CPI Understates Inflation & Overstates GDP???
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It's interesting to note that inflation could be understated by 7% using the Consumer Price Index (CPI). Picked up this article from Google.
<<Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes. The concentration of this installment on the quality of government economic reports will be first on CPI series redefinition and the damages done to those dependent on accurate cost-of-living estimates, and on pending further redefinition and economic damage.
The CPI was designed to help businesses, individuals and the government adjust their financial planning and considerations for the impact of inflation. The CPI worked reasonably well for those purposes into the early-1980s. In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.
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Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.
The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.
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There now are three major CPI measures published by the BLS, CPI for All Urban Consumers (CPI-U), CPI for Urban Wage Earners and Clerical Workers (CPI-W) and the Chained CPI-U (C-CPI-U). The CPI-U is the popularly followed inflation measure reported in the financial media. It was introduced in 1978 as a more-broadly-based version of the then existing CPI, which was renamed CPI-W. The CPI-W is used in calculating Social Security benefits. These two series tend to move together and are based on frequent price sampling, which is supposed to yield something close to an average monthly price measure by component.
The C-CPI-U was introduced during the second Bush Administration as an alternate CPI measure. Unlike the theoretical approximation of geometric weighting to a variable, substitution-prone market basket, the C-CPI-U is a direct measure of the substitution effect. The difference in reporting is that August 2006 year-to-year inflation rates for the CPI-U and the C-CPI-U were 3.8% and 3.4%, respectively. Hence current inflation still has a 0.4% notch to be taken out of it through methodological manipulation. The C-CPI-U would not have been introduced unless there were plans to replace the current series, eventually.
Too-Low Inflation Reporting Yields Too-High GDP Growth
As is discussed in the final installment on GDP, part of the problem with GDP reporting is the way inflation is handled. Although the CPI is not used in the GDP calculation, there are relationships with the price deflators used in converting GDP data and growth to inflation-adjusted numbers. The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported.>>
Source: http://www.shadowstats.com/article/56 -
I wonder if our inflation is understated by the usage of CPI.
Take note that our Consumer Price Index (CPI), which also measures inflation is 4.2% for Nov 2007 and increasing to above 5% in 2008.
Why is the savings interest rate paid by the banks and CPF below the rate of inflation?
Are Singaporeans making negative returns in their banks and CPF?
CPF's Interest: 2.5%
Bank's Interest Fixed Deposit ($50k below): 0.825% p.a. (not even 1%)
Our bank's interest rate and CPF interest rate hardly covers savers for the cost of inflation. -
CPI affects people very differently from person to person.... the inflation rate is just a chapalan vegetable mix....
for example... if the cost of cars went up by 10 percent... but clothes went up by 1 percent.... averaged out inflation would be around 5 percent... (assuming there are only 2 goods)
but the truth is... people who dont buy cars... dont really suffer the full impact of the 10 percent rise in car cost mah....
the interest rate paid to you by the banks on your deposit is determined to the supply of money vs the demand for money.....from the bank.... banks dont really care about keeping your real value vs the inflation rate... its not their job.
money kept in the bank and CPF board for low interest rate is indeed loosing real value vs the inflation rate....
however... most people have used their CPF to buy HDB flat.... and i dont have to tell you how much the prices of property has shot up in singapore.... recently...
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in general there are 2 sides to inflation... demand and supply...
demand side...for example..... singaporean's huge bonus payout this year has induced a demand side inflation as singaporeans went on a buying spree pushing up the price.
supply side... for example.... the recent drought in australia has pushed up the price of wheat and thus the cost of many staple food....
knowing the above... there are afew method for singapore govt to control the inflation rate....
from the demand side... the govt can raise the taxes massively to wipeout all your bonus money in your wallet and force the demand for goods and service to fall.... not popular for sure.
from the supply side... the govt can send u to australia to grow grain... not practical at all.... in short... its not within their control...
lastly... the govt can raise the singapore dollar forex value.... such a move would.... have good and bad effects...
a big sin dollar..... reduce the cost of import of goods such as goodstuff like flour....reducing the hardship on the poor whose most expenses goes to food.... GOOD for most singaproeans... unless they dont need to eat....
