Another thing I don't understand about the basket of goods approach to measuring consumer prices is how we're getting inflation figures which are so low. Since goods we buy priced in USD have gone up massively in 2-3 years due to a falling Canadian dollar (electronics, smartphones, computers, SaaS, etc.), the only way the basket stays at 2% YoY growth is if that's offset by other things falling in price.

But, anecdotally, home services, energy cost, health services, food and clothing are all more expensive now than a few years ago, the only exception I can think of off the top of my head is gasoline, which has fallen.

Edit: This StatCan paper (http://www.statcan.gc.ca/pub/62-553-x/62-553-x2015001-eng.pd...) explains CPI in detail and it seems like the basket is thorough and well-thought-out. Appendix B outlines all the components and their weights, and both homeowner costs, rents, and mortgage interest costs do factor into the shelter calculation.

The cynic in me suggests that the basket might intentionally be chosen to hide the fact that the cost of living is going up. Lots of people with money have incentives for inflation numbers to be low. ex: COLA raises are common and benefit if the CPI hides the true costs

Ex2: many government benefits are tied to "inflation" . If your personal basket inflates faster than their example basket then they can get away with paying you less than promised (in spirit).

I do not appreciate random unfounded conspiracy theories like this comment.

Wages haven't gone up, so while you may have shifted allocation of purchases within the CPI basket, your total spending is probably around the same as it was last year, and the year before that.

EG you buy more electronics and gas (cheaper), and less clothing and food (more expensive), but your overall spending remains ~50% of your income, which hasn't changed.

Wages are usually the primary driver of higher CPI measured inflation.

Inflation has occurred outside of CPI basket, most notably in equity markets and real estate prices in large urban cities - and bitcoin :)

> Inflation has occurred outside of CPI basket, most notably in equity markets and real estate prices in large urban cities

Those are assets rather than goods. They are neither produced nor consumed. That being said, yeah, it's no mystery that low rates have caused asset price inflation, not consumer price inflation.

It's all a matter of technicalities and definitions :)

You are consuming housing when you pay rent/mortgage. A house is built, and then its owners consume it in "housing units", or rent those "housing units" to other for consumption.

Likewise that ground beef you have in the fridge is an asset - you can sell it to your neighbor at any point before you consume it.

Equity is a claim on a company's assets. If General Electric goes bankrupt and you own GE stock, you will get paid out (after everyone else) a share of the bankruptcy proceeds. So in a way you own some of what GE produces, some of the inputs it consumes, etc.

You can look at literally any transaction as an investment into an asset (generally durable goods) or the purchase of a good for consumption (generally non-durable goods). It depends on how you want to record it on your personal balance sheet...

Assets are not durable goods. Assets different than goods.

When you pay rent you are consuming housing. When you pay a mortgage it is a financing transaction on the asset. Your consumption cost nets out because you are both paying and receiving rent. Yes all transactions are for either an asset or a good, as Y=C+I...

The problem with your comment is that durable goods do in fact have many of the characteristics which are desireable of financial vehicles and assets: utility/value, portability, indestructibility, homogeneity, divisibility, stability, cognixability. (William Stanley Jevons, Money and the Mechanism of Exchange https://archive.org/stream/moneyexchange00jevorich#page/n7/m...)

And whilst land may not be particularly portable, land ownership is.

Other productive assets: metals, grain, productive plant, etc., may also have financial asset value. Also goods which aren't particularly useful such as fine art.

I can not talk about the ins and outs of the statistical measures.

But from an economist perspective relative price changes of one good to another are usually not very relevant.

The measure for real domestic deflation you want to look at is the 'GDP Deflator'.

What you have a problem understanding is called 'montary transmission mechanism'. You are thinking about it to directly. The theory basically says that the central bank offers lones above or below the natural interest rate in order to increase or decrease demand for base money increasing or decressing total spending (agregate demand) and thus the general price level.

The problem of conecting the economists theoretic definition of general price level is quite tricky to nail down. The commenly used CPI or even Core CPI does not perform very well.

Many economist would now argue that instread of focusing on CPI price level measure we should use either total spending directly, or use a different price level measure like the 'GDP deflator'.

What I did not talk about is that many prices are foreward looking, so prices start adjusting before demand if things are expected.

In past times, business expansion lowered the unemployment rate, which raised wages, which raised prices.

The first part happened. The last two don't seem to be happening, which is puzzling. Central banks are having to consider that the old model may not hold anymore. No one's really sure what to do.

Consumer tendencies weren't really supposed to enter into it, as far as I know.

