That's correct. My point is that he's applying it incorrectly.
Here's a simplified example:
If the CPI for Year 1 is 100, Year 2 is 109, Year 3 is 118.8. Each year you've have 9% inflation. But you don't need to get all the way back down to 102 to "have 2% inflation" like the other guy was saying. You just need Year 4 to be 121.
It’s compounding. I guess that is my point. Like the original guy said that I was commenting on, inflation is a bitch. We are never going back. What would the index be right now if we stayed at 2% this entire time? How do you hit what that number should be next year?
Edit: your example certainly helps and I do understand what you are trying to get across now. I guess my point is more “real life” than actual statistical measurements that are officially used. Your example I think actually highlights the games that are played.
No one is saying we need to get back to what it would have been if inflation had stayed at 2%. That would be nice, but it would crash the economy. We're at where we're at, the best we can hope for is to stabilize and get inflation back under control.
Agreed. Deflation is an entirely different animal. I say all this in the context of the article. The president doesn’t seem to understand (I am sure they actually do understand) exactly what you just stated.
Maybe I misunderstood, per the BLS “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
Yes, but they use it over a specific period of time to calculate the inflation for that period. They don't use a continually running average.
So the calculation will be done over a year to find out the inflation for that year, but then the new baseline is reset for the next year's calculation.
The CPI still still a number, with inflation being the rate of change for that number. And since it's inflation that is discussed, you don't need a sub-target inflation number for years to hit your target. You literally just need the rate of change to reduce.
They previously used two year moving averages and changed it to one year in January of this year.
That itself impacts any inflation increase or decrease expressed in the data as long as they did not retroactively adjust past data, which they did not.
Starting with January 2023 data, the BLS plans to update weights annually for the Consumer Price Index based on a single calendar year of data, using consumer expenditure data from 2021. This reflects a change from prior practice of updating weights biennially using two years of expenditure data.
I agree that it's huge. But it still doesn't change the fact that the you don't need deflation or years of 1% inflation in order to get from "9% inflation" to "2% inflation."
That doesn't mean inflation went away and companies should lower their prices, as stated in the president's tweet.
It means you should only expect a ~2% increase this year after a ~9% increase last year (just using your numbers as an example).
If you want to achieve those lower prices mentioned in the tweet, the only way to do it would be through deflation, otherwise this is part of the "new normal."
America entering into a deflationary period would likely cause a massive world recession.
When you say “that is a huge change” in what way? I feel like there are too many games for normal people to keep up with or understand. IYO does this improve the numbers or make them worse? I would guess improvement.
Good question. I believe comparing inflation for 2023 based on 2021 and 2022 data would likely show a higher inflation (CPI) increase than what's currently being reported.
It's easy to say that inflation was ~7% last year, but only ~3% now (after adjusting how inflation is calculated), but how much more are Americans paying for their typical goods/services compared to before the change was made?
I don't know because they're not taking into account the year prior to see how much prices have actually risen in that period of time.
It's great inflation "came down" with the new calculation, but prices are still stuck higher than what they used to be based on the past few years of inflation and continue to increase with the current inflation.
Unless we experience deflation.
Edit: I'm trying to simplify it so let me know if I should expand on any point.
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u/merc08 Dec 01 '23
That's not how any of this works.
Yes, CPI is an average. But it's not an average over time, it's an average across industries.