BAD for singapore manufacturer and sometimes could result in slight retrenchment as some companies might relocate to another country for cost competitive.....
a rising singapore dollar is gonna attract lots of foreign dollars (especially americans) trying to preserve their real monetary value by moving their money into singapore... especially in private property sectors... causing the housing prices to go up... and add on the inflation pressure....
...and much much more effects....
in short.... dont just blame the govt.... without understanding their problem. -
Unlike the government, we cannot increase our salary as and when we want to combat the effects of inflation.Originally posted by tripwire:in general there are 2 sides to inflation... demand and supply...
demand side...for example..... singaporean's huge bonus payout this year has induced a demand side inflation as singaporeans went on a buying spree pushing up the price.
supply side... for example.... the recent drought in australia has pushed up the price of wheat and thus the cost of many staple food....
knowing the above... there are afew method for singapore govt to control the inflation rate....
from the demand side... the govt can raise the taxes massively to wipeout all your bonus money in your wallet and force the demand for goods and service to fall.... not popular for sure.
from the supply side... the govt can send u to australia to grow grain... not practical at all.... in short... its not within their control...
lastly... the govt can raise the singapore dollar forex value.... such a move would.... have good and bad effects...
a big sin dollar..... reduce the cost of import of goods such as goodstuff like flour....reducing the hardship on the poor whose most expenses goes to food.... GOOD for most singaproeans... unless they dont need to eat....
BAD for singapore manufacturer and sometimes could result in slight retrenchment as some companies might relocate to another country for cost competitive.....
a rising singapore dollar is gonna attract lots of foreign dollars (especially americans) trying to preserve their real monetary value by moving their money into singapore... especially in private property sectors... causing the housing prices to go up... and add on the inflation pressure....
...and much much more effects....
in short.... dont just blame the govt.... without understanding their problem.
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Maybe they should adopt a system like the US, where they have 2 inflation indices, one to reflect inflation for lower income group and another to reflect inflation for middle income group.Originally posted by tripwire:CPI affects people very differently from person to person.... the inflation rate is just a chapalan vegetable mix....
for example... if the cost of cars went up by 10 percent... but clothes went up by 1 percent.... averaged out inflation would be around 5 percent... (assuming there are only 2 goods)
but the truth is... people who dont buy cars... dont really suffer the full impact of the 10 percent rise in car cost mah....
the interest rate paid to you by the banks on your deposit is determined to the supply of money vs the demand for money.....from the bank.... banks dont really care about keeping your real value vs the inflation rate... its not their job.
money kept in the bank and CPF board for low interest rate is indeed loosing real value vs the inflation rate....
however... most people have used their CPF to buy HDB flat.... and i dont have to tell you how much the prices of property has shot up in singapore.... recently...
It's true that private banks do not have any impetus to increase the interest rates for savings. But central banks have an interest in controlling inflation.
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Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.>>
In the US, most savings rate (4.25%) would equate to the Fed Fund rates (4.25%).
How come our Singapore Inter-Bank Offer Rate (SIBOR = 2.75%) is not consistent with our savings rate (0.5%) or fixed deposit (0.825% to 1.8%)?
Maybe the government intends to control inflation by reducing government spending, BUT, for the past year they have been increasing cost through salary increases across the civil sector. So I guess it trickles down to the last alternative, more taxes and fines to reduce money supply to control inflation.
It's true that the prices of housing has increased substantially throughout the year. Does that mean everybody who owns housing earns from the property increases? I think it's a fallacious understanding, because what you make in the increase in housing prices is just a paper gain (unrealised profits), it's a feel good figure (money illusion). How many can sell of their sole housing to profit from the housing increase? At the end of the day, you still need a house for your family to live in. -
Shake my head
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There is just no end to what one can manipulate.
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2.75% is the 12 month SIBOR rate.... the overnight lending rate which is around 0.8 percent is the rate local banks follow....Originally posted by maurizio13:Maybe they should adopt a system like the US, where they have 2 inflation indices, one to reflect inflation for lower income group and another to reflect inflation for middle income group.
It's true that private banks do not have any impetus to increase the interest rates for savings. But central banks have an interest in controlling inflation.