I don't think it is puzzling. Technological advances have made each person capable of doing much more, and capital does more and more of the work that people used to (or someone in another country does it). I bet underemployment rate is not low, and with more and more people competing for low skill jobs where they're easily replaceable, again, thanks to technology, there is no reason for wages to go up.

Also of note is that more economic activity is concentrated in fewer and fewer regions, so while a select few (urban) regions experience growth and whatnot, most other areas do not.

There seems to be a trend among large employers to avoid full-time employment, either by keeping weekly hours below x or hiring contract workers.

We've seen since the last recession that top 2% have grown incomes while most others are stagnant, perhaps this is part of it.

I think the majority of technologic trends since at least 2000 have been fundamentally deflationary in nature, for all material goods. We simply are conserving more; using less materials and energy for the same set of consumer uses. Unlike the last industrial revolution where new energy hungry appliances were being invented and new ways of life expanding, most new inventions today are long lasting, low energy consuming, or are just innovations making existing products cheaper.

That central banks and treasuries insist on inflation above zero when we should probably be deflating and letting technology make everyone wealthier...no wonder there are property bubbles. (Note this inflation argument encompasses the effect of trade deficits in creating asset bubbles, because inflation/treasury debt breaks the trade/currency feedback loop)

The theory is simple. Circulating money means the economy is active and producing.

More money circulating means more of the economy is active.

More money in the economy increases inflation because more supply lowers value.

Inflation is good because it is not deflation, but it is not good because it devalues monetary assets over time. Low inflation is best.

The problem is simple. The additional money from cheap loans is not circulating. It is being sunk into mortgages and other debt.

The truth is that the policy is working in the sense that the alternate would have been deflation. Deflation kills retail because it is hard to stay in business if you buy low, sell lower.

As an example - if I get to reduce my mortgage payment by $500 - because interest rate is extremely low - I could technically spend that money on upgrading my car or travel or groceries or eating out - and so pushing up the price. At least that's how I understand it. I assumed that housing prices were included but apparently not (at least in the US)[1]

[1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu...

Keywords here being IF and COULD...

I'm under the impression most people are ready to spend a certain portion of their income on their living arrangement and low interest rates just encourage them to buy ~bigger~ more expensive property, rather than actually turning the "savings" into other types of spending. I'd be interested to find actual data and research about the relationship between interest rates and mortgage spending for given incomes...

Low interest rates directly drive up housing prices of equivalent houses. If you drive down monthly mortgage payments while keeping rents constant, buying residential property and renting it out becomes more economically attractive, which then drives up the house price at which buying an investment property is sufficiently profitable.

In other words, the fixed factor is the spot rent market - how much you can get renting out a house in a certain location. When you lower interest rates, the monthly payment remains relatively constant, which drives up the principle to compensate.

The CPI in the U.S. does count shelter in its index. It is not very accurate because of issues measuring the prices of consumer electronics which are getting better and cheaper. See https://medium.com/@vince.pavlish/using-iphone-prices-to-che...

I don't know about Canada, but using a wildly unjustified extrapolation from my country - many a public sector wage, and worse - retirement plans, are following an official cost of living index. Calculating a "realistic" index would have a devastating impact on the long-term fiscal balance of the state.

Low interests rates don't directly cause inflation. For one thing it may not even expand the monetary base, if there are few expansive areas of the economy in need of capital or if there are other even cheaper sources of capital (like trade deficit money returning from overseas).

For another thing, if the monetary base is expanding, it could be that all the new cash gets sucked into fixed asset wealth like land and stock value, but the number of transactions fall so that these price increases don't leak out into broader consumer prices or wages.

Finally it could be that technological change is causing deflation on the same order of magnitude as the banker's monetary inflation.

The main inflation channel works through investment in new projects and labor. The higher asset prices cause more assets to be built. In the case of housing, more house builders get more and higher wages which they then spend which makes other prices rise.

Well, you hit on it directly. Cost of housing ought to be included in inflation measures.

Yes - assume you're buying 1/200th of an "average home" every month as part of a monthly basket of consumption. It's an assumption I use when comparing cost of living between cities.

Does CPI not include a shelter component, even a problematic one?

http://www.slate.com/blogs/moneybox/2014/02/24/housing_infla...

I think the grandparent commenter is talking about inflation measures in Canada — I don't think Canada uses US CPI.

>If I want to borrow to buy groceries, gas, or the other things they measure for inflation I would be borrowing at >19.99%.

In the US, credit cards are often a fixed + prime rate, so changing national bank interest does affect credit card rates.

As as aside, ~20% is an insanely high rate for credit card purchases (again, in the US).