend to impact you: no government authority can do this accurately, but you can. Keep in mind that with governments in significant debt will always calculate a lower inflation rate as inflation does help reduce the real expense of their debt.
As far as how to measure inflation, I cover some techniques in the above video - the big keys here to watch for is making sure that you compare using the closest measuring points possible. For instance, measuring the cost per smallest unit at an identical time helps uncover rising costs due to shrinkflation as well as making sure that seasonal goods don't impact your measure as much (this can make any measure inaccurate because some goods come in and out of season). By knowing what goods are rising in price, you can look for substitutes (if applicable), consider storage (if applicable), or even consider eliminating all together (if possible).
Keep in mind that the measure of inflation in the US has changed over the last few decades (as mentioned in the video). This is another reason you should track your own - and it's not hard to do.
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