<
Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.>>
In the US, most savings rate (4.25%) would equate to the Fed Fund rates (4.25%).
How come our Singapore Inter-Bank Offer Rate (SIBOR = 2.75%) is not consistent with our savings rate (0.5%) or fixed deposit (0.825% to 1.8%)?
Maybe the government intends to control inflation by reducing government spending, BUT, for the past year they have been increasing cost through salary increases across the civil sector. So I guess it trickles down to the last alternative, more taxes and fines to reduce money supply to control inflation.
It's true that the prices of housing has increased substantially throughout the year. Does that mean everybody who owns housing earns from the property increases? I think it's a fallacious understanding, because what you make in the increase in housing prices is just a paper gain (unrealised profits), it's a feel good figure (money illusion). How many can sell of their sole housing to profit from the housing increase? At the end of the day, you still need a house for your family to live in.
banks only need to meet the MAS regulation on liquidity every night.... when it totalled its operations everyday.... the 0.8% is the cost to the bank(you can call it penalty) in borrowing money from other banks or the central bank to meet the MAS requirement.
given the cost is 0.8%... its senseless to pay depositors 1% or more to meet MAS regulations on liquidity holdings since they can borrow it cheaper from other banks at 0.8%.
now if you take a look at the US fed rate... you will noticed their day rate(or overnight rate) is around 4 percent... thus you have your answer.... why their depositors are paid around 4 percent... -
to be continued
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Most of the Inter-Bank rates for overnight to 1 year don't vary that much.Originally posted by tripwire:2.75% is the 12 month SIBOR rate.... the overnight lending rate which is around 0.8 percent is the rate local banks follow....
banks only need to meet the MAS regulation on liquidity every night.... when it totalled its operations everyday.... the 0.8% is the cost to the bank(you can call it penalty) in borrowing money from other banks or the central bank to meet the MAS requirement.
given the cost is 0.8%... its senseless to pay depositors 1% or more to meet MAS regulations on liquidity holdings since they can borrow it cheaper from other banks at 0.8%.
now if you take a look at the US fed rate... you will noticed their day rate(or overnight rate) is around 4 percent... thus you have your answer.... why their depositors are paid around 4 percent...
The overnight rate and the 1 year rate should not vary too much unless your currency is very volatile. The difference between Singapore's 1 year SIBOR and SIBOR overnight rate is 1.87% (2.75% - 0.88%), almost 2%.
The three-month sterling London Interbank Offered Rate (Libor) -- a key indication of banks' willingness to lend to each other over the medium term -- dropped to 5.99 pct from 6.02 pct last Friday.
The one-month sterling Libor rate fell to 5.95 pct from 6.04 pct, but the overnight rate spiked to 5.84 pct from 5.41 because of year-end factors.
The difference between the Inter-Bank Offer Rate and Savings Rate for UK:
5.84% - 5.75% = 0.09%
http://www.hsbc.co.uk/1/2/interest-rates/savings-investments;jsessionid=0000eJLCsshbMfmGKSwBcIM8vNE:11j5bgs6c (Under the heading MySavings)
The difference between the Inter-Bank Offer Rate and Savings Rate for Singapore:
First $3,000 : 0.88% - 0.25% = 0.63%
Next $47,000: 0.88% - 0.35% = 0.53%
http://www.dbs.com.sg/ratesonline/dddd.html
It's like if you buy something more expensive, the retailer makes less; if you buy something cheap, the retailer makes more.
I don't think it's really a penalty, because they loan out at 4% (for mortgages) and pay 0.88% to other banks.
Nobody is saying that they should pay us 2% if they can get the funds elsewhere at 0.88%. But then again the "elsewhere" that they so call get their funds from still originates from depositors such as us, who are getting 0.25% interest. It comes full circle doesn't it.
Back to the topic.
Does our bank pay us interest rates to cover us for the inflation; or are we getting negative returns when we put money into a bank?
If US could understate CPI by so much to cheat her citizens, I wonder how does our Dept. of Stats perform without any independant body to scrutinize their figures. -
with respect to the topics.... its not the banks problem to maintain the real value of your money in the bank.... its not their responsibilities... to begin with...
thus with reference to the above.... yes... our money in the banks and CPF is loosing value... if the inflation rate persistently exceed our nominal interest rate.
with respect to the difference in savings rate differential from the LIBOR and SIBOR.... it boils down to the demand and supply of money in the different market...
if the money situation is tight... its logical that banks would seek to toe the IBOR as close as possible....otherwise... one cannot expect banks to pay more then they need to.
and depositors are not the only source of their funds...
singapore's inflation rate is at the moment... worth close attention... given the combine effect of higher GST, bigger bonus payouts, higher salary, rising food cost due to global warming and the higher oil price....
i think the govt is waiting for the prices to stabilize... -
Who controls the supply of money? Monetary Authority of Singapore?Originally posted by tripwire:with respect to the topics.... its not the banks problem to maintain the real value of your money in the bank.... its not their responsibilities... to begin with...
thus with reference to the above.... yes... our money in the banks and CPF is loosing value... if the inflation rate persistently exceed our nominal interest rate.
with respect to the difference in savings rate differential from the LIBOR and SIBOR.... it boils down to the demand and supply of money in the different market...
if the money situation is tight... its logical that banks would seek to toe the IBOR as close as possible....otherwise... one cannot expect banks to pay more then they need to.
and depositors are not the only source of their funds...
singapore's inflation rate is at the moment... worth close attention... given the combine effect of higher GST, bigger bonus payouts, higher salary, rising food cost due to global warming and the higher oil price....
i think the govt is waiting for the prices to stabilize...
Who sets the Singapore Inter-Bank Offer Rate (SIBOR)? Monetary Authority of Singapore?
Then they provide nominal interest rates that makes negative returns after taking into account of inflation.
Depositors not the only source of funds? Maybe you can enlighten me? I am not very knowledgable regarding banking practices. Thanks.
Government waiting for price to stabilize to initiate what kind of action(s)? -
MAS control the supply of money... but MAS do not control MPC nor MPS of each and every single singaporean from 10 years old to 100 years old....Originally posted by maurizio13:Who controls the supply of money? Monetary Authority of Singapore?
Who sets the Singapore Inter-Bank Offer Rate (SIBOR)? Monetary Authority of Singapore?
Then they provide nominal interest rates that makes negative returns after taking into account of inflation.
Depositors not the only source of funds? Maybe you can enlighten me? I am not very knowledgable regarding banking practices. Thanks.
Government waiting for price to stabilize to initiate what kind of action(s)?
MAS sets the SIBOR... but MAS has considerations other then simply keeping the real value of your deposits in the bank.... furthermore... MAS do not set the bank's interest rate... that's for the bank to decide.
for every effect... there is a time delay ripple effect... and some effects are hard to predict.. its not as easy as your economics 101 textbook seems to imply.... thus the need to wait... -
MAS don't control MPS (Marginal Propensity to Save).Originally posted by tripwire:MAS control the supply of money... but MAS do not control MPC nor MPS of each and every single singaporean from 10 years old to 100 years old....
MAS sets the SIBOR... but MAS has considerations other then simply keeping the real value of your deposits in the bank.... furthermore... MAS do not set the bank's interest rate... that's for the bank to decide.
for every effect... there is a time delay ripple effect... and some effects are hard to predict.. its not as easy as your economics 101 textbook seems to imply.... thus the need to wait...
BUT the government controls MPS through other means, like Central Provident Fund (CPF), which is a Compulsory Propensity to Save, which is like 34.5% of total wages.
MAS does not set the interest rates, but Banks uses the SIBOR as a guideline to set their savings and loan rates. So doesn't MAS influence the interest rates. Didn't you say earlier on, that the banks in Singapore follow the MAS SIBOR? You are contradicting yourself.
Nobody said that the scenarios are textbook cases, but if you have so many geniuses in the cabinet, with all the relevant data. Don't you think that they would make better policies (feed forward) ratther than their put out fire policies (feed back)?Originally posted by tripwire: 01 January 2008 · 03:10 AM2.75% is the 12 month SIBOR rate.... the overnight lending rate which is around 0.8 percent is the rate local banks follow....